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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 December 31, 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 January 31, 2009, there were 27,442,966 shares of the registrants common stock, $.10 par value, outstanding.









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##### Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES

INDEX



|                                                                                                                                                               |  |   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                                                  |  |   
|                                                                                                                                                               | 
|Item 1. Financial Statements                                                                                                                                   |  |   
|                                                                                                                                                               | 
|Consolidated Statements of Financial Condition December 31, 2008 (unaudited) and June 27,
2008                                                                 |  | 1 
|                                                                                                                                                               | 
|Consolidated Statements of Income and Comprehensive Income for the three and six-months ended December 
31, 2008 (unaudited) and December 31, 2007 (unaudited) |  | 2 
|                                                                                                                                                               | 
|Consolidated Statements of Cash Flows for the three and six-months ended December 
31, 2008 (unaudited) and December 31, 2007 (unaudited)                      |  | 3 
|                                                                                                                                                               | 
|Notes to Consolidated Financial Statements (unaudited)                                                                                                         |  | 5 
|                                                                                                                                                               | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                                  |  | 27
|                                                                                                                                                               | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                             |  | 60
|                                                                                                                                                               | 
|Item 4. Controls and Procedures                                                                                                                                |  | 61
|                                                                                                                                                               | 
|PART II. OTHER INFORMATION                                                                                                                                     |  |   
|                                                                                                                                                               | 
|Item 1. Legal Proceedings                                                                                                                                      |  | 61
|                                                                                                                                                               | 
|Item 1A. Risk Factors                                                                                                                                          |  | 61
|                                                                                                                                                               | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                            |  | 62
|                                                                                                                                                               | 
|Item 3. Defaults Upon Senior Securities                                                                                                                        |  | 63
|                                                                                                                                                               | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                    |  | 63
|                                                                                                                                                               | 
|Item 5. Other Information                                                                                                                                      |  | 63
|                                                                                                                                                               | 
|Item 6. Exhibits                                                                                                                                               |  | 63
|                                                                                                                                                               | 
|SIGNATURES                                                                                                                                                     |  | 64
|                                                                                                                                                               | 
|EXHIBIT INDEX                                                                                                                                                  |  | 65



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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

December 31, 2008 and June 27, 2008

(In thousands, except par values and share amounts)



|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                             |  | December    |           |   | June |  
|                                                                                                                                                                                                             |  | (Unaudited) |           |   |      |  
|Assets                                                                                                                                                                                                       |  |             |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                                                    |  | $           | 68,611    |   |      | $ | 39,628    |  
|Assets segregated for regulatory purposes                                                                                                                                                                    |  |             | 255,275   |   |      |   | 322,575   |  
|Receivable from brokers, dealers and clearing organizations                                                                                                                                                  |  |             | 2,173,378 |   |      |   | 2,849,982 |  
|Receivable from clients, net                                                                                                                                                                                 |  |             | 193,765   |   |      |   | 286,945   |  
|Loans held for sale                                                                                                                                                                                          |  |             | 311,257   |   |      |   | 359,945   |  
|Loans, net                                                                                                                                                                                                   |  |             | 1,060,141 |   |      |   | 925,758   |  
|Securities owned, at market value                                                                                                                                                                            |  |             | 108,970   |   |      |   | 198,573   |  
|Securities purchased under agreements to resell                                                                                                                                                              |  |             | 4,415     |   |      |   | 9,862     |  
|Goodwill                                                                                                                                                                                                     |  |             | 7,552     |   |      |   | 7,552     |  
|Marketable equity securities available for sale                                                                                                                                                              |  |             | 3,965     |   |      |   | 6,964     |  
|Other assets                                                                                                                                                                                                 |  |             | 102,528   |   |      |   | 110,467   |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  | $           | 4,289,857 |   |      | $ | 5,118,251 |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  |            
|Liabilities and Stockholders Equity                                                                                                                                                                         |  |             |           |   |      |   |           |  
|Short-term borrowings                                                                                                                                                                                        |  | $           | 3,505     |   |      | $ | 86,800    |  
|Payable to brokers, dealers and clearing organizations                                                                                                                                                       |  |             | 2,087,978 |   |      |   | 2,794,377 |  
|Payable to clients                                                                                                                                                                                           |  |             | 448,414   |   |      |   | 556,029   |  
|Deposits                                                                                                                                                                                                     |  |             | 1,159,520 |   |      |   | 1,071,973 |  
|Securities sold under agreements to repurchase                                                                                                                                                               |  |             | 3,646     |   |      |   | 6,342     |  
|Securities sold, not yet purchased, at market value                                                                                                                                                          |  |             | 23,360    |   |      |   | 26,511    |  
|Drafts payable                                                                                                                                                                                               |  |             | 23,506    |   |      |   | 19,657    |  
|Advances from Federal Home Loan Bank                                                                                                                                                                         |  |             | 148,140   |   |      |   | 166,250   |  
|Other liabilities                                                                                                                                                                                            |  |             | 58,563    |   |      |   | 67,306    |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  |             | 3,956,632 |   |      |   | 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 28,298,447 and outstanding 27,286,777 shares at December 31, 2008;
issued 28,269,134 and outstanding 27,195,609 shares at June 27, 2008 |  |             | 2,830     |   |      |   | 2,827     |  
|Additional paid-in capital                                                                                                                                                                                   |  |             | 269,906   |   |      |   | 269,360   |  
|Retained earnings                                                                                                                                                                                            |  |             | 73,262    |   |      |   | 62,100    |  
|Accumulated other comprehensive income  unrealized holding loss net of tax of $1,758 at December 31, 2008 and $739 at June 27,
2008                                                                         |  |             | (3,173    | ) |      |   | (1,194    | )
|Deferred compensation, net                                                                                                                                                                                   |  |             | 2,293     |   |      |   | 1,994     |  
|Treasury stock (1,011,670 shares at December 31, 2008 and 1,073,525 shares at June 27, 2008, at cost)                                                                                                        |  |             | (11,893   | ) |      |   | (12,081   | )
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                                   |  |             | 333,225   |   |      |   | 323,006   |  
|Commitments and contingencies                                                                                                                                                                                |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                   |  | $           | 4,289,857 |   |      | $ | 5,118,251 |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the three and six-months ended December 31, 2008 and December 31, 2007

(In thousands,
except per share and share amounts)

(Unaudited)



|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------- | -------------------------- | ---------- | ---------------- | ------------------------ | - | ---------------- | - |  | ---------------- | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                                                                                                                   |                  | For the Three-Months Ended |            |                  | For the Six-Months Ended |  
|                                                                                                                                                                                                                                                                   | December 31,2008 |                            |            | December 31,2007 |                          |   | December 31,2008 |   |  | December 31,2007 |           
|Revenues:                                                                                                                                                                                                                                                          |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Net revenues from clearing operations                                                                                                                                                                                                                              |                  | $                          | 3,077      |                  |                          | $ | 3,737            |   |  | $                | 6,373      |   |  | $ | 7,088      |  
|Commissions                                                                                                                                                                                                                                                        |                  |                            | 53,309     |                  |                          |   | 26,101           |   |  |                  | 89,054     |   |  |   | 48,273     |  
|Interest                                                                                                                                                                                                                                                           |                  |                            | 53,299     |                  |                          |   | 69,649           |   |  |                  | 120,079    |   |  |   | 138,854    |  
|Investment banking, advisory and administrative fees                                                                                                                                                                                                               |                  |                            | 9,430      |                  |                          |   | 8,819            |   |  |                  | 20,354     |   |  |   | 18,860     |  
|Net gains on principal transactions                                                                                                                                                                                                                                |                  |                            | 7,958      |                  |                          |   | 2,534            |   |  |                  | 10,662     |   |  |   | 3,877      |  
|Other                                                                                                                                                                                                                                                              |                  |                            | 21         |                  |                          |   | 6,003            |   |  |                  | 2,920      |   |  |   | 12,431     |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Total revenue                                                                                                                                                                                                                                                      |                  |                            | 127,094    |                  |                          |   | 116,843          |   |  |                  | 249,442    |   |  |   | 229,383    |  
|Interest expense                                                                                                                                                                                                                                                   |                  |                            | 26,918     |                  |                          |   | 44,019           |   |  |                  | 61,498     |   |  |   | 89,613     |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Net revenues                                                                                                                                                                                                                                                       |                  |                            | 100,176    |                  |                          |   | 72,824           |   |  |                  | 187,944    |   |  |   | 139,770    |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Non-Interest Expenses:                                                                                                                                                                                                                                             |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Commissions and other employee compensation                                                                                                                                                                                                                        |                  |                            | 63,441     |                  |                          |   | 43,285           |   |  |                  | 115,852    |   |  |   | 83,509     |  
|Occupancy, equipment and computer service costs                                                                                                                                                                                                                    |                  |                            | 8,032      |                  |                          |   | 6,375            |   |  |                  | 15,772     |   |  |   | 12,898     |  
|Communications                                                                                                                                                                                                                                                     |                  |                            | 3,308      |                  |                          |   | 2,484            |   |  |                  | 6,469      |   |  |   | 4,710      |  
|Floor brokerage and clearing organization charges                                                                                                                                                                                                                  |                  |                            | 997        |                  |                          |   | 889              |   |  |                  | 1,914      |   |  |   | 2,016      |  
|Advertising and promotional                                                                                                                                                                                                                                        |                  |                            | 1,141      |                  |                          |   | 922              |   |  |                  | 1,940      |   |  |   | 1,515      |  
|Other                                                                                                                                                                                                                                                              |                  |                            | 7,725      |                  |                          |   | 7,022            |   |  |                  | 19,672     |   |  |   | 11,329     |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Total non-interest expenses                                                                                                                                                                                                                                        |                  |                            | 84,644     |                  |                          |   | 60,977           |   |  |                  | 161,619    |   |  |   | 115,977    |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Income from continuing operations before income tax expense                                                                                                                                                                                                        |                  |                            | 15,532     |                  |                          |   | 11,847           |   |  |                  | 26,325     |   |  |   | 23,793     |  
|Income tax expense                                                                                                                                                                                                                                                 |                  |                            | 6,486      |                  |                          |   | 4,599            |   |  |                  | 10,256     |   |  |   | 8,841      |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                                                                                  |                  |                            | 9,046      |                  |                          |   | 7,248            |   |  |                  | 16,069     |   |  |   | 14,952     |  
|Discontinued operations:                                                                                                                                                                                                                                           |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Income from discontinued operation                                                                                                                                                                                                                                 |                  |                            |           |                  |                          |   |                 |   |  |                  |           |   |  |   | 29         |  
|Income tax expense                                                                                                                                                                                                                                                 |                  |                            |           |                  |                          |   |                 |   |  |                  |           |   |  |   | (9         | )
|Minority interest                                                                                                                                                                                                                                                  |                  |                            |           |                  |                          |   |                 |   |  |                  |           |   |  |   | (3         | )
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Income from discontinued operations                                                                                                                                                                                                                                |                  |                            |           |                  |                          |   |                 |   |  |                  |           |   |  |   | 17         |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                         |                  |                            | 9,046      |                  |                          |   | 7,248            |   |  |                  | 16,069     |   |  |   | 14,969     |  
|Net loss recognized in other comprehensive income, net of tax of $521 and $70 for the three-months ended December 31, 2008 and
December 31, 2007, respectively and $1,019 and $191 for the six-months ended December 31, 2008 and December 31, 2007, respectively. |                  |                            | (1,111     | )                |                          |   | (107             | ) |  |                  | (1,979     | ) |  |   | (332       | )
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Comprehensive income                                                                                                                                                                                                                                               |                  | $                          | 7,935      |                  |                          | $ | 7,141            |   |  | $                | 14,090     |   |  | $ | 14,637     |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Earnings per share  basic                                                                                                                                                                                                                                         |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                                                                                  |                  | $                          | 0.33       |                  |                          | $ | 0.26             |   |  | $                | 0.59       |   |  | $ | 0.55       |  
|Income from discontinued operations                                                                                                                                                                                                                                |                  |                            |           |                  |                          |   |                 |   |  |                  |           |   |  |   |           |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                         |                  | $                          | 0.33       |                  |                          | $ | 0.26             |   |  | $                | 0.59       |   |  | $ | 0.55       |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Weighted average shares outstanding  basic                                                                                                                                                                                                                        |                  |                            | 27,079,804 |                  |                          |   | 27,465,601       |   |  |                  | 27,053,620 |   |  |   | 27,437,367 |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Earnings per share  diluted                                                                                                                                                                                                                                       |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                                                                                  |                  | $                          | 0.33       |                  |                          | $ | 0.26             |   |  | $                | 0.59       |   |  | $ | 0.54       |  
|Income from discontinued operations                                                                                                                                                                                                                                |                  |                            |           |                  |                          |   |                 |   |  |                  |           |   |  |   |           |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                         |                  | $                          | 0.33       |                  |                          | $ | 0.26             |   |  | $                | 0.59       |   |  | $ | 0.54       |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  
|Weighted average shares outstanding  diluted                                                                                                                                                                                                                      |                  |                            | 27,186,715 |                  |                          |   | 27,584,415       |   |  |                  | 27,194,353 |   |  |   | 27,599,738 |  
|                                                                                                                                                                                                                                                                   |                  |                            |            |                  |                          |   |                  |   |  |                  |            |   |  |   |            |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six-months ended December 31, 2008 and December 31, 2007

(In thousands)

(Unaudited)



|                                                                                            |                  |                          |            |                  |  |   |          |  
|------------------------------------------------------------------------------------------- | ---------------- | ------------------------ | ---------- | ---------------- |  | - | -------- | -
|                                                                                            |                  | For the Six-Months Ended |           
|                                                                                            | December 31,2008 |                          |            | December 31,2007 | 
|Cash flows from operating activities:                                                       |                  |                          |            |                  |  |   |          |  
|Net income                                                                                  |                  | $                        | 16,069     |                  |  | $ | 14,969   |  
|Income from discontinued operations                                                         |                  |                          |           |                  |  |   | (17      | )
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                  |                          |            |                  |  |   |          |  
|Depreciation and amortization                                                               |                  |                          | 2,800      |                  |  |   | 2,433    |  
|Amortization of premiums on loans purchased                                                 |                  |                          | (358       | )                |  |   | (358     | )
|Provision for doubtful accounts and write downs on REO properties                           |                  |                          | 3,430      |                  |  |   | 2,310    |  
|Deferred income tax benefit (expense)                                                       |                  |                          | (1,172     | )                |  |   | 3,711    |  
|Deferred compensation                                                                       |                  |                          | (1,829     | )                |  |   | 1,245    |  
|Gain on sale of loans                                                                       |                  |                          | (435       | )                |  |   | (493     | )
|Loss (gain) on sale of fixed assets                                                         |                  |                          | (2         | )                |  |   | 187      |  
|Loss on sale of real estate                                                                 |                  |                          | 281        |                  |  |   | 96       |  
|Gain on sale of factored receivables                                                        |                  |                          | (260       | )                |  |   |         |  
|Equity in losses (earnings) of unconsolidated ventures                                      |                  |                          | 2,304      |                  |  |   | (421     | )
|Dividend received on investment in Federal Home Loan Bank stock                             |                  |                          | (75        | )                |  |   | (86      | )
|Windfall tax benefits                                                                       |                  |                          | (67        | )                |  |   | (218     | )
|Cash flow from operating activities of discontinued operations                              |                  |                          |           |                  |  |   | 4        |  
|Change in operating assets and liabilities:                                                 |                  |                          |            |                  |  |   |          |  
|Increase in assets segregated for regulatory purposes                                       |                  |                          | 67,300     |                  |  |   | 16,700   |  
|Net change in broker, dealer and clearing organization accounts                             |                  |                          | (29,795    | )                |  |   | 1,565    |  
|Net change in client accounts                                                               |                  |                          | (14,915    | )                |  |   | (8,902   | )
|Net change in loans held for sale                                                           |                  |                          | 48,688     |                  |  |   | (171,292 | )
|Decrease in securities owned                                                                |                  |                          | 89,603     |                  |  |   | 21,505   |  
|Decrease in securities purchased under agreements to resell                                 |                  |                          | 5,447      |                  |  |   | 28,388   |  
|Decrease in other assets                                                                    |                  |                          | 9,969      |                  |  |   | 6,581    |  
|Increase in drafts payable                                                                  |                  |                          | 3,849      |                  |  |   | 1,425    |  
|Decrease in securities sold, not yet purchased                                              |                  |                          | (3,151     | )                |  |   | (21,916  | )
|Decrease in other liabilities                                                               |                  |                          | (5,986     | )                |  |   | (9,947   | )
|                                                                                            |                  |                          |            |                  |  |   |          |  
|Net cash provided by (used in) operating activities                                         |                  |                          | 191,695    |                  |  |   | (112,531 | )
|                                                                                            |                  |                          |            |                  |  |   |          |  
|Cash flows from investing activities:                                                       |                  |                          |            |                  |  |   |          |  
|Purchase of fixed assets and capitalized improvements on REO properties                     |                  |                          | (6,854     | )                |  |   | (4,151   | )
|Proceeds from the sale of fixed assets                                                      |                  |                          | 4          |                  |  |   | 6        |  
|Proceeds from the sale of real estate                                                       |                  |                          | 7,254      |                  |  |   | 1,947    |  
|Loan originations and purchases                                                             |                  |                          | (316,796   | )                |  |   | (337,028 | )
|Loan repayments                                                                             |                  |                          | 173,539    |                  |  |   | 275,505  |  
|Proceeds from the sale of factored receivables                                              |                  |                          | 260        |                  |  |   |         |  
|Cash paid for purchase of correspondent clients of Ameritrade                               |                  |                          |           |                  |  |   | (2,677   | )
|Cash paid on investments                                                                    |                  |                          | (600       | )                |  |   | (1,500   | )
|Cash received from investments                                                              |                  |                          |           |                  |  |   | 639      |  
|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                                                   |                  |                          | (1,694     | )                |  |   | (2,453   | )
|                                                                                            |                  |                          |            |                  |  |   |          |  
|Net cash used in investing activities                                                       |                  |                          | (141,450   | )                |  |   | (65,894  | )
|                                                                                            |                  |                          |            |                  |  |   |          |  
|Cash flows from financing activities:                                                       |                  |                          |            |                  |  |   |          |  
|Payments on short-term borrowings                                                           |                  |                          | (1,271,187 | )                |  |   | (375,424 | )
|Cash proceeds from short-term borrowings                                                    |                  |                          | 1,187,891  |                  |  |   | 371,424  |  
|Increase in deposits                                                                        |                  |                          | 87,547     |                  |  |   | 78,942   |  
|Advances from the Federal Home Loan Bank                                                    |                  |                          | 513,962    |                  |  |   | 111,769  |  



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|                                                                           |                  |                          |          |                  |  |   |         |  
|-------------------------------------------------------------------------- | ---------------- | ------------------------ | -------- | ---------------- |  | - | ------- | -
|                                                                           |                  | For the Six-Months Ended |         
|                                                                           | December 31,2008 |                          |          | December 31,2007 | 
|Payments on advances from Federal Home Loan Bank                           |                  | $                        | (532,071 | )                |  | $ | (49,877 | )
|Payment of cash dividends on common stock                                  |                  |                          | (4,939   | )                |  |   | (4,438  | )
|Windfall tax benefits                                                      |                  |                          | 67       |                  |  |   | 218     |  
|Cash proceeds (payments) on securities sold under agreements to repurchase |                  |                          | (2,696   | )                |  |   | (14,156 | )
|Net proceeds from exercise of stock options                                |                  |                          | 288      |                  |  |   | 157     |  
|Cash flow from financing activities of discontinued operations             |                  |                          |         |                  |  |   | (382    | )
|Proceeds related to the Deferred Compensation Plan                         |                  |                          | 313      |                  |  |   | 330     |  
|Purchase of treasury stock related to Deferred Compensation Plan           |                  |                          | (437     | )                |  |   |        |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|Net cash provided by (used in) financing activities                        |                  |                          | (21,262  | )                |  |   | 118,563 |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                       |                  |                          | 28,983   |                  |  |   | (59,862 | )
|Cash and cash equivalents at beginning of period                           |                  |                          | 39,628   |                  |  |   | 128,760 |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|Cash and cash equivalents at end of period                                 |                  | $                        | 68,611   |                  |  | $ | 68,898  |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|Supplemental schedule of non-cash investing and financing activities:      |                  |                          |          |                  |  |   |         |  
|Granting of restricted stock                                               |                  | $                        | 997      |                  |  | $ | 1,268   |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|Foreclosures on loans                                                      |                  | $                        | 6,926    |                  |  | $ | 10,311  |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|Supplemental disclosure of cash flow information:                          |                  |                          |          |                  |  |   |         |  
|Cash paid during the period for:                                           |                  |                          |          |                  |  |   |         |  
|Interest from continuing operations                                        |                  | $                        | 63,019   |                  |  | $ | 89,175  |  
|                                                                           |                  |                          |          |                  |  |   |         |  
|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 and Six-Months Ended December 31, 2008 and December 31, 2007

(Unaudited)

GENERAL AND BASIS OF PRESENTATION

The interim consolidated financial
statements as of December 31, 2008, and for the three and six-months ended December 31, 2008 and December 31, 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. The broker/dealer business of M.L.
Stern was moved to Southwest Securities effective December 15, 2008. 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.



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FSB Development was formed to develop single-family residential lots. As of December 31, 2008 and June 30,
2008, it had no investments.

Consolidated Financial Statements. The quarterly consolidated financial statements of SWS are customarily closed on
the last Friday of each month except for the second fiscal quarter which is prepared as of December 31, 2008. The Banks and M.L. Sterns quarterly financial statements are prepared as of December 31, 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 from discontinued operations as of December 31, 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 December 31, 2008, the Company had approximately
$848,000 of unrecognized tax benefits. The Companys net liability decreased $102,000 from June 27, 2008 to December 31, 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 $142,000, net of federal benefit as of December 31, 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 $706,000, net of federal benefit as of December 31, 2008 and $769,000 as of June 27, 2008.

With limited exceptions, the
Company is no longer subject to U.S. Federal or state income tax examinations by taxing authorities for tax years preceding 2004. Federal income tax returns for the years ended December 31, 2004 through 2007 are currently under examination by
the Internal Revenue Service.

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.



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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 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 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) certain
real estate owned (REO) investments; and b) 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 owned 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, 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.

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



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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 investment partnership. 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 investment
partnership  (the Investment Partnerships) 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 December 31, 2008.



|                                                |  |         |       |         |   |         |  |       |        |  |   |        
|----------------------------------------------- |  | ------- | ----- | ------- | - | ------- |  | ----- | ------ |  | - | -------
|(in thousands)                                  |  | Level 1 |       | Level 2 |   | Level 3 |  | Total
|Marketable equity securities available for sale |  |         |       |         |   |         |  |       |        |  |   |        
|USHS stock                                      |  | $       | 925   |         | $ |        |  | $     |       |  | $ | 925    
|NYX stock                                       |  |         | 2,845 |         |   |        |  |       |       |  |   | 2,845  
|Westwood stock                                  |  |         | 195   |         |   |        |  |       |       |  |   | 195    
|                                                |  |         |       |         |   |         |  |       |        |  |   |        
|                                                |  | $       | 3,965 |         | $ |        |  | $     |       |  | $ | 3,965  
|                                                |  |         |       |         |   |         |  |       |        |  |   |        
|Securities owned, at market value               |  |         |       |         |   |         |  |       |        |  |   |        
|Corporate equity securities                     |  | $       | 2,401 |         | $ |        |  | $     | 925    |  | $ | 3,326  
|Municipal obligations                           |  |         |      |         |   | 48,570  |  |       | 24,475 |  |   | 73,045 
|U.S. government agency obligations              |  |         | 5,333 |         |   | 5,241   |  |       |       |  |   | 10,574 
|Corporate obligations                           |  |         |      |         |   | 20,081  |  |       | 267    |  |   | 20,348 
|Other                                           |  |         | 690   |         |   | 987     |  |       |       |  |   | 1,677  
|                                                |  |         |       |         |   |         |  |       |        |  |   |        
|                                                |  | $       | 8,424 |         | $ | 74,879  |  | $     | 25,667 |  | $ | 108,970
|                                                |  |         |       |         |   |         |  |       |        |  |   |        
|Other Assets                                    |  |         |       |         |   |         |  |       |        |  |   |        
|REO                                             |  | $       |      |         | $ | 10,560  |  | $     | 3,097  |  | $ | 13,657 
|Equity Investments                              |  |         |      |         |   |        |  |       | 2,728  |  |   | 2,728  
|                                                |  |         |       |         |   |         |  |       |        |  |   |        
|                                                |  | $       |      |         | $ | 10,560  |  | $     | 5,825  |  | $ | 16,385 
|                                                |  |         |       |         |   |         |  |       |        |  |   |        



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|                                                    |  |         |       |         |   |         |  |       |   |  |   |       
|--------------------------------------------------- |  | ------- | ----- | ------- | - | ------- |  | ----- | - |  | - | ------
|                                                    |  | Level 1 |       | Level 2 |   | Level 3 |  | Total
|Securities sold, not yet purchased, at market value |  |         |       |         |   |         |  |       |   |  |   |       
|Corporate equity securities                         |  | $       | 687   |         | $ |        |  | $     |  |  | $ | 687   
|Municipal obligations                               |  |         |      |         |   | 30      |  |       |  |  |   | 30    
|U.S. government and government agency obligations   |  |         | 5,862 |         |   | 6,953   |  |       |  |  |   | 12,815
|Corporate obligations                               |  |         |      |         |   | 8,928   |  |       |  |  |   | 8,928 
|Other                                               |  |         |      |         |   | 900     |  |       |  |  |   | 900   
|                                                    |  |         |       |         |   |         |  |       |   |  |   |       
|                                                    |  | $       | 6,549 |         | $ | 16,811  |  | $     |  |  | $ | 23,360
|                                                    |  |         |       |         |   |         |  |       |   |  |   |       

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    |   | InvestmentPartnership |   |       | 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  |  
|                                      |  |                           |       |   |                      |   |         |                      |  |   |        |   |                       |   |       |       |   |        |   |  |   |         |  
|Unrealized gains (losses)             |  |                           |      |   |                      |   |        |                      |  |   | 193    |   |                       |   |      |       |   |       |   |  |   | 193     |  
|Realized gains (losses)               |  |                           |      |   |                      |   |        |                      |  |   |       |   |                       |   |      |       |   | (1,354 | ) |  |   | (1,354  | )
|Transfers out of Level 3              |  |                           |      |   |                      |   | (14,950 | )                    |  |   |       |   |                       |   |      |       |   | (52    | ) |  |   | (15,002 | )
|Purchases, issuances, and settlements |  |                           |      |   |                      |   | (24,375 | )                    |  |   |       |   |                       |   |      |       |   |       |   |  |   | (24,375 | )
|                                      |  |                           |       |   |                      |   |         |                      |  |   |        |   |                       |   |       |       |   |        |   |  |   |         |  
|Ending balance at December 31, 2008   |  | $                         | 925   |   |                      | $ | 24,475  |                      |  | $ | 267    |   |                       | $ | 3,097 |       | $ | 2,728  |   |  | $ | 31,492  |  
|                                      |  |                           |       |   |                      |   |         |                      |  |   |        |   |                       |   |       |       |   |        |   |  |   |         |  

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 gains for the three and six-month periods ended
December 31, 2008 included in earnings that relate to assets still held at December 31, 2008 were $193,000 and $143,000, respectively. The total realized net losses for the three and six-month periods ended December 31, 2008 included
in earnings that relate to assets still held at December 31, 2008 were $1,354,000 and $2,304,000, respectively.

STOCK OPTION AND RESTRICTED STOCK
PLANS

Stock Option Plans. There were no active stock option plans at December 31, 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 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 contractual 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



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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.

During the first six-months of fiscal 2009, the Board of Directors approved grants to various officers and employees totaling 109,373 shares with a weighted average market value of $17.63 per share. In the first
six-months of fiscal 2008, the Board of Directors approved grants to various officers and employees totaling 132,609 shares with a weighted average market value of $18.57 per share. As a result of these grants, SWS recorded deferred compensation in
Additional Paid-in Capital of approximately $1,737,000 in fiscal 2009 and $2,294,000 in fiscal 2008. For the three and six-months ended December 31, 2008, SWS recognized compensation expense related to restricted stock grants of
approximately $555,000 and $1,061,000, respectively. For the three and six-months ended December 31, 2007, SWS recognized compensation expense related to restricted stock grants of approximately $443,000 and $852,000, respectively.

At December 31, 2008, the total number of unvested shares outstanding under the Restricted Stock Plan was 323,006 and the total number of shares available for
future grants was 522,446.

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. The Bank receives credit for excess balances maintained and receives interest on all such balances. At December 31, 2008, there was no required reserve balance. At
June 30, 2008, the required reserve balance amounted to $3,176,000.

INVESTMENTS

SWS has interests in two investment partnerships that are accounted for under the equity method which is reflective of fair value, as described above. One is a limited partnership venture capital fund to which SWS has
committed $5,000,000. As of December 31, 2008, SWS had contributed $4,000,000 of this commitment. During the three and six-months ended December 31, 2008, SWS reported losses of $1,392,000 and $2,466,000, respectively, related to this
investment. In comparison, during the three and six-months ended December 31, 2007, SWS recorded losses of $169,000 and income of $406,000, respectively, related to this investment.

The second is a limited partnership equity fund, to which the Bank committed $3,000,000 in fiscal 2007 as a cost effective way of meeting its obligations under the Community Reinvestment Act of 1977 (CRA).
As of December 31, 2008, the Bank has invested $2,400,000 of its commitment. During the three and six-months ended December 31, 2008 the Bank recorded gains of $38,000 and $162,000, respectively, related to this investment. During the
three and six-months ended December 31, 2007, the Bank recorded gains of $12,000 and $15,000, respectively, related to this investment.

In addition,
SWS has one investment that is accounted for under the cost method as prescribed by APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. In fiscal 2009, the Bank committed $2,000,000 to a new
limited partnership equity fund as a cost effective way of meeting its obligations under the CRA. As of December 31, 2008, the Bank has invested $600,000 of its commitment.



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ASSETS SEGREGATED FOR REGULATORY PURPOSES

At December 31, 2008, SWS had cash of approximately $255,275,000 segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 pursuant to the Exchange Act. SWS had no
balances in special reserve bank accounts for the Proprietary Accounts of Introducing Brokers (PAIB) at December 31, 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 Exchange Act. SWS had no balances 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 December 31, 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 $925,000 at December 31, 2008 and $1,393,000 at June 27, 2008.

At December 31, 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 $195,000 at December 31, 2008 and $281,000 at June 27, 2008.

At December 31, 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 $2,845,000 at December 31, 2008 and $5,290,000 at June 27, 2008. On October 1, 2008, the NYX removed
the restrictions on 26,725 shares that were set to lapse in March 2009. As a result, at December 31, 2008, all of the NYX shares were unrestricted.

RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

At December 31, 2008 and June 27, 2008, SWS had
receivable from and payable to brokers, dealers and clearing organizations related to the following (in thousands):



|                             |  |          |           |      |   |          
|---------------------------- |  | -------- | --------- | ---- | - | ---------
|                             |  | December |           | June
|Receivable                   |  |          |           |      |   |          
|Securities failed to deliver |  | $        | 33,967    |      | $ | 46,785   
|Securities borrowed          |  |          | 2,089,001 |      |   | 2,737,279
|Correspondent broker/dealers |  |          | 24,190    |      |   | 29,434   
|Clearing organizations       |  |          | 13,110    |      |   | 15,086   
|Other                        |  |          | 13,110    |      |   | 21,398   
|                             |  |          |           |      |   |          
|                             |  | $        | 2,173,378 |      | $ | 2,849,982
|                             |  |          |           |      |   |          
|Payable                      |  |          |           |      |   |          
|Securities failed to receive |  | $        | 13,348    |      | $ | 57,707   
|Securities loaned            |  |          | 2,050,536 |      |   | 2,702,605
|Correspondent broker/dealers |  |          | 14,091    |      |   | 12,216   
|Other                        |  |          | 10,003    |      |   | 21,849   
|                             |  |          |           |      |   |          
|                             |  | $        | 2,087,978 |      | $ | 2,794,377
|                             |  |          |           |      |   |          



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SWS participates in the securities borrowing and lending business by borrowing and lending securities other than those of
its clients. SWS obtains or releases collateral as prices of the underlying securities fluctuate. At December 31, 2008, SWS had collateral of $2,087,854,000 under securities lending agreements, of which SWS had repledged $2,046,174,000. 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.

Loans receivable at
December 31, 2008 and June 30, 2008 are summarized as follows (in thousands):



|                                                 |  |          |           |   |      |   |         |  
|------------------------------------------------ |  | -------- | --------- | - | ---- | - | ------- | -
|                                                 |  | December |           |   | June |  
|First mortgage loans (principally conventional): |  |          |           |   |      |   |         |  
|Real estate                                      |  | $        | 764,553   |   |      | $ | 637,289 |  
|Construction                                     |  |          | 171,538   |   |      |   | 189,379 |  
|                                                 |  |          |           |   |      |   |         |  
|                                                 |  |          | 936,091   |   |      |   | 826,668 |  
|                                                 |  |          |           |   |      |   |         |  
|Other loans:                                     |  |          |           |   |      |   |         |  
|Commercial                                       |  |          | 127,450   |   |      |   | 101,334 |  
|Consumer                                         |  |          | 6,884     |   |      |   | 6,433   |  
|                                                 |  |          |           |   |      |   |         |  
|                                                 |  |          | 134,334   |   |      |   | 107,767 |  
|                                                 |  |          |           |   |      |   |         |  
|                                                 |  |          | 1,070,425 |   |      |   | 934,435 |  
|Unearned income                                  |  |          | (1,353    | ) |      |   | (1,741  | )
|Allowance for probable loan losses               |  |          | (8,931    | ) |      |   | (6,936  | )
|                                                 |  |          |           |   |      |   |         |  
|                                                 |  | $        | 1,060,141 |   |      | $ | 925,758 |  
|                                                 |  |          |           |   |      |   |         |  

Impairment of loans with a recorded investment of approximately $3,252,000 and $2,705,000 at December 31,
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 year to date average recorded investment in impaired loans was approximately $2,343,000 for
the period ended December 31, 2008 and $3,939,000 for the period ended December 31, 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 $819,000 and $357,000 at December 31, 2008 and June 30, 2008, respectively. No material amount of interest income on impaired loans was recognized for cash payments received in the second quarter of either
fiscal 2009 or fiscal 2008.



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An analysis of the allowance for probable loan losses for the three and six-month periods ended December 31, 2008
and 2007 is as follows (in thousands):



|                               |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|------------------------------ | ---- | ------------------------------ | ----- | ---- | ---------------------------- | - | ------ | - |  | ---- | ----- | - |  | - | ------ | -
|                               |      | Three-Months EndedDecember 31, |       |      | Six-Months EndedDecember 31, |  
|                               | 2008 |                                |       | 2007 |                              |   | 2008   |   |  | 2007 |      
|Balance at beginning of period |      | $                              | 7,566 |      |                              | $ | 5,547  |   |  | $    | 6,936 |   |  | $ | 5,497  |  
|Provision for loan losses      |      |                                | 1,775 |      |                              |   | 1,687  |   |  |      | 2,709 |   |  |   | 1,738  |  
|Net charge-offs                |      |                                | (410  | )    |                              |   | (1,222 | ) |  |      | (714  | ) |  |   | (1,223 | )
|                               |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|                               |      |                                | 1,365 |      |                              |   | 465    |   |  |      | 1,995 |   |  |   | 515    |  
|                               |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Balance at end of period       |      | $                              | 8,931 |      |                              | $ | 6,012  |   |  | $    | 8,931 |   |  | $ | 6,012  |  
|                               |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  

The reserve to loan ratio for the six-months ended December 31, 2008 and 2007 was 0.84% and 0.74%,
respectively.

SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

Securities owned and securities sold, not yet purchased at December 31, 2008 and June 27, 2008, which are carried at market value, include the following (in thousands):



|                                                  |  |          |         |      |   |        
|------------------------------------------------- |  | -------- | ------- | ---- | - | -------
|                                                  |  | December |         | June
|Securities owned                                  |  |          |         |      |   |        
|Corporate equity securities                       |  | $        | 3,326   |      | $ | 9,393  
|Municipal obligations                             |  |          | 73,045  |      |   | 145,948
|U.S. government and government agency obligations |  |          | 10,574  |      |   | 13,887 
|Corporate obligations                             |  |          | 20,348  |      |   | 23,461 
|Other                                             |  |          | 1,677   |      |   | 5,884  
|                                                  |  |          |         |      |   |        
|                                                  |  | $        | 108,970 |      | $ | 198,573
|                                                  |  |          |         |      |   |        
|Securities sold, not yet purchased                |  |          |         |      |   |        
|Corporate equity securities                       |  | $        | 687     |      | $ | 2,197  
|Municipal obligations                             |  |          | 30      |      |   | __     
|U.S. government and government agency obligations |  |          | 12,815  |      |   | 14,205 
|Corporate obligations                             |  |          | 8,928   |      |   | 9,558  
|Other                                             |  |          | 900     |      |   | 551    
|                                                  |  |          |         |      |   |        
|                                                  |  | $        | 23,360  |      | $ | 26,511 
|                                                  |  |          |         |      |   |        

During the three-months ended December 31, 2008, 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
$4,399,000 and $3,782,000 at December 31, 2008 and June 27, 2008, respectively. Additionally, at December 31, 2008 and June 27, 2008, SWS had pledged firm securities valued at $535,000 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 December 31, 2008, SWS held reverse repurchase agreements totaling $4,415,000, collateralized by U.S. government and government agency
obligations with a market value of approximately $4,349,000. 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.



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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. SWS bases its assessment of the fair value of the business units with goodwill on a weighted average of a discounted cash flow model estimate of fair value and
a market multiple approach to fair value. No events occurred in the first six-months of fiscal 2009 that indicated that this asset should be tested for impairment as the business units continued to report pre-tax income for the three and six-month
periods ended December 31, 2008. Also, SWS Group, as a whole, had income in the three and six-months ended December 31, 2008 and the stock price at the end of December 2008 was above its book value per share of $12.21. Goodwill is valued
at $7,552,000 with $4,254,000 in the clearing segment and $3,298,000 in the institutional segment.

INTANGIBLE ASSETS

On March 22, 2006, the Company entered into an agreement with TD Ameritrade Holding Corporation (Ameritrade), to transfer 15 correspondent clients to the
Company. This transaction closed in July 2006, with 12 of the 15 correspondents agreeing to transfer to the Companys clearing platform. The purchase price was based on the estimated value of the transferred correspondents. $2,382,000 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
December 31, 2008 and June 27, 2008, respectively. The amount of the intangible, net of accumulated amortization at December 31, 2008 and June 27, 2008 was $2,299,000 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 recognized approximately $282,000 and $565,000 respectively, and $337,000 and $674,000, respectively, of amortization
expense for the three and six-months ended December 31, 2008 and December 31, 2007, respectively. The intangible is included in Other assets on the Consolidated Statements of Financial Condition. No events occurred in the first
six-months of fiscal 2009 that indicated that this asset should be tested for impairment.

SHORT-TERM BORROWINGS

Southwest Securities has credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. Southwest Securities has not received any
notification from the bank indicating a change in the amount of our broker loan lines since June 2008. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in
customers margin accounts. These lines may also be used to release pledged collateral against day loans. These credit arrangements are provided on an as offered basis and are not committed lines of credit. These arrangements can be
terminated at any time by the lender. Any outstanding balance under these credit arrangements is due on demand and bears interest at rates indexed to the federal funds rate. At December 31, 2008, there were no amounts outstanding under these
secured arrangements. 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 December 31, 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 December 31, 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.



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In addition to the broker loan lines, at December 31, 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 December 31, 2008, there were no amounts outstanding on this line, other than the
$536,000 under unsecured letters of credit referenced 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 December 31, 2008 and June 27,
2008, the total amount available for borrowing was $19,464,000 and $19,321,000, respectively.

At December 31, 2008 and June 27, 2008, SWS had an
irrevocable letter of credit agreement aggregating $50,000,000 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 $82,114,000 and $73,528,000 at December 31, 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 December 31, 2008, approximately $238,393,000 of client securities under customer margin loans was available to be pledged, of which SWS had pledged
$4,052,000 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 December 31, 2008, the amount outstanding under
this line of credit was $3,505,000. At June 30, 2008, there were no amounts outstanding on this line of credit.

DEPOSITS

Deposits at December 31, 2008 and June 30, 2008 are summarized as follows (dollars in thousands):



|                                              |        |          |           |  |       |        |  |         |           |  |       |  
|--------------------------------------------- | ------ | -------- | --------- |  | ----- | ------ |  | ------- | --------- |  | ----- | -
|                                              |        | December |           |  | June  |       
|                                              | Amount |          | Percent   |  |       | Amount |  | Percent |          
|Non-interest bearing demand accounts          |        | $        | 50,114    |  | 4.3   | %      |  | $       | 52,349    |  | 4.9   | %
|Interest bearing demand accounts              |        |          | 71,973    |  | 6.2   |        |  |         | 58,761    |  | 5.5   |  
|Savings accounts                              |        |          | 908,521   |  | 78.4  |        |  |         | 824,596   |  | 76.9  |  
|Limited access money market accounts          |        |          | 47,258    |  | 4.1   |        |  |         | 43,865    |  | 4.1   |  
|Certificates of deposit, less than $100,000   |        |          | 45,760    |  | 3.9   |        |  |         | 55,173    |  | 5.1   |  
|Certificates of deposit, $100,000 and greater |        |          | 35,894    |  | 3.1   |        |  |         | 37,229    |  | 3.5   |  
|                                              |        |          |           |  |       |        |  |         |           |  |       |  
|                                              |        | $        | 1,159,520 |  | 100.0 | %      |  | $       | 1,071,973 |  | 100.0 | %
|                                              |        |          |           |  |       |        |  |         |           |  |       |  

The weighted average interest rate on deposits was approximately 1.5% at December 31, 2008 and 2.37% at
June 30, 2008.



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At December 31, 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   |  | $             | 36,846 |                        | $ | 5,532                   |  | $                       | 1,798 |            | $ | 799   |  | $ | 785   |  | $ | 45,760
|Certificates of deposit, $100,000 and greater |  |               | 29,991 |                        |   | 3,803                   |  |                         | 584   |            |   | 481   |  |   | 1,035 |  |   | 35,894
|                                              |  |               |        |                        |   |                         |  |                         |       |            |   |       |  |   |       |  |   |       
|                                              |  | $             | 66,837 |                        | $ | 9,335                   |  | $                       | 2,382 |            | $ | 1,280 |  | $ | 1,820 |  | $ | 81,654
|                                              |  |               |        |                        |   |                         |  |                         |       |            |   |       |  |   |       |  |   |       

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under
repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair
value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2008 and June 27, 2008 were $3,646,000 and $6,342,000, respectively.

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

At
December 31, 2008 and June 30, 2008, advances from the FHLB were due as follows (in thousands):



|                        |  |          |         |      |   |        
|----------------------- |  | -------- | ------- | ---- | - | -------
|                        |  | December |         | June
|Maturity:               |  |          |         |      |   |        
|Due within one year     |  | $        | 43,217  |      | $ | 71,056 
|Due within two years    |  |          | 6,674   |      |   | 5,946  
|Due within five years   |  |          | 25,940  |      |   | 39,736 
|Due within seven years  |  |          | 32,623  |      |   | 13,835 
|Due within ten years    |  |          | 9,159   |      |   | 11,512 
|Due within twenty years |  |          | 30,241  |      |   | 23,405 
|Due beyond twenty years |  |          | 286     |      |   | 760    
|                        |  |          |         |      |   |        
|                        |  | $        | 148,140 |      | $ | 166,250
|                        |  |          |         |      |   |        

Pursuant to collateral agreements, the advances from the FHLB, with interest rates ranging from 0.5% to 8%, are
collateralized by approximately $438,000,000 of collateral value (as defined) in qualifying first mortgage loans at December 31, 2008 (calculated at September 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 December 31, 2008, Southwest Securities had net capital of $125,559,000, or approximately 43.6% of aggregate
debit balances, which was $119,796,000 in excess of its minimum net capital requirement of $5,763,000 at that date. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting
net capital would be less than 5% of aggregate debit items. At December 31, 2008, Southwest Securities had net capital of $111,151,000 in excess of 5% of aggregate debit items.



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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 December 31, 2008, the net capital and excess net capital of SWS Financial was $800,000 and $550,000, 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 0.43 to 1. M.L. Stern also had net capital, as defined, of $4,897,000 which exceeded the minimum
requirements by $4,647,000.

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 December 31, 2008 and June 30, 2008, that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 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.

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



|                                        |        |        |         |  |                             |        |  |                                                               |        |  |        |   |       |   |         |  |      |  
|--------------------------------------- | ------ | ------ | ------- |  | --------------------------- | ------ |  | ------------------------------------------------------------- | ------ |  | ------ | - | ----- | - | ------- |  | ---- | -
|                                        |        | Actual |         |  | For CapitalAdequacyPurposes |        |  | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        | Amount |        | Ratio   |  |                             | Amount |  | Ratio                                                         |        |  | Amount |   | Ratio |  
|December 31, 2008:                      |        |        |         |  |                             |        |  |                                                               |        |  |        |   |       |   |         |  |      |  
|Total capital to risk weighted assets   |        | $      | 123,681 |  | 10.0                        | %      |  | $                                                             | 98,492 |  | 8.0    | % |       | $ | 123,115 |  | 10.0 | %
|Tier I capital to risk weighted assets  |        |        | 114,750 |  | 9.3                         |        |  |                                                               | 49,246 |  | 4.0    |   |       |   | 73,869  |  | 6.0  |  
|Tier I capital to adjusted total assets |        |        | 114,750 |  | 8.0                         |        |  |                                                               | 57,232 |  | 4.0    |   |       |   | 71,540  |  | 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  |  



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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 and six-month periods ended December 31, 2008 and December 31, 2007
(in thousands, except share and per share amounts):



|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|--------------------------------------------- | ---------------- | ------------------ | ---------------- | ---------------- | ---------------- | ---------- | ---------------- | - | ---------- |  | - | ----------
|                                              |                  | Three-Months Ended |                  | Six-Months Ended
|                                              | December 31,2008 |                    | December 31,2007 |                  | December 31,2008 |            | December 31,2007
|Income from continuing operations             |                  | $                  | 9,046            |                  | $                | 7,248      |                  | $ | 16,069     |  | $ | 14,952    
|Income from discontinued operations           |                  |                    |                 |                  |                  |           |                  |   |           |  |   | 17        
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Net income                                    |                  | $                  | 9,046            |                  | $                | 7,248      |                  | $ | 16,069     |  | $ | 14,969    
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Weighted average shares outstanding  basic   |                  |                    | 27,079,804       |                  |                  | 27,465,601 |                  |   | 27,053,620 |  |   | 27,437,367
|Effect of dilutive securities:                |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Assumed exercise of stock options             |                  |                    | 76,492           |                  |                  | 95,956     |                  |   | 92,824     |  |   | 123,182   
|Restricted stock                              |                  |                    | 30,419           |                  |                  | 22,858     |                  |   | 47,909     |  |   | 39,189    
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Weighted average shares outstanding  diluted |                  |                    | 27,186,715       |                  |                  | 27,584,415 |                  |   | 27,194,353 |  |   | 27,599,738
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Earnings per share  basic                    |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Income from continuing operations             |                  | $                  | 0.33             |                  | $                | 0.26       |                  | $ | 0.59       |  | $ | 0.55      
|Income from discontinued operations           |                  |                    |                 |                  |                  |           |                  |   |           |  |   |          
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Net income                                    |                  | $                  | 0.33             |                  | $                | 0.26       |                  | $ | 0.59       |  | $ | 0.55      
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Earnings per share  diluted                  |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Income from continuing operations             |                  | $                  | 0.33             |                  | $                | 0.26       |                  | $ | 0.59       |  | $ | 0.54      
|Income from discontinued operations           |                  |                    |                 |                  |                  |           |                  |   |           |  |   |          
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           
|Net income                                    |                  | $                  | 0.33             |                  | $                | 0.26       |                  | $ | 0.59       |  | $ | 0.54      
|                                              |                  |                    |                  |                  |                  |            |                  |   |            |  |   |           

At December 31, 2008 and December 31, 2007, there were options to acquire approximately 537,000 and
621,000 shares of common stock outstanding under the two stock option plans, respectively. See Stock Options and Restricted Stock Plans. As of December 31, 2008, options to acquire 7,417 shares of common stock were
anti-dilutive and therefore were not included in the calculation of weighted average shares outstanding-dilutive. As of December 31, 2007, approximately 12,074 outstanding average shares were anti-dilutive and therefore were not included in the
calculation of weighted average shares outstanding-dilutive.

Dividends per share for the three-months ended December 31, 2008 and 2007 were $0.09 and
$0.08 per share, respectively.

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 or the previous plan which expired June 30, 2008 during the six-months ended December 31, 2008 and December 31, 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. No shares were purchased in the three-months ended December 31, 2008. The plan purchased 20,000 shares in the
six-months ended December 31, 2008, at a cost of approximately $437,000 or $21.83 per share. No shares were purchased by the plan in the three and six-months ended December 31, 2007. The plan distributed 98 shares in the six-months ended
December 31, 2008.



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Upon vesting of the shares granted under the Restricted Stock Plan, 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, 21,901 shares were repurchased with a market value of approximately $372,899 or an average of $17.03 per share in the first half of fiscal 2009. In the
first half of fiscal 2008, 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), 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



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



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The following table presents the Companys operations by the segments outlined above for the three and six-months
ended December 31, 2008 and December 31, 2007:



|                                                      |  |          |        |   |        |   |               |  |   |         |   |  |       |        |   |                             |   |         |   |  |   |        
|----------------------------------------------------- |  | -------- | ------ | - | ------ | - | ------------- |  | - | ------- | - |  | ----- | ------ | - | --------------------------- | - | ------- | - |  | - | -------
|UNAUDITED QUARTERLY FINANCIAL
INFORMATION            
|(in thousands)                                        |  | Clearing |        |   | Retail |   | Institutional |  |   | Banking |   |  | Other |        |   | ConsolidatedSWS Group, Inc.
|Three-months ended December 31, 2008                  |  |          |        |   |        |   |               |  |   |         |   |  |       |        |   |                             |   |         |   |  |   |        
|                                                      |  |          |        |   |        |  
|Operating revenue                                     |  | $        | 6,011  |   |        | $ | 30,084        |  | $ | 42,497  |   |  | $     | (93    | ) |                             | $ | (4,704  | ) |  | $ | 73,795 
|Net intersegment revenues                             |  |          | (260   | ) |        |   | 277           |  |   | 238     |   |  |       | 2,115  |   |                             |   | (2,370  | ) |  |   |       
|Net interest revenue                                  |  |          | 1,162  |   |        |   | 818           |  |   | 9,720   |   |  |       | 14,680 |   |                             |   | 1       |   |  |   | 26,381 
|Net revenues                                          |  |          | 7,173  |   |        |   | 30,902        |  |   | 52,217  |   |  |       | 14,587 |   |                             |   | (4,703  | ) |  |   | 100,176
|Operating expenses                                    |  |          | 5,289  |   |        |   | 26,691        |  |   | 32,175  |   |  |       | 12,228 |   |                             |   | 8,261   |   |  |   | 84,644 
|Depreciation and amortization                         |  |          | 290    |   |        |   | 222           |  |   | 123     |   |  |       | 526    |   |                             |   | 338     |   |  |   | 1,499  
|Income (loss) from continuing operations before taxes |  |          | 1,884  |   |        |   | 4,211         |  |   | 20,042  |   |  |       | 2,359  |   |                             |   | (12,964 | ) |  |   | 15,532 
|                                                      |  |          |        |   |        |  
|Three-months ended December 31, 2007                  |  |          |        |   |        |   |               |  |   |         |   |  |       |        |   |                             |   |         |   |  |   |        
|                                                      |  |          |        |   |        |  
|Operating revenue                                     |  | $        | 6,336  |   |        | $ | 20,380        |  | $ | 20,061  |   |  | $     | 676    |   |                             | $ | (259    | ) |  | $ | 47,194 
|Net intersegment revenues                             |  |          | (251   | ) |        |   | 339           |  |   | (114    | ) |  |       | 1,743  |   |                             |   | (1,717  | ) |  |   |       
|Net interest revenue                                  |  |          | 3,683  |   |        |   | 1,544         |  |   | 8,198   |   |  |       | 12,194 |   |                             |   | 11      |   |  |   | 25,630 
|Net revenues                                          |  |          | 10,019 |   |        |   | 21,924        |  |   | 28,259  |   |  |       | 12,870 |   |                             |   | (248    | ) |  |   | 72,824 
|Operating expenses                                    |  |          | 7,338  |   |        |   | 17,806        |  |   | 17,937  |   |  |       | 9,155  |   |                             |   | 8,741   |   |  |   | 60,977 
|Depreciation and amortization                         |  |          | 342    |   |        |   | 186           |  |   | 106     |   |  |       | 205    |   |                             |   | 356     |   |  |   | 1,195  
|Income (loss) from continuing operations before taxes |  |          | 2,681  |   |        |   | 4,118         |  |   | 10,322  |   |  |       | 3,715  |   |                             |   | (8,989  | ) |  |   | 11,847 



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|                                                      |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |         |   |  |   |          
|----------------------------------------------------- |  | -------- | ------- | - | ------ | - | ------------- |  | ------- | --------- | ----- | - | --------- | --------------------------- | - | ------- | - |  | - | ---------
|UNAUDITED QUARTERLY FINANCIAL
INFORMATION            
|(in thousands)                                        |  | Clearing |         |   | Retail |   | Institutional |  | Banking |           | Other |   |           | ConsolidatedSWS Group, Inc.
|Six-months ended December 31, 2008                    |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |         |   |  |   |          
|                                                      |  |          |         |   |        |  
|Operating revenue                                     |  | $        | 11,927  |   |        | $ | 58,678        |  | $       | 65,436    |       | $ | 570       |                             | $ | (7,248  | ) |  | $ | 129,363  
|Net intersegment revenues                             |  |          | (491    | ) |        |   | 528           |  |         | 386       |       |   | 4,138     |                             |   | (4,561  | ) |  |   |         
|Net interest revenue                                  |  |          | 3,422   |   |        |   | 2,221         |  |         | 23,593    |       |   | 29,344    |                             |   | 1       |   |  |   | 58,581   
|Net revenues                                          |  |          | 15,349  |   |        |   | 60,899        |  |         | 89,029    |       |   | 29,914    |                             |   | (7,247  | ) |  |   | 187,944  
|Operating expenses                                    |  |          | 11,193  |   |        |   | 53,914        |  |         | 57,960    |       |   | 23,007    |                             |   | 15,545  |   |  |   | 161,619  
|Depreciation and amortization                         |  |          | 580     |   |        |   | 418           |  |         | 238       |       |   | 890       |                             |   | 674     |   |  |   | 2,800    
|Income (loss) from continuing operations before taxes |  |          | 4,156   |   |        |   | 6,985         |  |         | 31,069    |       |   | 6,907     |                             |   | (22,792 | ) |  |   | 26,325   
|Assets(*)                                             |  |          | 327,947 |   |        |   | 162,498       |  |         | 2,214,558 |       |   | 1,431,069 |                             |   | 19,822  |   |  |   | 4,155,894
|                                                      |  |          |         |   |        |  
|Six-months ended December 31, 2007                    |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |         |   |  |   |          
|                                                      |  |          |         |   |        |  
|Operating revenue                                     |  | $        | 12,135  |   |        | $ | 38,288        |  | $       | 38,515    |       | $ | 1,276     |                             | $ | 315     |   |  | $ | 90,529   
|Net intersegment revenues                             |  |          | (494    | ) |        |   | 590           |  |         | 403       |       |   | 3,444     |                             |   | (3,943  | ) |  |   |         
|Net interest revenue                                  |  |          | 8,162   |   |        |   | 3,275         |  |         | 13,697    |       |   | 24,085    |                             |   | 22      |   |  |   | 49,241   
|Net revenues                                          |  |          | 20,297  |   |        |   | 41,563        |  |         | 52,212    |       |   | 25,361    |                             |   | 337     |   |  |   | 139,770  
|Operating expenses                                    |  |          | 13,119  |   |        |   | 34,261        |  |         | 34,853    |       |   | 16,194    |                             |   | 17,550  |   |  |   | 115,977  
|Depreciation and amortization                         |  |          | 683     |   |        |   | 360           |  |         | 203       |       |   | 388       |                             |   | 799     |   |  |   | 2,433    
|Income (loss) from continuing operations before taxes |  |          | 7,178   |   |        |   | 7,302         |  |         | 17,359    |       |   | 9,167     |                             |   | (17,213 | ) |  |   | 23,793   
|Income from discontinued operations                   |  |          |        |   |        |   |              |  |         |          |       |   | 17        |                             |   |        |   |  |   | 17       
|Assets(*)                                             |  |          | 493,273 |   |        |   | 189,237       |  |         | 2,839,134 |       |   | 1,213,603 |                             |   | 34,147  |   |  |   | 4,769,394



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|(*) | Assets are reconciled to total assets as presented in the December 31, 2008 and December 31, 2007 Consolidated Statements of Financial Condition as follows (in thousands):
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  |                  |           |   |                  |   |           |  
|------------------------------------------------------------ |  | ---------------- | --------- | - | ---------------- | - | --------- | -
|                                                             |  | December 31,2008 |           |   | December 31,2007 |  
|Amount as presented above                                    |  | $                | 4,155,894 |   |                  | $ | 4,769,394 |  
|Reconciling items:                                           |  |                  |           |   |                  |   |           |  
|Unallocated assets:                                          |  |                  |           |   |                  |   |           |  
|Cash                                                         |  |                  | 48,972    |   |                  |   | 18,381    |  
|Receivables from brokers, dealers and clearing organizations |  |                  | 47,496    |   |                  |   | 81,493    |  
|Receivable from clients, net of allowances                   |  |                  | 23,484    |   |                  |   | 37,597    |  
|Other assets                                                 |  |                  | 30,883    |   |                  |   | 16,244    |  
|Unallocated eliminations                                     |  |                  | (16,872   | ) |                  |   | (7,345    | )
|                                                             |  |                  |           |   |                  |   |           |  
|Total assets                                                 |  | $                | 4,289,857 |   |                  | $ | 4,915,764 |  
|                                                             |  |                  |           |   |                  |   |           |  



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COMMITMENTS, CONTINGENCIES and GUARANTEES

Commitment and Contingencies.

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

Venture Capital Funds.SWS has committed to invest $5,000,000 in a limited
partnership venture capital fund. As of December 31, 2008, SWS had contributed $4,000,000 of its commitment. The Bank has committed to invest $5,000,000 in two limited partnership funds. As of December 31, 2008, the Bank had invested
$3,000,000 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 December 31, 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 $2,887,000. 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 $4,562,000 and $7,752,000 at December 31, 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
$86,000 and $175,000 for the three and six-months ended December 31, 2008, respectively and $215,000 and $512,000 for the three and six-months ended December 31, 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. (together with its subsidiaries,
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
(SEC) 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 Southwest Securities, FSB (the Bank) earns substantially all of its income on the



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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.

The other category includes SWS Group, Inc. (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 half, and specifically the second quarter, of fiscal 2009. Equity market indices declined from a year ago with the Dow Jones Industrial Average (the DJIA) decreasing 34%, the Standard & Poors 500 Index down 38% and
the NASDAQ Composite Index down 41%. Since the end of the first quarter of fiscal 2009, all of these indices have continued to decline. The DJIA has closed below 8,000 for the first time in almost six years and was 8,776 at the close of trading on
December 31, 2008. Volume remained active with average daily volume for the quarter on the New York Stock Exchange increasing 35% 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. This turmoil did not subside in the second quarter of fiscal 2009. 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.

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. In addition, the new U.S. President has indicated that he will be working on a stimulus plan to help the U.S. economy and will propose new legislation to help
stabilize the U.S. stock markets. However, both the EESA and the proposed new legislation will take time to show their impact on the U.S. economy.

The
Federal Reserve Board (FRB) lowered the federal funds rate by 400 basis points from December 31, 2007 to December 31, 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 U.S. 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.

Through the end of December 2008, these activities have failed to reinvigorate the financial and credit markets. Credit standards have
continued to tighten while unemployment rates and foreclosures have increased substantially. All of these factors have had an impact on our businesses at the Bank and the brokerage.



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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.

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 normally.

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. At the end of the first and second quarters of fiscal 2009, we held $95.0 million and $39.4 million, respectively of auction rate municipal bonds. In the second quarter of fiscal 2009, we sold $55.6 million of the auction rate municipal bonds
and, subsequent to the end of the second quarter of fiscal 2009, we sold another $14.9 million of these bonds, reducing our holdings to $24.5 million, which represents one security. This security is investment grade credit, is valued at par and as
of January 31, 2009 is yielding approximately 1% per year. While management does not expect any reduction in the cash flow from this bond, prolonged failure of this auction could indicate an impairment in the value due to lack of
liquidity. The company currently has the ability to hold this investment. We expect the issuer of this bond to refinance their debt.

Auction rate bonds have been 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 this investment daily and ensures that we have limited exposure.

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 $31.1 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 or classify them as cash equivalents on our statements 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 $14.2 million in auction rate bonds, 93% of which are held by customers of 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 December 31, 2008, we held mortgage
and asset-backed securities of approximately $5.4 million included in Securities owned, at market value on the Consolidated Statements of Financial Condition.



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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.

We have 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 and second quarters
of fiscal 2009, we recorded a $1.1 million loss and $1.4 million loss, respectively, for a total loss of $2.5 million on this joint venture. A prolonged downturn in the economy could lead to a continued decline in the fair value of this investment.
At December 31, 2008, this investment was recorded at $268,000. Additionally, the company has a commitment to invest an additional $1 million in this partnership 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 during the
second quarter of fiscal 2009 have ranged as high as 35% greater than our highest margin requirement in the second 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. Subsequent to the end of the second quarter of fiscal 2009, one of our securities lending clearing houses substantially increased the margin requirements for this business. This increase in our
margin requirement could impact the volume of stock loan business we conduct.

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. 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 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.

Bank. Credit quality at the Bank has been adversely impacted by the current economic downturn. Deterioration of the residential construction portfolio continues as the North Texas market continues to
work through the oversupply of vacant housing. Finished vacant housing inventory currently stands at a 3.4 month supply, while a 2.5 month supply is considered more optimum, according to Residential Strategies, Inc. The Bank also continues to
experience deterioration in lot and land development loan portfolios. Nonperforming assets increased $10.2 million during the second fiscal



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quarter. This increase can be attributed to residential construction and lot and land development loans. Resulting losses from the deteriorating asset
quality continue to be at manageable levels with net charge-offs for the quarter at $410,000 compared to $304,000 in the first quarter of fiscal 2009. This represents a 15% loss on problem loans liquidated during fiscal 2009 to date. Deterioration
is also evident in the increased loan loss provision expense of $1.8 million this quarter compared to $934,000 in the first quarter of fiscal 2009. The loan loss provision was $2.7 million during the first half of fiscal 2009 and $1.7 million during
the first half of fiscal 2008. We anticipate loan loss provision expense to continue at the fiscal 2009 levels for the next few quarters. Mortgage rates continue to be at or near historic lows which should help mitigate losses associated with the
residential construction loan portfolio.

As the economic downturn persists, we have experienced and expect to experience additional deterioration in our
commercial real estate portfolio. Deterioration in this portfolio could extend over the next few quarters. Because we expect that losses associated with this portfolio will have a tendency to be individually larger than those experienced in the
residential portfolio, we may experience more volatility in our earnings.

The Federal Reserve continued aggressive rate reductions during the second
quarter of fiscal 2009, lowering the discount rate 175 basis points to 0.50% and, for the first time ever, set the federal funds target using a range. At the December 2008, Federal Open Market Committee meeting, the FRB set the federal funds target
at a historic low using a range of 0.0% - 0.25%. The Bank is asset sensitive and this type of falling rate environment has a negative impact on our net interest spreads. As the rate environment stabilizes and liabilities reprice, net interest
spreads should begin to normalize.

Passage of the EESA accelerated the FRBs authority to pay interest on depository institutions required and
excess reserve balances. This allowed the FRB to establish a floor for federal funds, which has provided stability to this 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 $250 billion of capital into the banking system. On October 30, 2008, we, through our banking subsidiary, made an initial application
for the Capital Purchase Program under the Troubled Asset Relief Program, TARP funds. Management believed it was prudent to apply and subsequently evaluate whether to proceed with the application process at a future date. In
January 2009, management determined it was not in the best interest of the firm to pursue this form of funding and has discontinued its application process.

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 and SWS Group are participating in the senior unsecured debt component and the Bank is also participating in the non interest bearing transaction account component. No senior
unsecured debt has been issued by SWS Group or the Bank.

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



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sales and revaluation of the remaining collateral resulted 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. Substantially all of
the operations of the M.L. Stern broker/dealer were transferred to Southwest Securities in December 2008 and are operating as M.L. Stern a division of Southwest Securities, Inc. These operations are included in our retail segment. We expect to
dissolve the M.L. Stern broker/dealer in the third quarter of fiscal 2009

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 (FASB) Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations.

RESULTS OF OPERATIONS

Consolidated

Net income for the three and six-month periods ended December 31, 2008 was $9.0 million and $16.1 million, respectively, an increase of $1.8 million and $1.1 million from net income for the comparable three and
six-month periods ended December 31, 2007, respectively. Net income for the six-month period ending December 31, 2007 includes income of $17,000 from discontinued operations. The three and six-month periods ended December 31, 2008 and
December 31, 2007 contained 66 and 129 and 63 and 127 trading days, respectively.

The following is a summary of increases (decreases) in categories
of net revenues and operating expenses for the three and six-month periods ended December 31, 2008 compared to the three and six-month periods ended December 31, 2007 (dollars in thousands):



|                                                     |        |                   |        |         |                 |      |        |  |   |         |   |  |     |   
|---------------------------------------------------- | ------ | ----------------- | ------ | ------- | --------------- | ---- | ------ |  | - | ------- | - |  | --- | --
|                                                     |        | Three-MonthsEnded |        |         | Six-MonthsEnded |     
|                                                     | Amount |                   |        | %Change |                 |      | Amount |  |   | %Change |  
|Net revenues:                                        |        |                   |        |         |                 |      |        |  |   |         |   |  |     |   
|Net revenues from clearing operations                |        | $                 | (660   | )       |                 | (18  | )%     |  | $ | (715    | ) |  | (10 | )%
|Commissions                                          |        |                   | 27,208 |         |                 | 104  |        |  |   | 40,781  |   |  | 84  |   
|Net interest                                         |        |                   | 751    |         |                 | 3    |        |  |   | 9,340   |   |  | 19  |   
|Investment banking, advisory and administrative fees |        |                   | 611    |         |                 | 7    |        |  |   | 1,494   |   |  | 8   |   
|Net gains on principal transactions                  |        |                   | 5,424  |         |                 | 214  |        |  |   | 6,785   |   |  | 175 |   
|Other                                                |        |                   | (5,982 | )       |                 | (100 | )      |  |   | (9,511  | ) |  | (77 | ) 
|                                                     |        |                   |        |         |                 |      |        |  |   |         |   |  |     |   
|                                                     |        |                   | 27,352 |         |                 | 38   |        |  |   | 48,174  |   |  | 34  |   
|                                                     |        |                   |        |         |                 |      |        |  |   |         |   |  |     |   



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|                                                  |        |                   |         |  |                 |        |  |   |         |   |  |    |  
|------------------------------------------------- | ------ | ----------------- | ------- |  | --------------- | ------ |  | - | ------- | - |  | -- | -
|                                                  |        | Three-MonthsEnded |         |  | Six-MonthsEnded |       
|                                                  | Amount |                   | %Change |  |                 | Amount |  |   | %Change |  
|Operating expenses:                               |        |                   |         |  |                 |        |  |   |         |   |  |    |  
|Commissions and other employee compensation       |        | $                 | 20,156  |  | 47              | %      |  | $ | 32,343  |   |  | 39 | %
|Occupancy, equipment and computer service costs   |        |                   | 1,657   |  | 26              |        |  |   | 2,874   |   |  | 22 |  
|Communications                                    |        |                   | 824     |  | 33              |        |  |   | 1,759   |   |  | 37 |  
|Floor brokerage and clearing organization charges |        |                   | 108     |  | 12              |        |  |   | (102    | ) |  | (5 | )
|Advertising and promotional                       |        |                   | 219     |  | 24              |        |  |   | 425     |   |  | 28 |  
|Other                                             |        |                   | 703     |  | 10              |        |  |   | 8,343   |   |  | 74 |  
|                                                  |        |                   |         |  |                 |        |  |   |         |   |  |    |  
|                                                  |        |                   | 23,667  |  | 39              |        |  |   | 45,642  |   |  | 39 |  
|                                                  |        |                   |         |  |                 |        |  |   |         |   |  |    |  
|Pre-tax income                                    |        | $                 | 3,685   |  | 31              | %      |  | $ | 2,532   |   |  | 11 | %
|                                                  |        |                   |         |  |                 |        |  |   |         |   |  |    |  

Net revenues increased for the second quarter of fiscal 2009 by $27.4 million as compared to the same period of
fiscal 2008. The largest components of the increase were in commissions, $27.2 million and net gains on principal transactions, $5.4 million. The increase in commissions is due to primarily to a $19.6 million increase in the institutional segment
primarily in the fixed income business as greater volatility and increased client activity led to wider spreads and more transactions. Also contributing to the increase in commissions is the increase in our retail segment of $7.6 million. The
increase in our retail segment is primarily due to the acquisition of M.L Stern. M.L. Stern recorded commission revenue of $9.3 million for the second quarter of fiscal 2009. These commission revenue increases were partially offset by a $726,000
decrease in commissions for SWS Financial and a $970,000 decrease in commissions for our Private Client Group. The increase in net gains on principal transactions is driven by activity in the fixed income business primarily from the volatility in
the market and increased customer activity. These increases were offset by a decrease in other revenue of $6.0 million. This decrease is due to $1.2 million increase in our losses related to our limited partnership venture capital fund, a $2.2
million increase in our losses on our deferred compensation plan, with a corresponding decrease in compensation expenses on our deferred compensation plan, a $873,000 decrease in revenue from the sale of our insurance products and a decrease of
$635,000 in SEC fees collected with a corresponding decrease in other expenses.

Net revenues increased for the first half of fiscal 2009 by $48.2 million
as compared to the same period of fiscal 2008. The largest components of the increase were in commissions, $40.8 million; net interest, $9.3 million and net gains on principal transactions, $6.8 million. The increase in commissions is due primarily
to a $24.1 million increase in the institutional segment primarily in the fixed income business as greater volatility and increased client activity led to wider spreads and more transactions. Also contributing to the increase in commissions is the
increase in our retail segment of $16.7 million. The increase in our retail segment is primarily due to the acquisition of M.L Stern. M.L. Stern recorded commission revenue of $19.0 million for the first six-months of fiscal 2009. These commission
revenue increases were partially offset by a $1.2 million decrease in commissions for SWS Financial and a $1.1 million decrease in commissions for our Private Client Group. The increase in net interest is due primarily to a 91 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 31%. The increase in net gains on principal transactions is driven by activity in the fixed income business primarily from the volatility in
the market and increased customer activity. These increases were offset by a decrease in other revenue of $9.5 million. This decrease is due to $2.9 million increase in our losses related to our limited partnership venture capital fund, a $3.1
million increase in our losses on our deferred compensation plan, with a corresponding decrease in compensation expenses on our deferred compensation plan, a $1.6 million decrease in revenue from the sale of our insurance products and a decrease of
$1.1 million in SEC fees collected with a corresponding decrease in other expenses.



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Operating expenses increased $23.7 million for the three-months ended December 31, 2008 as compared to the same
period of fiscal 2008. The largest increases were in commissions and other employee compensation, $20.2 million and occupancy, equipment and computer service costs, $1.7 million. The increase in commissions and other employee compensation is due
primarily to the acquisition of M.L. Stern. M.L. Sterns commission and other employee expenses were $7.8 million for the quarter ended December 31, 2008. The remainder of the increase is due to variable compensation in the institutional
segment and additional headcount at the Bank from fiscal 2008 to fiscal 2009. The increase in occupancy, equipment and computer service costs is due primarily to the acquisition of M.L. Stern.

Operating expenses increased $45.6 million for the six-months ended December 31, 2008 as compared to the same period of fiscal 2008. The largest increases were in
commissions and other employee compensation, $32.3 million; occupancy, equipment and computer service costs, $2.9 million and other expenses, $8.3 million. The increase in commissions and other employee compensation is due primarily to the
acquisition of M.L. Stern. M.L. Sterns commission and other employee expenses were $16.1 million for the six-months ended December 31, 2008. The remainder of the increase is due to variable compensation in the institutional segment and
additional headcount at the Bank from fiscal 2008 to fiscal 2009. The increase in occupancy, equipment and computer service costs is due primarily to the acquisition of M.L. Stern. The increase in other expenses is primarily due to the $5.4 million
write-off of the Lehman counterparty exposure, an increase in the provision for loan losses of $1.1 million, and increases in purchased mortgage loan losses, real estate expenses and Savings Association Insurance Fund (SAIF) assessments
of $1.8 million.

Net Interest Income

Net
interest income from the brokerage segments is dependent upon the level of customer and stock loan balances as well as the spread between the rates we earn on those assets compared with the cost of funds. Net interest is the primary source of income
for the Bank and represents the amount by which interest and fees generated by earning assets exceed the cost of funds, primarily interest paid to the Banks depositors on interest-bearing accounts. The components of interest earnings are as
follows for the three and six-month periods ended December 31, 2008 and 2007 (in thousands):



|             |                  |                    |                  |                  |                  |        |                  |   |        |  |   |       
|------------ | ---------------- | ------------------ | ---------------- | ---------------- | ---------------- | ------ | ---------------- | - | ------ |  | - | ------
|             |                  | Three-Months Ended |                  | Six-Months Ended
|             | December 31,2008 |                    | December 31,2007 |                  | December 31,2008 |        | December 31,2007
|Brokerage    |                  | $                  | 11,701           |                  | $                | 13,436 |                  | $ | 29,237 |  | $ | 25,156
|Bank         |                  |                    | 14,680           |                  |                  | 12,194 |                  |   | 29,344 |  |   | 24,085
|             |                  |                    |                  |                  |                  |        |                  |   |        |  |   |       
|Net interest |                  | $                  | 26,381           |                  | $                | 25,630 |                  | $ | 58,581 |  | $ | 49,241
|             |                  |                    |                  |                  |                  |        |                  |   |        |  |   |       

For the three-months ended December 31, 2008 and 2007, net interest income from our brokerage entities
accounted for approximately 12% and 19% of our net revenues, respectively. For the six-months ended December 31, 2008 and 2007, net interest income generated by our brokerage entities accounted for approximately 16% and 18% of our net revenues,
respectively. Net interest for the Bank is discussed in the Banking segment discussion below.



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Average balances of interest-earning assets and interest-bearing liabilities in the broker/dealer operations are as
follows (in thousands):



|                                          |                  |                    |                  |                  |                  |           |                  |   |           |  |   |          
|----------------------------------------- | ---------------- | ------------------ | ---------------- | ---------------- | ---------------- | --------- | ---------------- | - | --------- |  | - | ---------
|                                          |                  | Three-Months Ended |                  | Six-Months Ended
|                                          | December 31,2008 |                    | December 31,2007 |                  | December 31,2008 |           | December 31,2007
|Average interest-earning assets:          |                  |                    |                  |                  |                  |           |                  |   |           |  |   |          
|Customer margin balances                  |                  | $                  | 181,000          |                  | $                | 290,000   |                  | $ | 206,000   |  | $ | 291,000  
|Assets segregated for regulatory purposes |                  |                    | 304,000          |                  |                  | 338,000   |                  |   | 319,000   |  |   | 325,000  
|Stock borrowed                            |                  |                    | 1,766,000        |                  |                  | 3,077,000 |                  |   | 2,296,000 |  |   | 3,073,000
|                                          |                  |                    |                  |                 
|Average interest-bearing liabilities:     |                  |                    |                  |                  |                  |           |                  |   |           |  |   |          
|Customer funds on deposit                 |                  |                    | 421,000          |                  |                  | 514,000   |                  |   | 453,000   |  |   | 508,000  
|Stock loaned                              |                  |                    | 1,735,000        |                  |                  | 3,042,000 |                  |   | 2,260,000 |  |   | 3,036,000

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

Income Tax Expense

For the first half of fiscal 2009, income
tax expense (effective rate of 39%) differed from the amount that would have otherwise been calculated by applying the federal corporate tax rate (35%) to income from continuing operations before income taxes due to state income taxes and other
permanently excluded items.

Segment Information

The
following is a summary of the increases (decreases) in categories of net revenues and pre-tax income by segment for the three and six-month periods ended December 31, 2008 compared to the three and six-month periods ended December 31, 2007
(dollars in thousands):



|                |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   
|--------------- | ---------------- | ------------------ | ------- | ---------------- | ------------------- | - | ------ | -------- |  | - | ------ | - |  | ------ | --
|                |                  | Three-Months Ended |         |                  | Increase/(Decrease) |   |        | % Change | 
|                | December 31,2008 |                    |         | December 31,2007 |                     |   |       
|Net revenues:   |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   
|Clearing        |                  | $                  | 7,173   |                  |                     | $ | 10,019 |          |  | $ | (2,846 | ) |  | (28    | )%
|Retail          |                  |                    | 30,902  |                  |                     |   | 21,924 |          |  |   | 8,978  |   |  | 41     |   
|Institutional   |                  |                    | 52,217  |                  |                     |   | 28,259 |          |  |   | 23,958 |   |  | 85     |   
|Banking         |                  |                    | 14,587  |                  |                     |   | 12,870 |          |  |   | 1,717  |   |  | 13     |   
|Other           |                  |                    | (4,703  | )                |                     |   | (248   | )        |  |   | (4,455 | ) |  | (1,796 | ) 
|                |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   
|Total           |                  | $                  | 100,176 |                  |                     | $ | 72,824 |          |  | $ | 27,352 |   |  | 38     | % 
|                |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   
|Pre-tax income: |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   
|Clearing        |                  | $                  | 1,884   |                  |                     | $ | 2,681  |          |  | $ | (797   | ) |  | (30    | )%
|Retail          |                  |                    | 4,211   |                  |                     |   | 4,118  |          |  |   | 93     |   |  | 2      |   
|Institutional   |                  |                    | 20,042  |                  |                     |   | 10,322 |          |  |   | 9,720  |   |  | 94     |   
|Banking         |                  |                    | 2,359   |                  |                     |   | 3,715  |          |  |   | (1,356 | ) |  | (37    | ) 
|Other           |                  |                    | (12,964 | )                |                     |   | (8,989 | )        |  |   | (3,975 | ) |  | (44    | ) 
|                |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   
|Total           |                  | $                  | 15,532  |                  |                     | $ | 11,847 |          |  | $ | 3,685  |   |  | 31     | % 
|                |                  |                    |         |                  |                     |   |        |          |  |   |        |   |  |        |   



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|                |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   
|--------------- | ---------------- | ---------------- | ------- | ---------------- | ------------------- | - | ------- | -------- |  | - | ------ | - |  | ------ | --
|                |                  | Six-Months Ended |         |                  | Increase/(Decrease) |   |         | % Change | 
|                | December 31,2008 |                  |         | December 31,2007 |                     |   |        
|Net revenues:   |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   
|Clearing        |                  | $                | 15,349  |                  |                     | $ | 20,297  |          |  | $ | (4,948 | ) |  | (24    | )%
|Retail          |                  |                  | 60,899  |                  |                     |   | 41,563  |          |  |   | 19,336 |   |  | 47     |   
|Institutional   |                  |                  | 89,029  |                  |                     |   | 52,212  |          |  |   | 36,817 |   |  | 71     |   
|Banking         |                  |                  | 29,914  |                  |                     |   | 25,361  |          |  |   | 4,553  |   |  | 18     |   
|Other           |                  |                  | (7,247  | )                |                     |   | 337     |          |  |   | (7,584 | ) |  | (2,250 | ) 
|                |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   
|Total           |                  | $                | 187,944 |                  |                     | $ | 139,770 |          |  | $ | 48,174 |   |  | 34     | % 
|                |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   
|Pre-tax income: |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   
|Clearing        |                  | $                | 4,156   |                  |                     | $ | 7,178   |          |  | $ | (3,022 | ) |  | (42    | )%
|Retail          |                  |                  | 6,985   |                  |                     |   | 7,302   |          |  |   | (317   | ) |  | (4     | ) 
|Institutional   |                  |                  | 31,069  |                  |                     |   | 17,359  |          |  |   | 13,710 |   |  | 79     |   
|Banking         |                  |                  | 6,907   |                  |                     |   | 9,167   |          |  |   | (2,260 | ) |  | (25    | ) 
|Other           |                  |                  | (22,792 | )                |                     |   | (17,213 | )        |  |   | (5,579 | ) |  | (32    | ) 
|                |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   
|Total           |                  | $                | 26,325  |                  |                     | $ | 23,793  |          |  | $ | 2,532  |   |  | 11     | % 
|                |                  |                  |         |                  |                     |   |         |          |  |   |        |   |  |        |   

Clearing:

Three-months Ended:

The following is a summary of the results for the clearing segment for the three-months ended December 31, 2008
compared to the three-months ended December 31, 2007 (dollars in thousands):



|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   
|---------------------------------- | ---------------- | ------------------ | ---------------- | ------------------- | - | ------- | -------- | - | ------- | - |  | --- | --
|                                   |                  | Three-Months Ended |                  | Increase/(Decrease) |   |         | % Change |  
|                                   | December 31,2008 |                    | December 31,2007 |                     |  
|Net revenue from clearing services |                  | $                  | 3,074            |                     | $ | 3,736   |          | $ | (662    | ) |  | (18 | )%
|Net interest                       |                  |                    | 1,162            |                     |   | 3,683   |          |   | (2,521  | ) |  | (68 | ) 
|Other                              |                  |                    | 2,937            |                     |   | 2,600   |          |   | 337     |   |  | 13  |   
|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   
|Net revenues                       |                  |                    | 7,173            |                     |   | 10,019  |          |   | (2,846  | ) |  | (28 | ) 
|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   
|Operating expenses                 |                  |                    | 5,289            |                     |   | 7,338   |          |   | (2,049  | ) |  | (28 | ) 
|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   
|Pre-tax income                     |                  | $                  | 1,884            |                     | $ | 2,681   |          | $ | (797    | ) |  | (30 | )%
|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   
|Average customer margin balance    |                  | $                  | 102,000          |                     | $ | 187,000 |          | $ | (85,000 | ) |  | (45 | )%
|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   
|Average customer funds on deposit  |                  | $                  | 266,000          |                     | $ | 321,000 |          | $ | (55,000 | ) |  | (17 | )%
|                                   |                  |                    |                  |                     |   |         |          |   |         |   |  |     |   

The following table reflects the number of client transactions processed for the three-months ended
December 31, 2008 and December 31, 2007 and number of correspondents at the end of each three-month period.



|                                              |                  |                    |                  |          
|--------------------------------------------- | ---------------- | ------------------ | ---------------- | ---------
|                                              |                  | Three-Months Ended
|                                              | December 31,2008 |                    | December 31,2007
|Tickets for high-volume trading firms         |                  | 2,014,191          |                  | 7,724,153
|Tickets for general securities broker/dealers |                  | 250,934            |                  | 281,016  
|                                              |                  |                    |                  |          
|Total tickets                                 |                  | 2,265,125          |                  | 8,005,169
|                                              |                  |                    |                  |          
|Correspondents                                |                  | 201                |                  | 202      
|                                              |                  |                    |                  |          



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The clearing segment posted a decrease in net revenue of 28% and a decrease in pre-tax income of 30%.

Tickets processed decreased substantially over the prior fiscal year period while clearing fee revenue decreased 18%. Decreased volume from day trading customers was the
primary driver of this change. The decrease is primarily attributable to one correspondent who no longer clears through us and one correspondent with substantially reduced volume in the quarter. Revenue per ticket increased over last year. Revenue
per ticket was $1.36 for the second quarter of fiscal 2009 versus $0.47 for the second quarter of fiscal 2008.

Net interest revenue allocated to the
clearing segment decreased 68% for the three-months ended December 31, 2008 over the same period last fiscal year. Net interest decreased primarily due to the 45% decline in margin balances in the clearing segment as well as a 75 basis point
drop in the spread we earn on customer deposits.

Operating expenses decreased for the three-months ended December 31, 2008 compared to the same
period last fiscal year primarily due to decreased commission and employee compensation of $963,000. The prior year included some one time expenses related to the hiring of the new head of clearing. Additionally, incentive compensation decreased due
to reduced pre-tax profit from our clearing operations. Also, there was a $1.0 million decrease in other expenses due primarily to a reduction of $400,000 in professional services, a $109,000 decrease in licenses and fees and a $344,000 decrease in
the amount of operational expenses allocated to the clearing segment.

Six-months Ended:

The following is a summary of the results for the clearing segment for the six-months ended December 31, 2008 compared to the six-months ended December 31, 2007
(dollars in thousands):



|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   
|---------------------------------- | ---------------- | ---------------- | ---------------- | ------------------- | - | ------- | -------- | - | ------- | - |  | --- | --
|                                   |                  | Six-Months Ended |                  | Increase/(Decrease) |   |         | % Change |  
|                                   | December 31,2008 |                  | December 31,2007 |                     |  
|Net revenue from clearing services |                  | $                | 6,369            |                     | $ | 7,086   |          | $ | (717    | ) |  | (10 | )%
|Net interest                       |                  |                  | 3,422            |                     |   | 8,162   |          |   | (4,740  | ) |  | (58 | ) 
|Other                              |                  |                  | 5,558            |                     |   | 5,049   |          |   | 509     |   |  | 10  |   
|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   
|Net revenues                       |                  |                  | 15,349           |                     |   | 20,297  |          |   | (4,948  | ) |  | (24 | ) 
|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   
|Operating expenses                 |                  |                  | 11,193           |                     |   | 13,119  |          |   | (1,926  | ) |  | (15 | ) 
|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   
|Pre-tax income                     |                  | $                | 4,156            |                     | $ | 7,178   |          | $ | (3,022  | ) |  | (42 | )%
|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   
|Average customer margin balance    |                  | $                | 117,000          |                     | $ | 193,000 |          | $ | (76,000 | ) |  | (39 | )%
|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   
|Average customer funds on deposit  |                  | $                | 289,000          |                     | $ | 320,000 |          | $ | (31,000 | ) |  | (10 | )%
|                                   |                  |                  |                  |                     |   |         |          |   |         |   |  |     |   

The following table reflects the number of client transactions processed for the six-months ended
December 31, 2008 and December 31, 2007.



|                                              |                  |                  |                  |           
|--------------------------------------------- | ---------------- | ---------------- | ---------------- | ----------
|                                              |                  | Six-Months Ended
|                                              | December 31,2008 |                  | December 31,2007
|Tickets for high-volume trading firms         |                  | 7,398,217        |                  | 14,768,608
|Tickets for general securities broker/dealers |                  | 456,784          |                  | 540,013   
|                                              |                  |                  |                  |           
|Total tickets                                 |                  | 7,855,001        |                  | 15,308,621
|                                              |                  |                  |                  |           



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The clearing segment posted a decrease in net revenue of 24% and a decrease in pre-tax income of 42%.

Tickets processed decreased substantially over the prior fiscal year period while clearing fee revenue decreased only 10%. Decreased volume from day trading customers
was the primary driver of this change. Revenue per ticket was $0.81 for the first half of fiscal 2009 versus $0.46 for the first half of fiscal 2008.

Net
interest revenue allocated to the clearing segment decreased 58% for the six-months ended December 31, 2008 over the same period last fiscal year. Net interest decreased primarily due to the 39% decline in margin balances in the clearing
segment as well as a 46 basis point drop in the spread we earn on customer deposits.

Operating expenses were down for the six-months ended
December 31, 2008 compared to the same period last fiscal year due primarily to decreased commission and employee compensation of $639,000 and a decrease in other expenses of $1.1 million. These decreases were due to decreases in salary
expenses, $389,000; incentive compensation, $249,000; professional services, $396,000; licenses and fees, $119,000; and the allocation of information technology and operating expenses of $459,000. These decreases are due to the same circumstances
described for the three-month periods above.

Retail:

Three-months Ended:

The following is a summary of the results for the retail segment for the three-months ended December 31, 2008 and
December 31, 2007 (dollars in thousands):



|                                                         |                  |                    |                  |          |   |        |  |     |   
|-------------------------------------------------------- | ---------------- | ------------------ | ---------------- | -------- | - | ------ |  | --- | --
|                                                         |                  | Three-Months Ended |                  | % Change |  
|                                                         | December 31,2008 |                    | December 31,2007 |         
|Private Client Group (PCG)                             |                  |                    |                  |          |   |        |  |     |   
|Commissions                                              |                  | $                  | 6,252            |          | $ | 7,222  |  | (13 | )%
|Advisory fees                                            |                  |                    | 1,412            |          |   | 1,436  |  | (2  | ) 
|Insurance products                                       |                  |                    | 984              |          |   | 1,066  |  | (8  | ) 
|Other                                                    |                  |                    | 149              |          |   | 187    |  | (20 | ) 
|Net interest revenue                                     |                  |                    | 351              |          |   | 757    |  | (54 | ) 
|                                                         |                  |                    |                  |          |   |        |  |     |   
|                                                         |                  |                    | 9,148            |          |   | 10,668 |  | (14 | ) 
|                                                         |                  |                    |                  |          |   |        |  |     |   
|Independent registered representatives (SWS Financial) |                  |                    |                  |          |   |        |  |     |   
|Commissions                                              |                  |                    | 5,650            |          |   | 6,376  |  | (11 | ) 
|Advisory fees                                            |                  |                    | 961              |          |   | 932    |  | 3   |   
|Insurance products                                       |                  |                    | 1,177            |          |   | 1,890  |  | (38 | ) 
|Other                                                    |                  |                    | 132              |          |   | 308    |  | (57 | ) 
|Net interest revenue                                     |                  |                    | 144              |          |   | 750    |  | (81 | ) 
|                                                         |                  |                    |                  |          |   |        |  |     |   
|                                                         |                  |                    | 8,064            |          |   | 10,256 |  | (21 | ) 
|                                                         |                  |                    |                  |          |   |        |  |     |   



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|                                  |                  |                    |                  |          |   |         |  |     |   
|--------------------------------- | ---------------- | ------------------ | ---------------- | -------- | - | ------- |  | --- | --
|                                  |                  | Three-Months Ended |                  | % Change |  
|                                  | December 31,2008 |                    | December 31,2007 |         
|M.L. Stern                        |                  |                    |                  |          |   |         |  |     |   
|Commissions                       |                  | $                  | 9,322            |          | $ |        |  |    | % 
|Advisory fees                     |                  |                    | 1,493            |          |   |        |  |    |   
|Insurance products                |                  |                    | 76               |          |   |        |  |    |   
|Other                             |                  |                    | 1,620            |          |   |        |  |    |   
|Net interest revenue              |                  |                    | 326              |          |   |        |  |    |   
|                                  |                  |                    |                  |          |   |         |  |     |   
|                                  |                  |                    | 12,837           |          |   |        |  |    |   
|                                  |                  |                    |                  |          |   |         |  |     |   
|Other                             |                  |                    | 853              |          |   | 1,000   |  | (15 | ) 
|                                  |                  |                    |                  |          |   |         |  |     |   
|Total                             |                  |                    | 30,902           |          |   | 21,924  |  | 41  |   
|                                  |                  |                    |                  |          |   |         |  |     |   
|Operating expenses                |                  |                    | 26,691           |          |   | 17,806  |  | 50  |   
|                                  |                  |                    |                  |          |   |         |  |     |   
|Pre-tax income                    |                  | $                  | 4,211            |          | $ | 4,118   |  | 2   | % 
|                                  |                  |                    |                  |          |   |         |  |     |   
|Average customer margin balances  |                  | $                  | 66,000           |          | $ | 78,000  |  | (15 | )%
|                                  |                  |                    |                  |          |   |         |  |     |   
|Average customer funds on deposit |                  | $                  | 109,000          |          | $ | 133,000 |  | (18 | )%
|                                  |                  |                    |                  |          |   |         |  |     |   
|PCG representatives               |                  |                    | 110              |          |   | 99      |  | 11  | % 
|                                  |                  |                    |                  |          |   |         |  |     |   
|SWS Financial representatives     |                  |                    | 306              |          |   | 336     |  | (9  | )%
|                                  |                  |                    |                  |          |   |         |  |     |   
|M.L. Stern representatives        |                  |                    | 104              |          |   |        |  | 100 | % 
|                                  |                  |                    |                  |          |   |         |  |     |   

Net revenues in the retail segment increased 41% for the three-months ended December 31, 2008 over the same
period last fiscal year driven by the commissions, fees and other revenues from the acquisition of M.L. Stern of $12.8 million. Total customer assets were $10.3 billion at December 31, 2008 and $7.2 billion at December 31, 2007. Total
customer assets for the three-month period ended December 31, 2008 include $4.6 billion at M.L. Stern. Assets under management were $722 million, including $383 million from Tower Asset Management, LLC, at December 31, 2008 versus $419
million at December 31, 2007.

Net interest revenue allocated to the retail segment decreased 69% for the three-months ended December 31, 2008
over the same period of the last fiscal year. This decrease is primarily due to a reduced spread earned on customer deposits.

Operating expenses increased
50% for the three-months ended December 31, 2008 over the same period last fiscal year. This increase is primarily due to a 41% increase in commission expense, the primary component of operating expenses in the retail segment, driven by M.L.
Stern commission expense of $7.8 million. In addition, other operating expenses increased due to increased rent expense from the addition of new branches with our M.L. Stern acquisition, computer service expense, license and fees, professional
services and legal expense and information technology expenses allocated to the segment. M.L. Stern contributed $2.6 million to the increase in other operating expenses.



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Six-months Ended:

The following is a summary of the results for the retail segment for the six-months ended December 31, 2008 and December 31, 2007 (dollars in thousands):



|                                       |                  |                  |                  |          |   |         |  |     |   
|-------------------------------------- | ---------------- | ---------------- | ---------------- | -------- | - | ------- |  | --- | --
|                                       |                  | Six-Months Ended |                  | % Change |  
|                                       | December 31,2008 |                  | December 31,2007 |         
|Private Client Group                   |                  |                  |                  |          |   |         |  |     |   
|Commissions                            |                  | $                | 11,880           |          | $ | 13,022  |  | (9  | )%
|Advisory fees                          |                  |                  | 2,768            |          |   | 2,774   |  | __  |   
|Insurance products                     |                  |                  | 1,994            |          |   | 1,780   |  | 12  |   
|Other                                  |                  |                  | 266              |          |   | 336     |  | (21 | ) 
|Net interest revenue                   |                  |                  | 1,047            |          |   | 1,532   |  | (32 | ) 
|                                       |                  |                  |                  |          |   |         |  |     |   
|                                       |                  |                  | 17,955           |          |   | 19,444  |  | (8  | ) 
|                                       |                  |                  |                  |          |   |         |  |     |   
|Independent registered representatives |                  |                  |                  |          |   |         |  |     |   
|Commissions                            |                  |                  | 11,044           |          |   | 12,222  |  | (10 | ) 
|Advisory fees                          |                  |                  | 1,875            |          |   | 1,776   |  | 6   |   
|Insurance products                     |                  |                  | 2,333            |          |   | 4,021   |  | (42 | ) 
|Other                                  |                  |                  | 355              |          |   | 582     |  | (39 | ) 
|Net interest revenue                   |                  |                  | 554              |          |   | 1,659   |  | (67 | ) 
|                                       |                  |                  |                  |          |   |         |  |     |   
|                                       |                  |                  | 16,161           |          |   | 20,260  |  | (20 | ) 
|                                       |                  |                  |                  |          |   |         |  |     |   
|M.L. Stern                             |                  |                  |                  |          |   |         |  |     |   
|Commissions                            |                  | $                | 18,991           |          | $ |        |  |    | % 
|Advisory fees                          |                  |                  | 2,951            |          |   |        |  |    |   
|Insurance products                     |                  |                  | 93               |          |   |        |  |    |   
|Other                                  |                  |                  | 2,409            |          |   |        |  |    |   
|Net interest revenue                   |                  |                  | 585              |          |   |        |  |    |   
|                                       |                  |                  |                  |          |   |         |  |     |   
|                                       |                  |                  | 25,029           |          |   |        |  |    |   
|                                       |                  |                  |                  |          |   |         |  |     |   
|Other                                  |                  |                  | 1,754            |          |   | 1,859   |  | (6  | ) 
|                                       |                  |                  |                  |          |   |         |  |     |   
|Total                                  |                  |                  | 60,899           |          |   | 41,563  |  | 47  |   
|                                       |                  |                  |                  |          |   |         |  |     |   
|Operating expenses                     |                  |                  | 53,914           |          |   | 34,261  |  | 57  |   
|                                       |                  |                  |                  |          |   |         |  |     |   
|Pre-tax income                         |                  | $                | 6,985            |          | $ | 7,302   |  | (4  | )%
|                                       |                  |                  |                  |          |   |         |  |     |   
|Average customer margin balances       |                  | $                | 75,000           |          | $ | 77,000  |  | (3  | )%
|                                       |                  |                  |                  |          |   |         |  |     |   
|Average customer funds on deposit      |                  | $                | 115,000          |          | $ | 132,000 |  | (13 | )%
|                                       |                  |                  |                  |          |   |         |  |     |   
|Customer deposits at the Bank          |                  | $                | 408,734          |          | $ | 320,232 |  | 28  | % 
|                                       |                  |                  |                  |          |   |         |  |     |   

Net revenues in the retail segment increased 47% for the six-months ended December 31, 2008 over the same
period last fiscal year driven by the commissions, fees and other revenues from the acquisition of M.L. Stern of $25.0 million.

Net interest revenue
allocated to the retail segment decreased 50% for the six-months ended December 31, 2008 over the same period of last fiscal year primarily due to a reduction in the spread earned on customer deposits.

Operating expenses increased 57% for the six-months ended December 31, 2008 over the same period last fiscal year. This increase is primarily due to a 47% increase
in commission expense, the primary component of operating expenses in the retail segment, driven by M.L. Stern commission expense of $16.1 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 $5.3 million to the increase in other operating expenses.



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Institutional:

Three-months Ended:

The following is a summary of the results for the institutional segment for the three-months ended December 31,
2008 and December 31, 2007 (dollars in thousands):



|                                       |                  |                    |                  |          |   |        |  |     |   
|-------------------------------------- | ---------------- | ------------------ | ---------------- | -------- | - | ------ |  | --- | --
|                                       |                  | Three-Months Ended |                  | % Change |  
|                                       | December 31,2008 |                    | December 31,2007 |         
|Commissions                            |                  |                    |                  |          |   |        |  |     |   
|Taxable fixed income                   |                  | $                  | 24,511           |          | $ | 6,446  |  | 280 | % 
|Municipal distribution                 |                  |                    | 3,772            |          |   | 1,916  |  | 97  |   
|Portfolio trading                      |                  |                    | 3,710            |          |   | 4,047  |  | (8  | ) 
|Other                                  |                  |                    | 3                |          |   | 4      |  | (25 | ) 
|                                       |                  |                    |                  |          |   |        |  |     |   
|                                       |                  |                    | 31,996           |          |   | 12,413 |  | 158 |   
|                                       |                  |                    |                  |          |   |        |  |     |   
|Investment banking fees                |                  |                    | 4,417            |          |   | 5,275  |  | (16 | ) 
|Net gains on principal transactions    |                  |                    | 5,799            |          |   | 2,085  |  | 178 |   
|Other                                  |                  |                    | 285              |          |   | 288    |  | (1  | ) 
|Net interest revenue                   |                  |                    | 9,720            |          |   | 8,198  |  | 19  |   
|                                       |                  |                    |                  |          |   |        |  |     |   
|Total net revenues                     |                  |                    | 52,217           |          |   | 28,259 |  | 85  |   
|                                       |                  |                    |                  |          |   |        |  |     |   
|Operating expenses                     |                  |                    | 32,175           |          |   | 17,937 |  | 79  |   
|                                       |                  |                    |                  |          |   |        |  |     |   
|Pre-tax income                         |                  | $                  | 20,042           |          | $ | 10,322 |  | 94  | % 
|                                       |                  |                    |                  |          |   |        |  |     |   
|Taxable fixed income representatives   |                  |                    | 27               |          |   | 28     |  | (4  | )%
|                                       |                  |                    |                  |          |   |        |  |     |   
|Municipal distribution representatives |                  |                    | 22               |          |   | 21     |  | 5   | % 
|                                       |                  |                    |                  |          |   |        |  |     |   

Net revenues from the institutional segment increased 85% while pre-tax income was up 94% in the three-months
ended December 31, 2008. Commissions in the institutional segment were up 158% for the three-months ended December 31, 2008 over the same period last fiscal year as volumes in both the taxable fixed income and municipal areas improved
significantly. The volatility in the market has presented opportunities to our institutional segment. Both the taxable and municipal sides have increased their business and client base. Investment banking fees were down 16% for the three-months
ended December 31, 2008 driven by a decrease in public finance advisory fees of $652,000 and corporate finance fees of $651,000. The decrease is due to the current economic environment and a lack of new municipal or corporate issues in the
market.

Net gains on principal transactions were up 178% due to an increase in market volatility and wider spreads in the secondary market. Taxable fixed
income increased $2.2 million due to the volatility in the market and increased customer activity.

In the three-months ended December 31, 2008, net
interest revenue in the institutional segment increased 19% 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 due to
a 74 basis point increase in the spread earned on securities lending balances despite a 43% drop in the average balance. The disruption in the markets, the regulators limits on short sales and changes in our internal risk limits caused average
balances in our stock loan business to fall to $1.7 billion. 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 December 31, 2008 and December 31, 2007:



|                              |                  |                    |                  |  |   |               
|----------------------------- | ---------------- | ------------------ | ---------------- |  | - | --------------
|                              |                  | Three-Months Ended
|                              | December 31,2008 |                    | December 31,2007
|Number of Issues              |                  |                    | 83               |  |   | 92            
|Aggregate Amount of Offerings |                  | $                  | 13,523,430,000   |  | $ | 12,134,042,000

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



|                                      |                  |                    |                  |  |   |          
|------------------------------------- | ---------------- | ------------------ | ---------------- |  | - | ---------
|                                      |                  | Three-Months Ended
|                                      | December 31,2008 |                    | December 31,2007
|Average interest-earning assets:      |                  |                    |                  |  |   |          
|Stock borrowed                        |                  | $                  | 1,766,000        |  | $ | 3,077,000
|                                      |                  |                   
|Average interest-bearing liabilities: |                  |                    |                  |  |   |          
|Stock loaned                          |                  |                    | 1,735,000        |  |   | 3,042,000

Operating expenses were up 79% for the three-months ended December 31, 2008 versus the same period last
fiscal year primarily due to increases in commission expense. The increase in commission expense is due to the increase in revenue produced by the institutional segment.

Six-months Ended:

The following is a summary of the results for the institutional segment for the six-months ended
December 31, 2008 and December 31, 2007 (dollars in thousands):



|                                    |                  |                  |                  |          |   |        |  |     |  
|----------------------------------- | ---------------- | ---------------- | ---------------- | -------- | - | ------ |  | --- | -
|                                    |                  | Six-Months Ended |                  | % Change |  
|                                    | December 31,2008 |                  | December 31,2007 |         
|Commissions                         |                  |                  |                  |          |   |        |  |     |  
|Taxable fixed income                |                  | $                | 32,607           |          | $ | 11,268 |  | 189 | %
|Municipal distribution              |                  |                  | 7,903            |          |   | 3,993  |  | 98  |  
|Portfolio trading                   |                  |                  | 6,442            |          |   | 7,567  |  | (15 | )
|Other                               |                  |                  | 6                |          |   | 10     |  | (40 | )
|                                    |                  |                  |                  |          |   |        |  |     |  
|                                    |                  |                  | 46,958           |          |   | 22,838 |  | 106 |  
|                                    |                  |                  |                  |          |   |        |  |     |  
|Investment banking fees             |                  |                  | 10,697           |          |   | 11,978 |  | (11 | )
|Net gains on principal transactions |                  |                  | 7,230            |          |   | 3,203  |  | 126 |  
|Other                               |                  |                  | 551              |          |   | 496    |  | 11  |  
|Net interest revenue                |                  |                  | 23,593           |          |   | 13,697 |  | 72  |  
|                                    |                  |                  |                  |          |   |        |  |     |  
|Total net revenues                  |                  |                  | 89,029           |          |   | 52,212 |  | 71  |  
|                                    |                  |                  |                  |          |   |        |  |     |  
|Operating expenses                  |                  |                  | 57,960           |          |   | 34,853 |  | 66  |  
|                                    |                  |                  |                  |          |   |        |  |     |  
|Pre-tax income                      |                  | $                | 31,069           |          | $ | 17,359 |  | 79  | %
|                                    |                  |                  |                  |          |   |        |  |     |  

Net revenues from the institutional segment increased 71% while pre-tax income was up 79% in the six-months ended
December 31, 2008. Commissions in the institutional segment were up 189% for the six-months ended December 31, 2008 over the same period last fiscal year as volumes in both the taxable fixed income and municipal areas significantly
improved. These increases were partially offset by a decrease in the portfolio trading area due to a 28% decline in the number of trades processed. Investment banking fees were down 11% for the six-months ended December 31, 2008 driven by a
decrease in corporate finance advisory fees of $1.2 million and public finance advisory fees of $739,000. The decrease for corporate finance is due to a large M&A transaction that generated advisory fees in the first quarter of fiscal 2008. For
public finance, the decrease is due to the current economic environment and the lack of new municipal issues.



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Net gains on principal transactions were up 126% due to an increase in market volatility and wider spreads in the
secondary market. The municipal business unit increased $2.6 million and the taxable fixed income unit increased $1.5 million.

In the six-months ended
December 31, 2008, net interest revenue in the institutional segment increased 72% 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 due to a 91 basis point increase in the spread earned on securities lending balances despite a 25% drop in the average balance. The disruption in the markets, the regulators limits on short sales and changes in our
internal risk limits caused average balances in our stock loan business to fall to $2.3 billion. 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.

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 six-month periods ended December 31, 2008 and December 31, 2007:



|                              |  |                  |                |                  |   |               
|----------------------------- |  | ---------------- | -------------- | ---------------- | - | --------------
|                              |  | Six-Months Ended
|                              |  | December 31,2008 |                | December 31,2007
|Number of Issues              |  |                  | 254            |                  |   | 292           
|Aggregate Amount of Offerings |  | $                | 25,286,662,000 |                  | $ | 22,309,272,000

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



|                                      |                  |                  |                  |  |   |          
|------------------------------------- | ---------------- | ---------------- | ---------------- |  | - | ---------
|                                      |                  | Six-Months Ended
|                                      | December 31,2008 |                  | December 31,2007
|Average interest-earning assets:      |                  |                  |                  |  |   |          
|Stock borrowed                        |                  | $                | 2,296,000        |  | $ | 3,073,000
|                                      |                  |                 
|Average interest-bearing liabilities: |                  |                  |                  |  |   |          
|Stock loaned                          |                  |                  | 2,260,000        |  |   | 3,036,000

Operating expenses were up 66% for the six-months ended December 31, 2008 versus the same period last fiscal
year primarily due to increases in commission expense and other operating expense. The increase in commission 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.



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Banking:

Three-months Ended:

The following is a summary of the results for the banking segment for the three-month periods ended December 31,
2008 and December 31, 2007 (dollars in thousands):



|                     |                  |                    |        |                  |  |   |        |  |      |   
|-------------------- | ---------------- | ------------------ | ------ | ---------------- |  | - | ------ |  | ---- | --
|                     |                  | Three-Months Ended |        | % Change         | 
|                     | December 31,2008 |                    |        | December 31,2007 | 
|Net interest revenue |                  | $                  | 14,680 |                  |  | $ | 12,194 |  | 20   | % 
|Other                |                  |                    | (93    | )                |  |   | 676    |  | (114 | ) 
|                     |                  |                    |        |                  |  |   |        |  |      |   
|Total net revenues   |                  |                    | 14,587 |                  |  |   | 12,870 |  | 13   |   
|                     |                  |                    |        |                  |  |   |        |  |      |   
|Operating expenses   |                  |                    | 12,228 |                  |  |   | 9,155  |  | 34   |   
|                     |                  |                    |        |                  |  |   |        |  |      |   
|Pre-tax income       |                  | $                  | 2,359  |                  |  | $ | 3,715  |  | (37  | )%
|                     |                  |                    |        |                  |  |   |        |  |      |   

The Banks net revenues increased 13% while pre-tax income decreased 37% for the three-months ended
December 31, 2008 as compared to the same period last fiscal year.

Net interest revenue generated by the Bank accounted for approximately 14.7% of
consolidated net revenue for the three-months ended December 31, 2008 and 16.7% for the three-month period ended December 31, 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 down slightly compared to the same quarter last fiscal year.

The Banks operating expenses were up 34% for the
three-month period ended December 31, 2008 over the same period last fiscal year. This increase is due to an increase of $1.4 million in compensation expense due to additional headcount at the Bank compared with the prior year fiscal 2008
quarter, and a $1.0 million increase in other expense due to the cost of maintaining real-estate and other foreclosed property and other expenses.

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 December 31, 2008 and December 31, 2007
(dollars in thousands):



|                                   |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|---------------------------------- | ----------------- | ------------------ | ---------------------- | ----------------- | ---------- | ------ |  | -------------- | - | ---------------------- | - | ---------- |  | - | ------ |  | --- | -
|                                   |                   | Three-Months Ended |                       
|                                   | December 31, 2008 |                    |                        | December 31, 2007 |           
|                                   | AverageBalance    |                    | InterestIncome/Expense |                   | Yield/Rate |        |  | AverageBalance |   | InterestIncome/Expense |   | Yield/Rate | 
|Assets:                            |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                   |                   |                    |                        |                   |            |       
|Interest-earning assets:           |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                   |                   |                    |                        |                   |            |       
|Real estate  mortgage             |                   | $                  | 326,922                |                   | $          | 6,288  |  | 7.6            | % |                        | $ | 267,817    |  | $ | 6,125  |  | 9.1 | %
|Real estate  construction         |                   |                    | 178,675                |                   |            | 2,283  |  | 5.1            |   |                        |   | 223,364    |  |   | 4,276  |  | 7.6 |  
|Commercial                         |                   |                    | 556,163                |                   |            | 8,957  |  | 6.4            |   |                        |   | 358,153    |  |   | 8,006  |  | 8.9 |  
|Individual                         |                   |                    | 6,701                  |                   |            | 126    |  | 7.4            |   |                        |   | 6,171      |  |   | 123    |  | 8.0 |  
|Land                               |                   |                    | 184,036                |                   |            | 2,424  |  | 5.2            |   |                        |   | 148,245    |  |   | 3,390  |  | 9.1 |  
|Federal funds sold                 |                   |                    | 8,349                  |                   |            | 10     |  | 0.5            |   |                        |   | 57,503     |  |   | 661    |  | 4.6 |  
|Interest bearing deposits in banks |                   |                    | 19,870                 |                   |            | 19     |  | 0.4            |   |                        |   | 9,119      |  |   | 118    |  | 5.2 |  
|Federal reserve funds              |                   |                    | 41,518                 |                   |            | 67     |  | 0.6            |   |                        |   |           |  |   |       |  |    |  
|Investments - other                |                   |                    | 5,620                  |                   |            | 34     |  | 2.4            |   |                        |   | 3,953      |  |   | 46     |  | 4.7 |  
|                                   |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                   |                   |                    | 1,327,854              |                   | $          | 20,208 |  | 6.0            | % |                        |   | 1,074,325  |  | $ | 22,745 |  | 8.4 | %
|                                   |                   |                    |                        |                   |            |       
|Non-interest-earning assets:       |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                   |                   |                    |                        |                   |            |       
|Cash and due from banks            |                   |                    | 10,214                 |                   |            |        |  |                |   |                        |   | 37,281     |  |   |        |  |     |  
|Other assets                       |                   |                    | 29,986                 |                   |            |        |  |                |   |                        |   | 22,176     |  |   |        |  |     |  
|                                   |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                   |                   | $                  | 1,368,054              |                   |            |        |  |                |   |                        | $ | 1,133,782  |  |   |        |  |     |  
|                                   |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  



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|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|------------------------------------- | ----------------- | ------------------ | ---------------------- | ----------------- | ---------- | ------ |  | -------------- | - | ---------------------- | - | ---------- |  | - | ------ |  | --- | -
|                                      |                   | Three-Months Ended |                       
|                                      | December 31, 2008 |                    |                        | December 31, 2007 |           
|                                      | AverageBalance    |                    | InterestIncome/Expense |                   | Yield/Rate |        |  | AverageBalance |   | InterestIncome/Expense |   | Yield/Rate | 
|Liabilities and Stockholders Equity: |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                    |                        |                   |            |       
|Interest-bearing liabilities:         |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                    |                        |                   |            |       
|Certificates of deposit               |                   | $                  | 86,142                 |                   | $          | 711    |  | 3.3            | % |                        | $ | 82,445     |  | $ | 963    |  | 4.7 | %
|Money market accounts                 |                   |                    | 45,735                 |                   |            | 126    |  | 1.1            |   |                        |   | 37,789     |  |   | 319    |  | 3.4 |  
|Interest-bearing demand accounts      |                   |                    | 75,792                 |                   |            | 250    |  | 1.3            |   |                        |   | 62,710     |  |   | 612    |  | 3.9 |  
|Savings accounts                      |                   |                    | 880,423                |                   |            | 3,122  |  | 1.4            |   |                        |   | 729,294    |  |   | 7,654  |  | 4.2 |  
|Federal Home Loan Bank advances       |                   |                    | 106,869                |                   |            | 1,319  |  | 4.9            |   |                        |   | 76,085     |  |   | 1,002  |  | 5.2 |  
|Federal funds purchased               |                   |                    | 48                     |                   |            |       |  | 0.5            |   |                        |   | 66         |  |   | 1      |  | 5.5 |  
|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                    | 1,195,009              |                   |            | 5,528  |  | 1.8            | % |                        |   | 988,389    |  |   | 10,551 |  | 4.3 | %
|                                      |                   |                    |                        |                   |            |       
|Non-interest-bearing liabilities:     |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                    |                        |                   |            |       
|Non interest-bearing demand accounts  |                   |                    | 52,112                 |                   |            |        |  |                |   |                        |   | 48,039     |  |   |        |  |     |  
|Other liabilities                     |                   |                    | 4,989                  |                   |            |        |  |                |   |                        |   | 6,515      |  |   |        |  |     |  
|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                    | 1,252,110              |                   |            |        |  |                |   |                        |   | 1,042,943  |  |   |        |  |     |  
|Stockholders equity                  |                   |                    | 115,944                |                   |            |        |  |                |   |                        |   | 90,839     |  |   |        |  |     |  
|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   | $                  | 1,368,054              |                   |            |        |  |                |   |                        | $ | 1,133,782  |  |   |        |  |     |  
|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|Net interest income                   |                   |                    |                        |                   | $          | 14,680 |  |                |   |                        |   |            |  | $ | 12,194 |  |     |  
|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|Net yield on interest-earning assets  |                   |                    |                        |                   |            |        |  | 4.4            | % |                        |   |            |  |   |        |  | 4.5 | %
|                                      |                   |                    |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  

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 December 31,
2008 is down slightly from the same period last fiscal year as reduced interest rates affect the Banks floating rate assets immediately while deposits from brokerage customers reprice more slowly.

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



|                                   |                                                 |                    |        |               |      |   |       |     |  |   |        |   |  |   |        |  
|---------------------------------- | ----------------------------------------------- | ------------------ | ------ | ------------- | ---- | - | ----- | --- |  | - | ------ | - |  | - | ------ | -
|                                   |                                                 | Three-Months Ended |       
|                                   | December 31, 2008 compared to December 31, 2007 |                   
|                                   | TotalChange                                     |                    |        | Attributed to |     
|                                   |                                                 | Volume             |        |               | Rate |   |       | Mix | 
|Interest income:                   |                                                 |                    |        |               |      |   |       |     |  |   |        |   |  |   |        |  
|                                   |                                                 |                    |        |              
|Real estate - mortgage             |                                                 | $                  | 163    |               |      | $ | 1,355 |     |  | $ | (990   | ) |  | $ | (202   | )
|Real estate - construction         |                                                 |                    | (1,993 | )             |      |   | (858  | )   |  |   | (1,433 | ) |  |   | 298    |  
|Commercial                         |                                                 |                    | 951    |               |      |   | 4,438 |     |  |   | (2,260 | ) |  |   | (1,227 | )
|Individual                         |                                                 |                    | 3      |               |      |   | 11    |     |  |   | (8     | ) |  |   |       |  
|Land                               |                                                 |                    | (966   | )             |      |   | 821   |     |  |   | (1,447 | ) |  |   | (340   | )
|Federal funds sold                 |                                                 |                    | (651   | )             |      |   | (567  | )   |  |   | (595   | ) |  |   | 511    |  
|Interest bearing deposits in banks |                                                 |                    | (99    | )             |      |   | 140   |     |  |   | (110   | ) |  |   | (129   | )
|Federal reserve funds              |                                                 |                    | 67     |               |      |   |      |     |  |   |       |   |  |   | 67     |  
|Investments - other                |                                                 |                    | (12    | )             |      |   | 20    |     |  |   | (22    | ) |  |   | (10    | )
|                                   |                                                 |                    |        |               |      |   |       |     |  |   |        |   |  |   |        |  
|                                   |                                                 | $                  | (2,537 | )             |      | $ | 5,360 |     |  | $ | (6,865 | ) |  | $ | (1,032 | )
|                                   |                                                 |                    |        |               |      |   |       |     |  |   |        |   |  |   |        |  



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|                                 |                                                 |                    |        |               |  |   |       |  |   |        |   |  |   |        |  
|-------------------------------- | ----------------------------------------------- | ------------------ | ------ | ------------- |  | - | ----- |  | - | ------ | - |  | - | ------ | -
|                                 |                                                 | Three-Months Ended |       
|                                 | December 31, 2008 compared to December 31, 2007 |                   
|                                 | TotalChange                                     |                    |        | Attributed to | 
|                                 |                                                 | Volume             |        | Rate          |  |   | Mix   | 
|Interest expense:                |                                                 |                    |        |               |  |   |       |  |   |        |   |  |   |        |  
|                                 |                                                 |                    |        |              
|Certificates of deposit          |                                                 | $                  | (252   | )             |  | $ | 43    |  | $ | (285   | ) |  | $ | (10    | )
|Money market accounts            |                                                 |                    | (193   | )             |  |   | 67    |  |   | (215   | ) |  |   | (45    | )
|Interest-bearing demand accounts |                                                 |                    | (362   | )             |  |   | 128   |  |   | (407   | ) |  |   | (83    | )
|Savings accounts                 |                                                 |                    | (4,532 | )             |  |   | 1,590 |  |   | (5,089 | ) |  |   | (1,033 | )
|Federal Home Loan Bank advances  |                                                 |                    | 317    |               |  |   | 419   |  |   | (72    | ) |  |   | (30    | )
|Federal funds purchased          |                                                 |                    | (1     | )             |  |   |      |  |   | (1     | ) |  |   |       |  
|                                 |                                                 |                    |        |               |  |   |       |  |   |        |   |  |   |        |  
|                                 |                                                 |                    | (5,023 | )             |  |   | 2,247 |  |   | (6,069 | ) |  |   | (1,201 | )
|                                 |                                                 |                    |        |               |  |   |       |  |   |        |   |  |   |        |  
|Net interest income              |                                                 | $                  | 2,486  |               |  | $ | 3,113 |  | $ | (796   | ) |  | $ | 169    |  
|                                 |                                                 |                    |        |               |  |   |       |  |   |        |   |  |   |        |  

Six-months Ended:

The following is a summary of the results for the banking segment for the six-month periods ended December 31, 2008 and December 31, 2007 (dollars in thousands):



|                     |                  |                  |                  |          |   |        |  |     |   
|-------------------- | ---------------- | ---------------- | ---------------- | -------- | - | ------ |  | --- | --
|                     |                  | Six-Months Ended |                  | % Change |  
|                     | December 31,2008 |                  | December 31,2007 |         
|Net interest revenue |                  | $                | 29,344           |          | $ | 24,085 |  | 22  | % 
|Other                |                  |                  | 570              |          |   | 1,276  |  | (55 | ) 
|                     |                  |                  |                  |          |   |        |  |     |   
|Total net revenues   |                  |                  | 29,914           |          |   | 25,361 |  | 18  |   
|                     |                  |                  |                  |          |   |        |  |     |   
|Operating expenses   |                  |                  | 23,007           |          |   | 16,194 |  | 42  |   
|                     |                  |                  |                  |          |   |        |  |     |   
|Pre-tax income       |                  | $                | 6,907            |          | $ | 9,167  |  | (25 | )%
|                     |                  |                  |                  |          |   |        |  |     |   

The Banks net revenues increased 18% while pre-tax income decreased 25% for the six-months ended
December 31, 2008 as compared to the same period last fiscal year.

Net interest revenue generated by the Bank accounted for approximately 15.6% of
consolidated net revenue for the six-months ended December 31, 2008 and 17.2% for the six-month period ended December 31, 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 42% for the six-month period
ended December 31, 2008 over the same period last fiscal year. This increase is due to an increase of $1.1 million in the provision for loan losses, increased compensation of $2.8 million from additional headcount, as well as real-estate fees
and other expenses of $1.8 million. 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 six-month periods ended December 31, 2008 and December 31, 2007 (dollars in thousands):



|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|------------------------------------- | ----------------- | ---------------- | ---------------------- | ----------------- | ---------- | ------ |  | -------------- | - | ---------------------- | - | ---------- |  | - | ------ |  | --- | -
|                                      |                   | Six-Months Ended |                       
|                                      | December 31, 2008 |                  |                        | December 31, 2007 |           
|                                      | AverageBalance    |                  | InterestIncome/Expense |                   | Yield/Rate |        |  | AverageBalance |   | InterestIncome/Expense |   | Yield/Rate | 
|Assets:                               |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |       
|Interest-earning assets:              |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |       
|Real estate  mortgage                |                   | $                | 337,409                |                   | $          | 12,737 |  | 7.5            | % |                        | $ | 224,590    |  | $ | 10,540 |  | 9.3 | %
|Real estate  construction            |                   |                  | 179,516                |                   |            | 5,030  |  | 5.6            |   |                        |   | 221,587    |  |   | 9,157  |  | 8.2 |  
|Commercial                            |                   |                  | 531,047                |                   |            | 17,781 |  | 6.6            |   |                        |   | 343,257    |  |   | 15,554 |  | 9.0 |  
|Individual                            |                   |                  | 6,590                  |                   |            | 250    |  | 7.5            |   |                        |   | 6,295      |  |   | 253    |  | 8.0 |  
|Land                                  |                   |                  | 178,325                |                   |            | 5,200  |  | 5.8            |   |                        |   | 146,290    |  |   | 6,809  |  | 9.3 |  
|Federal funds sold                    |                   |                  | 14,294                 |                   |            | 104    |  | 1.4            |   |                        |   | 95,626     |  |   | 2,408  |  | 5.0 |  
|Interest bearing deposits in banks    |                   |                  | 33,616                 |                   |            | 229    |  | 1.4            |   |                        |   | 13,121     |  |   | 333    |  | 5.1 |  
|Federal reserve funds                 |                   |                  | 20,759                 |                   |            | 67     |  | 0.6            |   |                        |   |           |  |   |       |  |    |  
|Investments - other                   |                   |                  | 6,117                  |                   |            | 81     |  | 2.6            |   |                        |   | 5,965      |  |   | 145    |  | 4.8 |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  | 1,307,673              |                   | $          | 41,479 |  | 6.3            | % |                        |   | 1,056,731  |  | $ | 45,199 |  | 8.5 | %
|                                      |                   |                  |                        |                   |            |       
|Non-interest-earning assets:          |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |       
|Cash and due from banks               |                   |                  | 11,118                 |                   |            |        |  |                |   |                        |   | 34,737     |  |   |        |  |     |  
|Other assets                          |                   |                  | 32,397                 |                   |            |        |  |                |   |                        |   | 21,606     |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   | $                | 1,351,188              |                   |            |        |  |                |   |                        | $ | 1,113,074  |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|Liabilities and Stockholders Equity: |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |       
|Interest-bearing liabilities:         |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |       
|Certificates of deposit               |                   | $                | 88,770                 |                   | $          | 1,563  |  | 3.5            | % |                        | $ | 80,293     |  | $ | 1,866  |  | 4.6 | %
|Money market accounts                 |                   |                  | 45,150                 |                   |            | 295    |  | 1.3            |   |                        |   | 34,713     |  |   | 587    |  | 3.4 |  
|Interest-bearing demand accounts      |                   |                  | 73,913                 |                   |            | 556    |  | 1.5            |   |                        |   | 61,881     |  |   | 1,244  |  | 4.0 |  
|Savings accounts                      |                   |                  | 861,888                |                   |            | 7,096  |  | 1.6            |   |                        |   | 721,600    |  |   | 15,524 |  | 4.3 |  
|Federal Home Loan Bank advances       |                   |                  | 107,217                |                   |            | 2,625  |  | 4.7            |   |                        |   | 71,522     |  |   | 1,892  |  | 5.3 |  
|Federal funds purchased               |                   |                  | 24                     |                   |            |       |  | 0.5            |   |                        |   | 33         |  |   | 1      |  | 5.5 |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  | 1,176,962              |                   |            | 12,135 |  | 2.1            | % |                        |   | 970,042    |  |   | 21,114 |  | 4.3 | %
|                                      |                   |                  |                        |                   |            |       
|Non-interest-bearing liabilities:     |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |       
|Non interest-bearing demand accounts  |                   |                  | 52,607                 |                   |            |        |  |                |   |                        |   | 46,154     |  |   |        |  |     |  
|Other liabilities                     |                   |                  | 6,440                  |                   |            |        |  |                |   |                        |   | 7,408      |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   |                  | 1,236,009              |                   |            |        |  |                |   |                        |   | 1,023,604  |  |   |        |  |     |  
|Stockholders equity                  |                   |                  | 115,179                |                   |            |        |  |                |   |                        |   | 89,470     |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|                                      |                   | $                | 1,351,188              |                   |            |        |  |                |   |                        | $ | 1,113,074  |  |   |        |  |     |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|Net interest income                   |                   |                  |                        |                   | $          | 29,344 |  |                |   |                        |   |            |  | $ | 24,085 |  |     |  
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  
|Net yield on interest-earning assets  |                   |                  |                        |                   |            |        |  | 4.5            | % |                        |   |            |  |   |        |  | 4.5 | %
|                                      |                   |                  |                        |                   |            |        |  |                |   |                        |   |            |  |   |        |  |     |  

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 six-months ended December 31, 2008
did not change from the same period last fiscal year as the interest rates on deposits from brokerage customers have repriced to allow for a typical spread after the reduction to interest rates affecting the Banks floating rate assets, which
repriced immediately.



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##### Table of Contents

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



|                                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|---------------------------------- | ----------------------------------------------- | ---------------- | ------ | ------------- | ---- | - | ------ | --- |  | - | ------- | - |  | - | ------ | -
|                                   |                                                 | Six-Months Ended |       
|                                   | December 31, 2008 compared to December 31, 2007 |                 
|                                   | TotalChange                                     |                  |        | Attributed to |     
|                                   |                                                 | Volume           |        |               | Rate |   |        | Mix | 
|Interest income:                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|                                   |                                                 |                  |        |              
|Real estate - mortgage             |                                                 | $                | 2,197  |               |      | $ | 5,309  |     |  | $ | (2,090  | ) |  | $ | (1,022 | )
|Real estate - construction         |                                                 |                  | (4,127 | )             |      |   | (1,743 | )   |  |   | (2,974  | ) |  |   | 590    |  
|Commercial                         |                                                 |                  | 2,227  |               |      |   | 8,496  |     |  |   | (4,086  | ) |  |   | (2,183 | )
|Individual                         |                                                 |                  | (3     | )             |      |   | 11     |     |  |   | (14     | ) |  |   |       |  
|Land                               |                                                 |                  | (1,609 | )             |      |   | 1,495  |     |  |   | (2,562  | ) |  |   | (542   | )
|Federal funds sold                 |                                                 |                  | (2,304 | )             |      |   | (2,054 | )   |  |   | (1,722  | ) |  |   | 1,472  |  
|Interest bearing deposits in banks |                                                 |                  | (104   | )             |      |   | 522    |     |  |   | (245    | ) |  |   | (381   | )
|Federal reserve funds              |                                                 |                  | 67     |               |      |   |       |     |  |   |        |   |  |   | 67     |  
|Investments - other                |                                                 |                  | (64    | )             |      |   | 4      |     |  |   | (94     | ) |  |   | 26     |  
|                                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|                                   |                                                 | $                | (3,720 | )             |      | $ | 12,040 |     |  | $ | (13,787 | ) |  | $ | (1,973 | )
|                                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|Interest expense:                  |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|                                   |                                                 |                  |        |              
|Certificates of deposit            |                                                 | $                | (303   | )             |      | $ | 197    |     |  | $ | (457    | ) |  | $ | (43    | )
|Money market accounts              |                                                 |                  | (292   | )             |      |   | 177    |     |  |   | (362    | ) |  |   | (107   | )
|Interest-bearing demand accounts   |                                                 |                  | (688   | )             |      |   | 243    |     |  |   | (782    | ) |  |   | (149   | )
|Savings accounts                   |                                                 |                  | (8,428 | )             |      |   | 3,026  |     |  |   | (9,625  | ) |  |   | (1,829 | )
|Federal Home Loan Bank advances    |                                                 |                  | 733    |               |      |   | 922    |     |  |   | (131    | ) |  |   | (58    | )
|Federal funds purchased            |                                                 |                  | (1     | )             |      |   |       |     |  |   | (1      | ) |  |   |       |  
|                                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|                                   |                                                 |                  | (8,979 | )             |      |   | 4,565  |     |  |   | (11,358 | ) |  |   | (2,186 | )
|                                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  
|Net interest income                |                                                 | $                | 5,259  |               |      | $ | 7,475  |     |  | $ | (2,429  | ) |  | $ | 213    |  
|                                   |                                                 |                  |        |               |      |   |        |     |  |   |         |   |  |   |        |  

Other:

Three-months Ended:

Pre-tax loss from the other category was $13.0 million for the three-months ended December 31, 2008 compared to
$9.0 million for the same period last fiscal year. The change is primarily due to a decrease in income on corporate equity securities held by SWS Group of $329,000, a decrease in incentive compensation of $453,000 as well as a decrease in investment
income of $1.2 million related to a limited partnership venture capital fund in which we are an investor. We also had an increase of $707,000 in our profit sharing expense and an increase in salaries for our corporate employees.

Six-months Ended:

Pre-tax loss from the other category was $22.8
million for the six-months ended December 31, 2008 compared to $17.2 million for the same period last fiscal year. The change is primarily due to a decrease in income on corporate equity securities held by SWS Group of $390,000 and a decrease
in investment income of $2.9 million related to a limited partnership venture capital fund in which we are an investor. There was also an increase in health insurance costs of $476,000, incentive compensation costs of $569,000, as well as, an
increase of $242,000 in occupancy, equipment and computer services costs, an increase of $130,000 in our promotional expense and a $787,000 decrease in our unallocated investment banking, advisory and administrative fees.

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.



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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. In determining the appropriate allowance at the balance sheet date, management
evaluates the Banks historical loss percentage, concentrations of risk in the portfolio, estimated changes in the value of underlying collateral as well as changes in the volume and growth in the portfolio. To the extent we underestimate the
impact of these risks, our allowance account could be materially understated.

Loans receivable at December 31, 2008 and June 30, 2008 are
summarized as follows (in thousands):



|                           |  |                  |           |              |   |          
|-------------------------- |  | ---------------- | --------- | ------------ | - | ---------
|                           |  | December 31,2008 |           | June 30,2008
|Real estate  mortgage     |  | $                | 420,969   |              | $ | 445,053  
|Real estate  construction |  |                  | 248,581   |              |   | 246,171  
|Commercial                 |  |                  | 518,965   |              |   | 419,777  
|Individuals                |  |                  | 4,771     |              |   | 4,507    
|Land                       |  |                  | 178,112   |              |   | 170,195  
|                           |  |                  |           |              |   |          
|                           |  | $                | 1,371,398 |              | $ | 1,285,703
|                           |  |                  |           |              |   |          

The following table shows the scheduled maturities of certain loans at December 31, 2008 and segregates those
loans with fixed interest rates from those with floating or adjustable rates (in thousands):



|                                      |  |               |         |           |   |             |  |       |         |  |   |        
|------------------------------------- |  | ------------- | ------- | --------- | - | ----------- |  | ----- | ------- |  | - | -------
|                                      |  | 1 year orless |         | 1-5 years |   | Over 5years |  | Total
|Real estate  construction            |  | $             | 175,850 |           | $ | 40,711      |  | $     | 32,020  |  | $ | 248,581
|Commercial                            |  |               | 124,014 |           |   | 218,831     |  |       | 176,120 |  |   | 518,965
|                                      |  |               |         |           |   |             |  |       |         |  |   |        
|Total                                 |  | $             | 299,864 |           | $ | 259,542     |  | $     | 208,140 |  | $ | 767,546
|                                      |  |               |         |           |   |             |  |       |         |  |   |        
|Amount of loans based upon:           |  |               |         |           |   |             |  |       |         |  |   |        
|Floating or adjustable interest rates |  | $             | 275,874 |           | $ | 196,473     |  | $     | 155,853 |  | $ | 628,200
|Fixed interest rates                  |  |               | 23,990  |           |   | 63,069      |  |       | 52,287  |  |   | 139,346
|                                      |  |               |         |           |   |             |  |       |         |  |   |        
|Total                                 |  | $             | 299,864 |           | $ | 259,542     |  | $     | 208,140 |  | $ | 767,546
|                                      |  |               |         |           |   |             |  |       |         |  |   |        

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.



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Non-performing assets as of December 31, 2008 and June 30, 2008 are as follows (dollars in thousands):



|                                                             |  |                  |        |   |              |   |        |  
|------------------------------------------------------------ |  | ---------------- | ------ | - | ------------ | - | ------ | -
|                                                             |  | December 31,2008 |        |   | June 30,2008 |  
|Loans accounted for on a non-accrual basis                   |  |                  |        |   |              |   |        |  
|1-4 family                                                   |  | $                | 2,499  |   |              | $ | 1,797  |  
|Lot and land development                                     |  |                  | 13,463 |   |              |   | 8,741  |  
|Interim construction                                         |  |                  | 4,687  |   |              |   | 5,098  |  
|Commercial real estate                                       |  |                  | 1,878  |   |              |   | 2,340  |  
|Commercial loans                                             |  |                  | 1,133  |   |              |   | 674    |  
|Consumer loans                                               |  |                  | 3      |   |              |   | 12     |  
|                                                             |  |                  |        |   |              |   |        |  
|                                                             |  | $                | 23,663 |   |              | $ | 18,662 |  
|                                                             |  |                  |        |   |              |   |        |  
|Loans past due 90 days or more, not included above           |  | $                | 6,875  |   |              | $ | 335    |  
|                                                             |  |                  |        |   |              |   |        |  
|Non-performing loans as a percentage of total loans          |  |                  | 2.2    | % |              |   | 1.5    | %
|                                                             |  |                  |        |   |              |   |        |  
|Troubled debt restructurings (all Real Estate Owned (REO)) |  | $                | 13,690 |   |              | $ | 14,219 |  
|                                                             |  |                  |        |   |              |   |        |  
|Non-performing assets                                        |  | $                | 44,228 |   |              | $ | 33,216 |  
|                                                             |  |                  |        |   |              |   |        |  
|Total non-performing assets as a percentage of total assets  |  |                  | 3.1    | % |              |   | 2.5    | %
|                                                             |  |                  |        |   |              |   |        |  

An analysis of the allowance for probable loan losses for the three and six-month periods ended December 31,
2008 and December 31, 2007 is as follows (dollars in thousands):



|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|----------------------------------------------------------------------------------------- | ---- | ------------------------------ | ----- | ---- | ---------------------------- | - | ------ | - |  | ---- | ----- | - |  | - | ------ | -
|                                                                                          |      | Three-Months EndedDecember 31, |       |      | Six-Months EndedDecember 31, |  
|                                                                                          | 2008 |                                |       | 2007 |                              |   | 2008   |   |  | 2007 |      
|Balance at beginning of period                                                            |      | $                              | 7,566 |      |                              | $ | 5,547  |   |  | $    | 6,936 |   |  | $ | 5,497  |  
|Charge-offs:                                                                              |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Commercial, financial and agricultural                                                    |      |                                | (19   | )    |                              |   | (548   | ) |  |      | (19   | ) |  |   | (548   | )
|Real estate-construction                                                                  |      |                                | (301  | )    |                              |   | (693   | ) |  |      | (611  | ) |  |   | (693   | )
|Real estate-mortgage                                                                      |      |                                | (67   | )    |                              |   |       |   |  |      | (67   | ) |  |   |       |  
|Individuals                                                                               |      |                                | (29   | )    |                              |   | (5     | ) |  |      | (29   | ) |  |   | (17    | )
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|                                                                                          |      |                                | (416  | )    |                              |   | (1,246 | ) |  |      | (726  | ) |  |   | (1,258 | )
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Recoveries:                                                                               |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Commercial, financial and agricultural                                                    |      |                                | 6     |      |                              |   | 24     |   |  |      | 12    |   |  |   | 35     |  
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|                                                                                          |      |                                | 6     |      |                              |   | 24     |   |  |      | 12    |   |  |   | 35     |  
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Net charge-offs                                                                           |      |                                | (410  | )    |                              |   | (1,222 | ) |  |      | (714  | ) |  |   | (1,223 | )
|Additions charged to operations                                                           |      |                                | 1,775 |      |                              |   | 1,687  |   |  |      | 2,709 |   |  |   | 1,738  |  
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Balance at end of period                                                                  |      | $                              | 8,931 |      |                              | $ | 6,012  |   |  | $    | 8,931 |   |  | $ | 6,012  |  
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  
|Ratio of net charge-offs during the period to average loans outstanding during the period |      |                                | 0.03  | %    |                              |   | 0.12   | % |  |      | 0.06  | % |  |   | 0.13   | %
|                                                                                          |      |                                |       |      |                              |   |        |   |  |      |       |   |  |   |        |  



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The allowance for probable loan losses is applicable to the following types of loans as of December 31, 2008 and
June 30, 2008 (dollars in thousands):



|                              |        |                   |                              |  |               |        |  |                              |       |  |       |  
|----------------------------- | ------ | ----------------- | ---------------------------- |  | ------------- | ------ |  | ---------------------------- | ----- |  | ----- | -
|                              |        | December 31, 2008 |                              |  | June 30, 2008 |       
|                              | Amount |                   | Percentof loansto totalloans |  |               | Amount |  | Percentof loansto totalloans |      
|Commercial                    |        | $                 | 5,200                        |  | 38.0          | %      |  | $                            | 4,089 |  | 32.8  | %
|Real estate  construction    |        |                   | 1,157                        |  | 18.1          |        |  |                              | 1,012 |  | 19.1  |  
|Real estate  mortgage & land |        |                   | 2,543                        |  | 43.6          |        |  |                              | 1,793 |  | 47.7  |  
|Individuals                   |        |                   | 31                           |  | 0.3           |        |  |                              | 42    |  | 0.4   |  
|                              |        |                   |                              |  |               |        |  |                              |       |  |       |  
|                              |        | $                 | 8,931                        |  | 100.0         | %      |  | $                            | 6,936 |  | 100.0 | %
|                              |        |                   |                              |  |               |        |  |                              |       |  |       |  

Over half of the loan loss allowance is allocated to the commercial loan portfolio while the commercial portfolio
at the Bank represents approximately 30% of the total loan portfolio. Because these loans tend to be individually larger than residential loans, deterioration in this portfolio could lead to more volatility in our earnings.

The Banks written loan policies address specific underwriting standards for commercial loans. These policies include loan to value requirements, cash flow
requirements, acceptable amortization periods and appraisal guidelines. In addition, specific covenants, unique to each relationship, may be used where deemed appropriate to further strengthen the lending relationship.

Collateral in this portfolio varies from owner occupied property as well as investor properties. We review the portfolio for concentrations by industry as well as
geographic concentration. All commercial relationships are stress tested at the time of origination and major relationships are then stress tested on an annual basis.

Deposits

Average deposits and the average interest rate paid on the deposits for the three and six-month periods
ended December 31, 2008 and December 31, 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 $35.9 million and $37.2 million at December 31, 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 $966.1 million in funds on deposit from customers of Southwest Securities at December 31, 2008. This funding source has reduced the Banks reliance on
short-term borrowings from the FHLB and brokered certificates of deposit.



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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 and six-month periods ended December 31, 2008
and December 31, 2007 (dollars in thousands):



|                              |        |                                 |              |      |                               |        |      |              |        |      |        |   |              |   |        |        |     |              |  |   |        |  |     |  
|----------------------------- | ------ | ------------------------------- | ------------ | ---- | ----------------------------- | ------ | ---- | ------------ | ------ | ---- | ------ | - | ------------ | - | ------ | ------ | --- | ------------ |  | - | ------ |  | --- | -
|                              |        | Three-Months Ended December 31, |              |      | Six-Months Ended December 31, |       
|                              | 2008   |                                 |              | 2007 |                               |        | 2008 |              |        | 2007 |       
|                              | Amount |                                 | InterestRate |      |                               | Amount |      | InterestRate |        |      | Amount |   | InterestRate |   |        | Amount |     | InterestRate | 
|At end of period              |        | $                               | 46,722       |      | 0.8                           | %      |      | $            | 53,800 |      | 2.2    | % |              | $ | 46,722 |        | 0.8 | %            |  | $ | 53,800 |  | 2.2 | %
|Average during period         |        |                                 | 3,332        |      | 4.9                           | %      |      |              | 2,357  |      | 3.5    | % |              |   | 4,981  |        | 3.4 | %            |  |   | 1,392  |  | 3.5 | %
|Maximum balance during period |        |                                 | 47,893       |      |                              |        |      |              | 53,800 |      |       |   |              |   | 71,050 |        |    |              |  |   | 53,800 |  |    |  

LIQUIDITY AND CAPITAL RESOURCES

Brokerage

A substantial portion of our assets are highly liquid in nature and consist mainly of cash or assets
readily convertible into cash. Our equity capital, short-term bank borrowings, interest bearing and non-interest bearing client credit balances, correspondent deposits and other payables finance these assets. We maintain an allowance for doubtful
accounts which represents amounts that are necessary, in the judgment of management to adequately absorb losses from known and inherent risks in receivables from clients, clients of correspondents and correspondents. 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. We have not received any notification from the bank indicating a change in the amount of our broker loan lines since June 2008. 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
December 31, 2008, there were no amounts outstanding under these secured arrangements. To date, the largest amount outstanding at any given time during fiscal 2009 was $111.0 million, leaving us the ability to borrow up to $164 million in
additional funds. However, our ability to borrow addition funds is limited by our eligible collateral. See additional discussion under Part II-Item 1A. Risk Factors herein and Risk Factors in our Form 10-K filed
with the SEC on September 5, 2008.

We had $250,000 outstanding under unsecured letters of credit at December 31, 2008, pledged to support our
open positions with securities clearing organizations, which bear a 1% commitment fee and are renewable semi-annually.

At December 31, 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



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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 December 31, 2008. At
December 31, 2008, the total amount available for borrowing was $19.5 million.

We have an irrevocable letter of credit agreement aggregating $50.0
million at December 31, 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 December 31, 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 $82.1 million at December 31, 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 December 31, 2008, the Bank had borrowing capacity with the
FHLB of $330.1 million and a $30.0 million federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed.

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 December 31, 2008, the amount outstanding under this line of credit was $3.5 million.

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 is well
capitalized as of December 31, 2008. 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 would be applicable. The company expects to allocate sufficient capital to the Bank to maintain the well capitalized status for the foreseeable future.

The Banks asset and liability management policy is intended to manage interest rate risk. The Bank accomplishes this through management of the repricing of its
interest-earning assets and its interest-bearing liabilities. Overall interest rate risk is monitored through reports showing both sensitivity ratios, a simulation model and existing GAP data. (See the Banks GAP analysis in
Risk Management-Market Risk-Interest Rate Risk/Banking.) At December 31, 2008, $966.1 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 FDIC. The Bank has historically met all the capital adequacy requirements to which it is subject.



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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 $191.7 million for the six-months ended December 31, 2008 and net cash used in operating activities was
$112.5 million for the six-months ended December 31, 2007. Cash flow from operations was primarily provided by reduced investment in loans held for sale at the Bank, reduced inventory of securities owned and reduced balance in assets segregated
for regulatory purposes.

Net cash used in investing activities for the six-month periods ended December 31, 2008 and December 31, 2007 was
$141.5 million and $65.9 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 $81.7 million.

Net cash used in financing activities totaled $21.3 million for the six-month period ended December 31, 2008 compared to net cash provided by financing activities
of $118.6 million for the six-month period ended December 31, 2007. The primary reason for the use of cash from financing activities was decreased borrowings from banks and 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.

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 second 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 six-month period ended December 31, 2008, 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, grantees may sell a portion of their vested shares to us to cover the tax liabilities arising from such vesting. As
a result, in the six-month period ended December 31, 2008, 21,901 shares were repurchased by us with a market value of $372,899, or an average of $17.03 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,



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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 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.



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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.

The following table illustrates
the estimated change in net interest margin based on shifts in interest rates of positive 300 basis points and negative 100 basis points:



|                                      |  |                                        
|------------------------------------- |  | ---------------------------------------
|Hypothetical Change in Interest Rates |  | Projected Change in Net Interest Margin
|+300                                  |  | 11.70%                                 
|+200                                  |  | 9.21%                                  
|+100                                  |  | 6.43%                                  
|0                                     |  | 0%                                     
|-50                                   |  | -8.80%                                 
|-100                                  |  | -17.71%                                

The following GAP Analysis table indicates the Banks interest rate sensitivity position at December 31,
2008 (in thousands):



|                                   |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|---------------------------------- | ---------- | ----------------------- | --------- | ----------- |  | - | --------- | - | -------- | - | ------ |  | - | -------
|                                   |            | Repricing Opportunities
|                                   | 0-6 months |                         |           | 7-12 months |  |   | 1-3 years |   | 3+ years
|Earning assets:                    |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|Loans                              |            | $                       | 1,073,583 |             |  | $ | 52,567    |   |          | $ | 53,400 |  | $ | 200,779
|Securities and FHLB stock          |            |                         | 7,025     |             |  |   |          |   |          |   |       |  |   | 267    
|Interest bearing deposits          |            |                         | 536       |             |  |   |          |   |          |   |       |  |   |       
|                                   |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|Total earning assets               |            |                         | 1,081,144 |             |  |   | 52,567    |   |          |   | 53,400 |  |   | 201,046
|                                   |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|Interest bearing liabilities:      |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|Transaction accounts and savings   |            |                         | 1,027,752 |             |  |   |          |   |          |   |       |  |   |       
|Certificates of deposit            |            |                         | 38,128    |             |  |   | 28,708    |   |          |   | 11,718 |  |   | 3,100  
|Borrowings                         |            |                         | 43,831    |             |  |   | 2,891     |   |          |   | 17,182 |  |   | 87,741 
|                                   |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|Total interest bearing liabilities |            |                         | 1,109,711 |             |  |   | 31,599    |   |          |   | 28,900 |  |   | 90,841 
|                                   |            |                         |           |             |  |   |           |   |          |   |        |  |   |        
|GAP                                |            | $                       | (28,567   | )           |  | $ | 20,968    |   |          | $ | 24,500 |  | $ | 110,205
|                                   |            |                         |           |            
|Cumulative GAP                     |            | $                       | (28,567   | )           |  | $ | (7,599    | ) |          | $ | 16,901 |  | $ | 127,106



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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                             |           | $                 | 1,127  |        |  | $ | 5,327   |   |  | $       | 12,139 |   |       | $ | 14,997 |   |  | $ | 33,590 |  
|Auction rate municipal bonds                      |           |                   | 39,425 |        |  |   |        |   |  |         |       |   |       |   |       |   |  |   | 39,425 |  
|U.S. government and government agency obligations |           |                   | 4,421  |        |  |   | (297    | ) |  |         | (2,164 | ) |       |   | (4,201 | ) |  |   | (2,241 | )
|Corporate obligations                             |           |                   | 185    |        |  |   | (1,469  | ) |  |         | 7,800  |   |       |   | 4,904  |   |  |   | 11,420 |  
|                                                  |           |                   |        |        |  |   |         |   |  |         |        |   |       |   |        |   |  |   |        |  
|Total debt securities                             |           |                   | 45,158 |        |  |   | 3,561   |   |  |         | 17,775 |   |       |   | 15,700 |   |  |   | 82,194 |  
|Corporate equity                                  |           |                   |       |        |  |   |        |   |  |         |       |   |       |   | 2,639  |   |  |   | 2,639  |  
|Other                                             |           |                   | 777    |        |  |   |        |   |  |         |       |   |       |   |       |   |  |   | 777    |  
|                                                  |           |                   |        |        |  |   |         |   |  |         |        |   |       |   |        |   |  |   |        |  
|                                                  |           | $                 | 45,935 |        |  | $ | 3,561   |   |  | $       | 17,775 |   |       | $ | 18,339 |   |  | $ | 85,610 |  
|                                                  |           |                   |        |        |  |   |         |   |  |         |        |   |       |   |        |   |  |   |        |  
|Weighted average yield                            |           |                   |        |        |  |   |         |   |  |         |        |   |       |   |        |   |  |   |        |  
|Municipal obligations                             |           |                   | 3.7    | %      |  |   | 4.1     | % |  |         | 5.2    | % |       |   | 7.9    | % |  |   | 6.2    | %
|Auction rate municipal bonds                      |           |                   | 5.1    | %      |  |   |        |   |  |         |       |   |       |   |       |   |  |   | 5.1    | %
|U.S. government and government agency obligations |           |                   | 0.1    | %      |  |   | 1.3     | % |  |         | 3.0    | % |       |   | 5.2    | % |  |   | 2.5    | %
|Corporate obligations                             |           |                   | 8.9    | %      |  |   | 10.1    | % |  |         | 6.9    | % |       |   | 8.4    | % |  |   | 8.2    | %
|                                                  |           |                   |        |        | 
|Available-for-sale securities, at fair value      |           |                   |        |        |  |   |         |   |  |         |        |   |       |   |        |   |  |   |        |  
|Marketable equity securities                      |           | $                 |       |        |  | $ |        |   |  | $       |       |   |       | $ | 3,965  |   |  | $ | 3,965  |  
|                                                  |           |                   |        |        |  |   |         |   |  |         |        |   |       |   |        |   |  |   |        |  

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



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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 investment in USHS stock; b) our investment in
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) the REO investments; and b) 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  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 25% of our total assets measured at fair value at December 31, 2008. No liabilities
were categorized as Level 3 at December 31, 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 investments in USHS stock and 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.

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.



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We had no realized losses for these Level 3 securities for the three-months ended December 31, 2008
and realized losses of $1.0 million for the six-months ended December 31, 2008. We had unrealized gains of $193,000 and $143,000 for these securities for the three and six-month periods ended December 31, 2008, respectively. We have two
corporate obligation positions valued at $266,000 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. We sold all but two of our auction rate securities positions
outstanding at June 27, 2008 at par, leaving a portfolio balance of $39.4 million. Subsequent to December 31, 2008, we sold one position representing $14.9 million of our auction rate securities, leaving one security valued at $24.5
million in our portfolio. This position is valued at par as of December 31, 2008, and has not been impaired as of December 31, 2008. Currently, it has a calculated rate of return of 1%. Based on discussions with the issuer of the bonds, it
is our understanding that the entity has plans to refinance their debt. As such, we expect to receive full value on these bonds.

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 $1.4 million and $2.3 million
for the three and six-month periods ended December 31, 2008, respectively. As of December 31, 2008, we have a $267,000 balance for the venture capital fund investment and a $2.5 million balance for the Banks equity fund investment.
As of December 31, 2008, there was $3.1 million of REO valued at an adjusted appraisal value.

Goodwill and Intangible Assets

We performed our annual impairment test of goodwill and intangible assets in June 2008. No events occurred in the first six-months of fiscal 2009 that indicated that
these assets should be tested for impairment. Goodwill is valued at $7.6 million with $4.3 million in our clearing segment and $3.3 million in our institutional segment. Both segments reported income for the three and six-month periods ended
December 31, 2008 and are expected to report income in the next reporting period. Also, SWS Group, as a whole, had income in the three and six-months ended December 31, 2008 and the stock price at the end of December 2008 was above our
book value per share of $12.21. The intangible asset had a value of $2.3 million at December 31, 2008. The intangible asset is in the clearing segment.

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



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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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



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|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 December 31, 2008. Based on such
evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31, 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 (the Exchange Act) 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 December 31, 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.

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 has 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.



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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 the past few months, 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.



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

The following table provides information about our purchases during the quarter ended December 31, 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)
|09/27/08 to 10/31/08 |  | 1,145                            |  | $                         | 14.32 |                                                               |  |                                                                 | 698,944
|11/01/08 to 11/28/08 |  | 3,967                            |  |                           | 14.41 |                                                               |  |                                                                 | 698,944
|11/29/08 to 12/31/08 |  |                                 |  |                           |      |                                                               |  |                                                                 | 698,944
|                     |  |                                  |  |                           |       |                                                               |   |                                                                 |        
|                     |  | 5,112                            |  | $                         | 14.39 |                                                               |  |                                                                 |        
|                     |  |                                  |  |                           |       |                                                               |   |                                                                 |        



|(1) | All the shares purchased during the three-month period ended
December 31, 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

None.



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

Our
annual meeting of shareholders was held on November 20, 2008. The following directors were elected at the meeting:



|                   |  |            |  |           |  |        
|------------------ |  | ---------- |  | --------- |  | -------
|Nominees           |  | For        |  | Withheld  |  | Abstain
|Don A. Buchholz    |  | 24,686,971 |  | 882,239   |  |       
|Donald W. Hultgren |  | 24,682,730 |  | 886,480   |  |       
|Robert A. Buchholz |  | 24,916,079 |  | 653,130   |  |       
|Brodie L. Cobb     |  | 24,992,657 |  | 576,553   |  |       
|I.D. Flores III    |  | 16,500,946 |  | 9,068,264 |  |       
|Larry A. Jobe      |  | 24,992,026 |  | 577,184   |  |       
|Dr. R. Jan LeCroy  |  | 24,723,735 |  | 845,474   |  |       
|Frederick R. Meyer |  | 22,664,723 |  | 2,904,487 |  |       
|Dr. Mike Moses     |  | 22,307,342 |  | 3,261,868 |  |       
|Jon L. Mosle, Jr.  |  | 24,735,365 |  | 833,845   |  |       

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



|                                                                           |  |            |  |         |  |         |  |          
|-------------------------------------------------------------------------- |  | ---------- |  | ------- |  | ------- |  | ---------
|                                                                           |  | For        |  | Against |  | Abstain |  | Not Voted
|Approval of ratification of Grant Thornton LLP as our fiscal 2009 auditors |  | 25,387,162 |  | 165,781 |  | 16,267  |  |         



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

None.



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

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



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SIGNATURES

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



|                 |  |  |  |                                                                  
|---------------- |  |  |  | -----------------------------------------------------------------
|                 |  |  |  | SWS Group, Inc. (Registrant)                                     
|                 |  | 
|February 5, 2009 |  |  |  | /S/ Donald W. Hultgren                                           
|Date             |  |  |  | (Signature)                                                      
|                 |  |  |  | Donald W. Hultgren                                               
|                 |  |  |  | President and Chief Executive Officer and Duly Authorized Officer
|                 |  |  |  | (Principal Executive Officer)                                    
|                 |  | 
|February 5, 2009 |  |  |  | /S/ Kenneth R. Hanks                                             
|Date             |  |  |  | (Signature)                                                      
|                 |  |  |  | Kenneth R. Hanks                                                 
|                 |  |  |  | Treasurer and Chief Financial Officer                            
|                 |  |  |  | (Principal Financial Officer)                                    
|                 |  | 
|February 5, 2009 |  |  |  | /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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