##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



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

For the quarterly period ended March 31, 2006

OR



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

For the transition period from  to

Commission file number 0-19483



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SWS GROUP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



(Former name, former address and former fiscal year, if changed since last
report)



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

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



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

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

As of May 8, 2006, there were 17,772,094 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 ConditionMarch 31, 2006 (unaudited) and June 24, 2005                                                  |  | 1                                                                                    
|                                                                                                                                            | 
|Consolidated Statements of Income and Comprehensive IncomeFor the three and nine months ended March 31, 2006 and March 24, 2005 (unaudited) |  | 2                                                                                    
|                                                                                                                                            | 
|Consolidated Statements of Cash FlowsFor the nine months ended March 31, 2006 and March 24, 2005 (unaudited)                                |  | 3                                                                                    
|                                                                                                                                            | 
|Notes to Consolidated Financial Statements (unaudited)                                                                                      |  | 5                                                                                    
|                                                                                                                                            |  |                                                                                      
|Item 2.                                                                                                                                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23
|                                                                                                                                            |  |                                                                                      
|Item 3.                                                                                                                                     |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 44
|                                                                                                                                            |  |                                                                                      
|Item 4.                                                                                                                                     |  | Controls and Procedures                                                               |  | 44
|                                                                                                                                            | 
|PART II. OTHER INFORMATION                                                                                                                  |  |                                                                                      
|                                                                                                                                            |  |                                                                                      
|Item 1.                                                                                                                                     |  | Legal Proceedings                                                                     |  | 44
|                                                                                                                                            |  |                                                                                      
|Item 2.                                                                                                                                     |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 45
|                                                                                                                                            |  |                                                                                      
|Item 3.                                                                                                                                     |  | Defaults Upon Senior Securities                                                       |  | 45
|                                                                                                                                            |  |                                                                                      
|Item 4.                                                                                                                                     |  | Submission of Matters to a Vote of Security Holders                                   |  | 45
|                                                                                                                                            |  |                                                                                      
|Item 5.                                                                                                                                     |  | Other Information                                                                     |  | 45
|                                                                                                                                            |  |                                                                                      
|Item 6.                                                                                                                                     |  | Exhibits                                                                              |  | 45
|                                                                                                                                            | 
|SIGNATURES                                                                                                                                  |  | 46                                                                                   
|                                                                                                                                            | 
|EXHIBIT INDEX                                                                                                                               |  | 47                                                                                   



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

March 31, 2006 and June 24, 2005

(In thousands, except par values and share amounts)



|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                          |  | March       |           |   | June |  
|                                                                                                                                                                                                          |  | (Unaudited) |           |   |      |  
|Assets                                                                                                                                                                                                    |  |             |           |   |      |   |           |  
|Cash                                                                                                                                                                                                      |  | $           | 70,552    |   |      | $ | 23,045    |  
|Restricted cash                                                                                                                                                                                           |  |             | 3,587     |   |      |   |          |  
|Assets segregated for regulatory purposes                                                                                                                                                                 |  |             | 328,262   |   |      |   | 330,788   |  
|Marketable equity securities available for sale                                                                                                                                                           |  |             | 4,110     |   |      |   | 2,372     |  
|Receivable from brokers, dealers and clearing organizations                                                                                                                                               |  |             | 2,611,072 |   |      |   | 2,855,296 |  
|Receivable from clients, net                                                                                                                                                                              |  |             | 380,062   |   |      |   | 372,143   |  
|Loans held for sale                                                                                                                                                                                       |  |             | 119,992   |   |      |   | 172,023   |  
|Loans, net                                                                                                                                                                                                |  |             | 615,675   |   |      |   | 591,857   |  
|Securities owned, at market value                                                                                                                                                                         |  |             | 199,877   |   |      |   | 166,954   |  
|Securities purchased under agreements to resell                                                                                                                                                           |  |             | 37,970    |   |      |   | 28,890    |  
|Goodwill                                                                                                                                                                                                  |  |             | 7,552     |   |      |   | 11,660    |  
|Other assets                                                                                                                                                                                              |  |             | 69,857    |   |      |   | 76,116    |  
|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                          |  | $           | 4,448,568 |   |      | $ | 4,631,144 |  
|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  
|Liabilities and Stockholders Equity                                                                                                                                                                      |  |             |           |   |      |   |           |  
|Short-term borrowings                                                                                                                                                                                     |  | $           | 51,100    |   |      | $ | 68,400    |  
|Payable to brokers, dealers and clearing organizations                                                                                                                                                    |  |             | 2,510,761 |   |      |   | 2,755,076 |  
|Payable to clients                                                                                                                                                                                        |  |             | 616,875   |   |      |   | 609,477   |  
|Deposits                                                                                                                                                                                                  |  |             | 676,727   |   |      |   | 588,015   |  
|Securities sold under agreements to repurchase                                                                                                                                                            |  |             | 31,328    |   |      |   | 8,061     |  
|Securities sold, not yet purchased, at market value                                                                                                                                                       |  |             | 118,650   |   |      |   | 106,163   |  
|Drafts payable                                                                                                                                                                                            |  |             | 33,057    |   |      |   | 32,018    |  
|Advances from Federal Home Loan Bank                                                                                                                                                                      |  |             | 46,989    |   |      |   | 93,539    |  
|Bank borrowings                                                                                                                                                                                           |  |             |          |   |      |   | 47,150    |  
|Other liabilities                                                                                                                                                                                         |  |             | 60,731    |   |      |   | 56,309    |  
|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                          |  |             | 4,146,218 |   |      |   | 4,364,208 |  
|                                                                                                                                                                                                          |  |            
|Minority interest in consolidated subsidiaries                                                                                                                                                            |  |             | 616       |   |      |   | 1,166     |  
|                                                                                                                                                                                                          |  |            
|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 18,208,795 and outstanding 17,648,303 shares at March 31, 2006;
issued 17,977,240 and outstanding 17,329,779 shares at June 24, 2005 |  |             | 1,820     |   |      |   | 1,797     |  
|Additional paid-in capital                                                                                                                                                                                |  |             | 252,913   |   |      |   | 247,996   |  
|Retained earnings                                                                                                                                                                                         |  |             | 52,737    |   |      |   | 23,920    |  
|Accumulated other comprehensive income  unrealized holding gain net of tax of $673 at March 31, 2006 and $66 at June 24,
2005                                                                            |  |             | 1,276     |   |      |   | 138       |  
|Deferred compensation, net                                                                                                                                                                                |  |             | 1,581     |   |      |   | 1,488     |  
|Treasury stock (560,492 shares at March 31, 2006 and 647,461 shares at June 24, 2005, at cost)                                                                                                            |  |             | (8,593    | ) |      |   | (9,569    | )
|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                                |  |             | 301,734   |   |      |   | 265,770   |  
|Commitments and contingencies                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                          |  | $           | 4,448,568 |   |      | $ | 4,631,144 |  
|                                                                                                                                                                                                          |  |             |           |   |      |   |           |  

See accompanying Notes to Consolidated Financial Statements.



1



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the three and nine months ended March 31, 2006 and March 24, 2005

(In thousands, except per share and share amounts)

(Unaudited)



|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | ------------- |  | - | ------------- | - |  | - | ---------- | -
|                                                                                                                                                                                                        |  | For the Three Months Ended |            |   | For the Nine Months Ended |  
|                                                                                                                                                                                                        |  | March 31,2006              |            |   | March 24,2005             |   |            | March 31,2006 |  |   | March 24,2005 |  
|Net revenues from clearing operations                                                                                                                                                                   |  | $                          | 3,742      |   |                           | $ | 3,306      |               |  | $ | 10,908        |   |  | $ | 10,697     |  
|Commissions                                                                                                                                                                                             |  |                            | 19,357     |   |                           |   | 19,408     |               |  |   | 65,483        |   |  |   | 62,937     |  
|Interest                                                                                                                                                                                                |  |                            | 54,806     |   |                           |   | 37,694     |               |  |   | 157,766       |   |  |   | 95,103     |  
|Investment banking, advisory and administrative fees                                                                                                                                                    |  |                            | 5,773      |   |                           |   | 7,084      |               |  |   | 21,881        |   |  |   | 20,390     |  
|Net gains on principal transactions                                                                                                                                                                     |  |                            | 7,803      |   |                           |   | 4,551      |               |  |   | 16,647        |   |  |   | 30,323     |  
|Other                                                                                                                                                                                                   |  |                            | 5,714      |   |                           |   | 4,935      |               |  |   | 18,285        |   |  |   | 15,226     |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|                                                                                                                                                                                                        |  |                            | 97,195     |   |                           |   | 76,978     |               |  |   | 290,970       |   |  |   | 234,676    |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Commissions and other employee compensation                                                                                                                                                             |  |                            | 34,474     |   |                           |   | 33,311     |               |  |   | 109,766       |   |  |   | 98,878     |  
|Interest                                                                                                                                                                                                |  |                            | 33,935     |   |                           |   | 21,426     |               |  |   | 98,268        |   |  |   | 48,365     |  
|Occupancy, equipment and computer service costs                                                                                                                                                         |  |                            | 6,163      |   |                           |   | 6,140      |               |  |   | 17,730        |   |  |   | 19,525     |  
|Communications                                                                                                                                                                                          |  |                            | 2,273      |   |                           |   | 2,415      |               |  |   | 6,925         |   |  |   | 8,493      |  
|Floor brokerage and clearing organization charges                                                                                                                                                       |  |                            | 343        |   |                           |   | 1,177      |               |  |   | 2,436         |   |  |   | 4,346      |  
|Advertising and promotional                                                                                                                                                                             |  |                            | 931        |   |                           |   | 533        |               |  |   | 2,257         |   |  |   | 2,384      |  
|Other                                                                                                                                                                                                   |  |                            | 6,104      |   |                           |   | 5,027      |               |  |   | 17,757        |   |  |   | 16,657     |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|                                                                                                                                                                                                        |  |                            | 84,223     |   |                           |   | 70,029     |               |  |   | 255,139       |   |  |   | 198,648    |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income from continuing operations before income tax expense                                                                                                                                             |  |                            | 12,972     |   |                           |   | 6,949      |               |  |   | 35,831        |   |  |   | 36,028     |  
|Income tax expense                                                                                                                                                                                      |  |                            | 4,524      |   |                           |   | 2,498      |               |  |   | 12,632        |   |  |   | 12,682     |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                       |  |                            | 8,448      |   |                           |   | 4,451      |               |  |   | 23,199        |   |  |   | 23,346     |  
|Discontinued operations                                                                                                                                                                                 |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income from discontinued operations including a gain on sale of $20,453 for the three and nine months ended March 31,
2006                                                                              |  |                            | 20,775     |   |                           |   | 1,858      |               |  |   | 22,576        |   |  |   | 4,775      |  
|Income tax expense                                                                                                                                                                                      |  |                            | (6,227     | ) |                           |   | (605       | )             |  |   | (6,826        | ) |  |   | (1,473     | )
|Minority interest                                                                                                                                                                                       |  |                            | (2,974     | ) |                           |   | (111       | )             |  |   | (3,065        | ) |  |   | (626       | )
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income from discontinued operations                                                                                                                                                                     |  |                            | 11,574     |   |                           |   | 1,142      |               |  |   | 12,685        |   |  |   | 2,676      |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income before cumulative effect of a change in accounting principle                                                                                                                                     |  |                            | 20,022     |   |                           |   | 5,593      |               |  |   | 35,884        |   |  |   | 26,022     |  
|Cumulative effect of a change in accounting principle, net of tax of $40.                                                                                                                               |  |                            |           |   |                           |   |           |               |  |   | 75            |   |  |   |           |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Net income                                                                                                                                                                                              |  |                            | 20,022     |   |                           |   | 5,593      |               |  |   | 35,959        |   |  |   | 26,022     |  
|Other comprehensive income (loss):                                                                                                                                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Holding gains and losses arising during the three and nine months ended March 31, 2006, net of tax of $358 and $606 and the three and
nine months ended March 24, 2005, net of tax of ($58) and ($327). |  |                            | 678        |   |                           |   | (114       | )             |  |   | 1,138         |   |  |   | 52         |  
|Reclassification for hedging activities, net of tax of $9.                                                                                                                                              |  |                            |           |   |                           |   |           |               |  |   |              |   |  |   | 17         |  
|Reclassification for delivery of Knight shares in settlement of DARTSSMobligation, net of tax of $6,262.                                                                                                |  |                            |           |   |                           |   |           |               |  |   |              |   |  |   | (12,471    | )
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Net income (loss) recognized in other comprehensive income                                                                                                                                              |  |                            | 678        |   |                           |   | (114       | )             |  |   | 1,138         |   |  |   | (12,402    | )
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Comprehensive income                                                                                                                                                                                    |  | $                          | 20,700     |   |                           | $ | 5,479      |               |  | $ | 37,097        |   |  | $ | 13,620     |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Earnings per share - basic                                                                                                                                                                              |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                       |  | $                          | 0.49       |   |                           | $ | 0.25       |               |  | $ | 1.33          |   |  | $ | 1.36       |  
|Income from discontinued operations                                                                                                                                                                     |  |                            | 0.66       |   |                           |   | 0.07       |               |  |   | 0.73          |   |  |   | 0.15       |  
|Cumulative effect of change in accounting principles                                                                                                                                                    |  |                            |           |   |                           |   |           |               |  |   | 0.01          |   |  |   |           |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Net income                                                                                                                                                                                              |  | $                          | 1.15       |   |                           | $ | 0.32       |               |  | $ | 2.07          |   |  | $ | 1.51       |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Weighted average shares outstanding  basic                                                                                                                                                             |  |                            | 17,467,368 |   |                           |   | 17,275,934 |               |  |   | 17,382,130    |   |  |   | 17,194,927 |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Earnings per share  diluted                                                                                                                                                                            |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                       |  | $                          | 0.48       |   |                           | $ | 0.25       |               |  | $ | 1.32          |   |  | $ | 1.35       |  
|Income from discontinued operations                                                                                                                                                                     |  |                            | 0.65       |   |                           |   | 0.07       |               |  |   | 0.72          |   |  |   | 0.15       |  
|Cumulative effect of change in accounting principles                                                                                                                                                    |  |                            |           |   |                           |   |           |               |  |   |              |   |  |   |           |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Net income                                                                                                                                                                                              |  | $                          | 1.13       |   |                           | $ | 0.32       |               |  | $ | 2.04          |   |  | $ | 1.50       |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Weighted average shares outstanding  diluted                                                                                                                                                           |  |                            | 17,775,886 |   |                           |   | 17,501,027 |               |  |   | 17,633,227    |   |  |   | 17,389,953 |  
|                                                                                                                                                                                                        |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  

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 nine months ended March 31, 2006 and March 24, 2005

(In thousands)

(Unaudited)



|                                                                                            |  |                           |            |   |               |   |            |  
|------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                            |  | For the Nine Months Ended |           
|                                                                                            |  | March 31,2006             |            |   | March 24,2005 |  
|Cash flows from operating activities:                                                       |  |                           |            |   |               |   |            |  
|Net income                                                                                  |  | $                         | 35,959     |   |               | $ | 26,022     |  
|Income from discontinued operations                                                         |  |                           | (12,685    | ) |               |   | (2,676     | )
|Cumulative effect of a change in accounting principle                                       |  |                           | (75        | ) |               |   |           |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                           |            |   |               |   |            |  
|Depreciation and amortization                                                               |  |                           | 4,122      |   |               |   | 4,583      |  
|Amortization of discounts on loans purchased                                                |  |                           | (592       | ) |               |   | (808       | )
|Provision for doubtful accounts                                                             |  |                           | 2,530      |   |               |   | 476        |  
|Deferred income tax expense                                                                 |  |                           | (539       | ) |               |   | (3,282     | )
|Deferred compensation                                                                       |  |                           | 1,590      |   |               |   | 779        |  
|Gain on sale of loans                                                                       |  |                           | (780       | ) |               |   | (593       | )
|Loss on sale of fixed assets                                                                |  |                           | 648        |   |               |   | 48         |  
|(Gain) loss on sale of real estate                                                          |  |                           | (65        | ) |               |   | (304       | )
|Gain on delivery of Knight shares in settlement of DARTSSMobligation                        |  |                           |           |   |               |   | (18,732    | )
|Dividend received on investment in Federal Home Loan Bank stock                             |  |                           | (94        | ) |               |   |           |  
|Equity (gains) losses on investments                                                        |  |                           | (1,603     | ) |               |   | 612        |  
|Net change in minority interest in consolidated subsidiaries                                |  |                           | 43         |   |               |   |           |  
|Cash flow from operating activities of discontinued operations                              |  |                           | (1,294     | ) |               |   | 3,905      |  
|Change in operating assets and liabilities:                                                 |  |                           |            |   |               |   |            |  
|Decrease in assets segregated for regulatory purposes                                       |  |                           | 2,526      |   |               |   | 8,927      |  
|Net change in broker, dealer and clearing organization accounts                             |  |                           | (91        | ) |               |   | (13,657    | )
|Net change in client accounts                                                               |  |                           | (1,241     | ) |               |   | 9,074      |  
|Net change in loans held for sale                                                           |  |                           | 52,031     |   |               |   | (66,015    | )
|Increase in securities owned                                                                |  |                           | (32,923    | ) |               |   | (65,900    | )
|Increase in securities purchased under agreements to resell                                 |  |                           | (9,080     | ) |               |   | (65,571    | )
|Increase in other assets                                                                    |  |                           | (1,979     | ) |               |   | (2,878     | )
|Increase in drafts payable                                                                  |  |                           | 1,039      |   |               |   | 4,652      |  
|Increase in securities sold, not yet purchased                                              |  |                           | 12,487     |   |               |   | 58,331     |  
|Increase in other liabilities                                                               |  |                           | 5,684      |   |               |   | 719        |  
|Windfall tax benefits                                                                       |  |                           | (30        | ) |               |   |           |  
|                                                                                            |  |                           |            |   |               |   |            |  
|Net cash provided by (used in) operating activities                                         |  |                           | 55,588     |   |               |   | (122,288   | )
|                                                                                            |  |                           |            |   |               |   |            |  
|Cash flows from investing activities:                                                       |  |                           |            |   |               |   |            |  
|Purchase of fixed assets                                                                    |  |                           | (1,891     | ) |               |   | (2,843     | )
|Purchase of real estate                                                                     |  |                           | (161       | ) |               |   | (2,471     | )
|Proceeds from the sale of fixed assets                                                      |  |                           | 93         |   |               |   | 54         |  
|Proceeds from the sale of real estate                                                       |  |                           | 1,507      |   |               |   | 5,850      |  
|Loan originations and purchases                                                             |  |                           | (479,914   | ) |               |   | (347,588   | )
|Loan repayments                                                                             |  |                           | 368,047    |   |               |   | 274,588    |  
|Cash paid for purchase of OConnor                                                          |  |                           | (86        | ) |               |   | (585       | )
|Cash paid for investments                                                                   |  |                           | (500       | ) |               |   | (1,443     | )
|Cash received from investments                                                              |  |                           | 1,630      |   |               |   | 180        |  
|Cash paid for additional investment in FSB Financial & FSBF                                 |  |                           |           |   |               |   | (3,000     | )
|Cash flow from investing activities of discontinued operations                              |  |                           | 104,814    |   |               |   | (31,010    | )
|Proceeds from the sale of Federal Home Loan Bank stock                                      |  |                           | 3,877      |   |               |   |           |  
|Purchases of Federal Home Loan Bank stock                                                   |  |                           | (487       | ) |               |   | (3,428     | )
|                                                                                            |  |                           |            |   |               |   |            |  
|Net cash used in investing activities                                                       |  |                           | (3,071     | ) |               |   | (111,696   | )
|                                                                                            |  |                           |            |   |               |   |            |  
|Cash flows from financing activities:                                                       |  |                           |            |   |               |   |            |  
|Payments on short-term borrowings                                                           |  |                           | (1,733,100 | ) |               |   | (1,520,415 | )
|Cash proceeds from short-term borrowings                                                    |  |                           | 1,715,800  |   |               |   | 1,584,815  |  
|Payments on capital leases                                                                  |  |                           |           |   |               |   | (253       | )
|Increase in deposits                                                                        |  |                           | 88,712     |   |               |   | 24,437     |  



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|                                                                      |  |                           |            |   |               |   |          |  
|--------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ------------- | - | -------- | -
|                                                                      |  | For the Nine Months Ended |           
|                                                                      |  | March 31,2006             |            |   | March 24,2005 |  
|Advances from Federal Home Loan Bank                                  |  |                           | 3,597,033  |   |               |   | 692,671  |  
|Payments on advances from Federal Home Loan Bank                      |  |                           | (3,643,583 | ) |               |   | (610,828 | )
|Payment of cash dividends on common stock  SWS Group                 |  |                           | (5,449     | ) |               |   | (5,207   | )
|Cash payments on notes payable  Bank                                 |  |                           |           |   |               |   | (165     | )
|Cash flow from financing activities of discontinued operations        |  |                           | (50,878    | ) |               |   | 12,200   |  
|Windfall tax benefits                                                 |  |                           | 30         |   |               |   |         |  
|Cash proceeds on securities sold under agreements to repurchase       |  |                           | 23,267     |   |               |   |         |  
|Net proceeds from exercise of stock options                           |  |                           | 3,422      |   |               |   | 1,983    |  
|Proceeds related to the Deferred Compensation Plan                    |  |                           | 213        |   |               |   | 235      |  
|Purchase of treasury stock                                            |  |                           | (477       | ) |               |   | (238     | )
|                                                                      |  |                           |            |   |               |   |          |  
|Net cash provided by (used in) financing activities                   |  |                           | (5,010     | ) |               |   | 179,235  |  
|                                                                      |  |                           |            |   |               |   |          |  
|Net increase (decrease) in cash                                       |  |                           | 47,507     |   |               |   | (54,749  | )
|Cash at beginning of period                                           |  |                           | 23,045     |   |               |   | 88,589   |  
|                                                                      |  |                           |            |   |               |   |          |  
|Cash at end of period                                                 |  | $                         | 70,552     |   |               | $ | 33,840   |  
|                                                                      |  |                           |            |   |               |   |          |  
|Supplemental schedule of non-cash investing and financing activities: |  |                           |            |   |               |   |          |  
|Granting of Restricted Stock                                          |  | $                         | 2,074      |   |               | $ | 948      |  
|                                                                      |  |                           |            |   |               |   |          |  
|Delivery of Knight shares in settlement of DARTSSMobligation          |  | $                         |           |   |               | $ | 18,732   |  
|                                                                      |  |                           |            |   |               |   |          |  
|Supplemental disclosure of cash flow information:                     |  |                           |            |   |               |   |          |  
|                                                                      |  |                          
|Cash paid during the period for:                                      |  |                           |            |   |               |   |          |  
|Interest                                                              |  | $                         | 98,551     |   |               | $ | 57,278   |  
|                                                                      |  |                           |            |   |               |   |          |  
|Taxes                                                                 |  | $                         | 6,983      |   |               | $ | 10,300   |  
|                                                                      |  |                           |            |   |               |   |          |  

See accompanying Notes to Consolidated Financial Statements.



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SWS Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Three and Nine Months Ended March 31, 2006 and March 24, 2005

(Unaudited)

GENERAL AND BASIS OF PRESENTATION

The interim consolidated financial statements as of March 31, 2006, and for the three and nine-month periods ended March 31, 2006 and March 24, 2005, 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 24, 2005 filed on Form 10-K. Amounts included for June 24, 2005 are derived from the audited consolidated financial
statements as filed on Form 10-K. All significant intercompany balances and transactions have been eliminated.

The consolidated financial statements
include the accounts of SWS Group, Inc. (SWS Group) and its consolidated subsidiaries listed below (collectively, SWS or the Company):



|                                            |  |                              
|------------------------------------------- |  | -----------------------------
|Brokerage Group                             |  |                              
|Southwest Securities, Inc.                  |  | Southwest Securities       
|SWS Financial Services, Inc.                |  | SWS Financial              
|Asset Management Group                      |  |                              
|SWS Capital Corporation                     |  | SWS Capital                
|Southwest Investment Advisors, Inc.         |  | Southwest Advisors         
|Banking Group                               |  |                              
|SWS Banc Holdings, Inc.                     |  | SWS Banc                   
|Southwest Securities, FSB(*)                |  | Bank                       
|FSBF, LLC (90%)                             |  | FSBF                       
|FSB Financial, LTD(**)                      |  | FSB Financial              
|FSB Development, LLC                        |  | FSB Development            
|Other                                       |  |                              
|Southwest Financial Insurance Agency, Inc.  |  |                              
|Southwest Insurance Agency, Inc.            |  |                              
|Southwest Insurance Agency of Alabama, Inc. |  | collectively, SWS Insurance

---

|(*) | Effective January 1, 2006, the Bank changed its name from Southwest Securities Bank to Southwest Securities, FSB.
|--- | -----------------------------------------------------------------------------------------------------------------

|(**) | On March 1, 2006, FSB Financial sold substantially all of its assets. See discussion in -Discontinued Operations.
|---- | -------------------------------------------------------------------------------------------------------------------

Brokerage Group.Southwest Securities is a New York Stock Exchange (NYSE) member broker/dealer and SWS Financial is a National Association of
Securities Dealers (NASD) member broker/dealer. Each is registered under the Securities Exchange Act of 1934 (1934 Act). Southwest Securities and SWS Financial are also registered with the Securities and Exchange Commission
(SEC) as registered investment advisors under the Investment Advisors Act of 1940.

SWS filed a broker/dealer withdrawal with the NASD for May
Financial Corporation (May Financial) on October 26, 2004. The effective date of the withdrawal was November 1, 2004. May Financial was dissolved on December 31, 2004.

Asset Management Group.Asset management services are offered through SWS Capital, which administered the Local Government Investment Cooperative
(LOGIC) fund for cities, counties, schools and other local governments across Texas through September 4, 2005. LOGIC is an investment program tailored to the investing needs of local governments within the state of Texas. SWS
Capital did not renew its contract as General Manager of LOGIC upon the expiration of the



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original agreement on September 4, 2005. LOGIC represented 100% of the assets under management of SWS Capital at June 24, 2005. At March 31,
2006, SWS Capital had no assets under management.

Southwest Advisors, although dormant, is a registered investment advisor under the Investment Advisors
Act of 1940.

Banking Group.The Bank is a federally chartered savings association regulated by the Office of Thrift Supervision. SWS Banc was
incorporated as a wholly owned subsidiary of SWS Group and became the sole shareholder of the Bank in 2004. FSBF is a 2% general partner of FSB Financial which purchased non-prime automobile loans.

On March 1, 2006, FSB Financial, a purchaser, generator and servicer of non-prime automobile loans, sold substantially all of its assets for $35,870,000 in cash and
the retirement of $116,868,000 of related debt. See -Discontinued Operations.

In January 2005, the Bank purchased an additional 15% of FSBF at
a cost of $84,000, bringing the Banks percentage ownership to 90%. Also, the Bank purchased an additional 14.7% of FSB Financial at a cost of $4,367,000 bringing the Banks percentage of ownership to 88.2%. FSBF owns 2% of FSB Financial
effectively giving the Bank a 90% interest in FSB Financial. Of the $4,451,000 total purchase price, $3,062,000 was paid in cash and the remaining $1,389,000 was given in the form of a promissory note. The note was paid in full in March 2006 with
the sale of the assets of FSB Financial. See -Discontinued Operations.

FSB Development develops single-family residential lots.

The Banks quarterly financial statements are prepared as of March 31 for each period presented. All significant intercompany balances and transactions have
been eliminated.

Other Consolidated Entities.SWS Insurance holds insurance agency licenses in 44 states for the purpose of facilitating the sale
of insurance and annuities for customers of Southwest Securities and its correspondents.

STOCK OPTION AND RESTRICTED STOCK PLANS

Stock Option Plans. At March 31, 2006, SWS had two stock option plans; the SWS Group, Inc. Stock Option Plan (the 1996 Plan) and the SWS Group,
Inc. 1997 Stock Option Plan (the 1997 Plan). The 1996 Plan reserves shares of SWS Groups common stock for issuance to eligible officers, directors and employees of SWS Group or its subsidiaries, as well as to non-employee members
of the Board of Directors. The 1997 Plan reserves shares of SWS Groups common stock for eligible employees or potential employees of SWS Group or its subsidiaries. Officers and directors are not eligible to receive options under the 1997 Plan.
Options granted under the 1996 and 1997 Plans have a maximum ten-year term, and the vesting period is determined on an individual basis by the Compensation Committee of the Board of Directors. However, options granted to non-employee directors under
the 1996 Plan are fully vested six months after grant and have a five-year term.

The 1996 Plan expired on February 1, 2006. All options outstanding
under the 1996 Plan may still be exercised until their contracted expiration date occurs.

On June 7, 2005, all outstanding options were vested upon
approval by the Board of Directors. The Company has substantially eliminated the use of options as a compensation tool and currently grants restricted stock to reward management and employees. Consequently, no stock options were granted during the
nine months ended March 31, 2006.

As of June 25, 2005, SWS began accounting for the plans under the recognition and measurement principles of
the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment. For all periods prior to June 25, 2005, SWS accounted for the
plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.



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The following table illustrates the effect on net income and earnings per share if SWS had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the three and nine months ended March 24, 2005 (in thousands, except per share amounts):



|                                                                                                                                        |  |                                  |       |   |                                 |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ------ | -
|                                                                                                                                        |  | Three Months EndedMarch 24,
2005 |       |   | Nine Months EndedMarch 24,
2005 |  
|Net income:                                                                                                                             |  |                                  |       |   |                                 |   |        |  
|As reported                                                                                                                             |  | $                                | 5,593 |   |                                 | $ | 26,022 |  
|Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                  | (95   | ) |                                 |   | (402   | )
|                                                                                                                                        |  |                                  |       |   |                                 |   |        |  
|Pro forma                                                                                                                               |  | $                                | 5,498 |   |                                 | $ | 25,620 |  
|                                                                                                                                        |  |                                  |       |   |                                 |   |        |  
|Earnings per share - basic:                                                                                                             |  |                                  |       |   |                                 |   |        |  
|As reported                                                                                                                             |  | $                                | 0.32  |   |                                 | $ | 1.51   |  
|Pro forma                                                                                                                               |  |                                  | 0.32  |   |                                 |   | 1.49   |  
|                                                                                                                                        |  |                                 
|Earnings per share - diluted:                                                                                                           |  |                                  |       |   |                                 |   |        |  
|As reported                                                                                                                             |  | $                                | 0.32  |   |                                 | $ | 1.50   |  
|Pro forma                                                                                                                               |  |                                  | 0.31  |   |                                 |   | 1.47   |  

The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions for the three and nine months ended March 24, 2005:



|                        |  |               |  
|----------------------- |  | ------------- | -
|                        |  | March 24,2005 |  
|Expected volatility     |  | 57            | %
|Risk-free interest rate |  | 3.94          | %
|Expected dividend yield |  | 2.66          | %
|Expected life           |  | 5 years       |  

Restricted Stock Plan. The SWS Group, Inc. 2003 Restricted Stock Plan (Restricted Stock Plan),
which terminates on August 21, 2013, allows for awards of up to 500,000 shares of SWS Groups common stock to SWS directors, officers and employees. No more than 200,000 of the authorized shares may be newly issued shares of common
stock. The vesting period is determined on an individualized basis by the Compensation Committee of the Board of Directors. In general, restricted stock granted to employees under the Restricted Stock Plan is fully vested after three years, and
restricted stock granted to non-employee directors vests on the one year anniversary of the date of grant.

On August 25, 2005, the Board of Directors
approved grants to various officers and employees totaling 72,199 shares with a fair market value of $16.65 per share. On November 28, 2005, a grant was approved totaling 50,000 shares with a fair market value of $20.89 per share. For the three
and nine months ended March 31, 2006, SWS recognized compensation expense of approximately $332,000 which includes $18,000 expensed for dividends paid on unvested restricted stock and $763,000 which includes $49,000 expensed for dividends paid
on unvested restricted stock, respectively. For the three and nine months ended March 24, 2005, SWS recognized compensation expense of approximately $147,000 and $388,000, respectively.



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On June 25, 2005, SWS adopted the provisions of SFAS No. 123R in relation to the Restricted Stock Plan. This
adoption resulted in income of $75,000 recorded as a cumulative effect of a change in accounting principle, net of tax. The adoption affected SWS accounting for forfeitures and dividends. The adoption required SWS to estimate and record future
forfeitures on previously granted restricted stock awards. SWS was also required to change its accounting for dividends paid to unvested holders of restricted stock.

CASH

The Company considers cash to include cash on hand and in depository accounts.

RESTRICTED CASH

At March 31, 2006, restricted cash consisted of
$3,587,000, of which $358,700 will be paid to the minority shareholder of FSB Financial, received by the Bank and held in escrow from the sale of FSB Financial. As part of the asset purchase agreement, ten percent of the purchase price is to be held
in escrow until June 30, 2007; until such time, the Bank does not have access to these funds. See -Discontinued Operations for discussion of the sale of the assets of FSB Financial.

INVESTMENTS

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

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

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

SWS did not participate in CSS equity offering in January 2005. SWS has developed many of the functions needed to run the CSS system in-house and is no longer dependent on CSS for enhancements. Subsequent to the equity offering in
January 2005, SWS owned 13.7% of CSS. SWS has not made any additional investments in CSS since January 2005.

See -Subsequent Events for
discussion of a maintenance fee agreement entered into in April 2006.

SWS share of the undistributed losses of CSS for the three and nine months
ended March 31, 2006 were $220,000 and $643,000, respectively, which SWS did not recognize as there is no recorded equity investment in CSS. From inception of the investment to date, SWS has recognized $6,486,000 of its pro-rata percentage of
CSS losses of $8,375,000.



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Summarized financial information of CSS is as follows (in thousands):



|                               |  |                    |        |   |                |   |        |  
|------------------------------ |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                               |  | March 31, 2006     |        |   | June 30, 2005  |  
|Total assets                   |  | $                  | 3,288  |   |                | $ | 7,719  |  
|Total liabilities              |  |                    | 4,539  |   |                |   | 4,273  |  
|Shareholders equity (deficit) |  |                    | (1,251 | ) |                |   | 3,446  |  
|                               | 
|                               |  | Three Months Ended |       
|                               |  | March 31,2006      |        |   | March 31, 2005 |  
|Total revenues                 |  | $                  | 1,174  |   |                | $ | 1,176  |  
|Net loss                       |  |                    | (1,606 | ) |                |   | (1,969 | )
|                               | 
|                               |  | Nine Months Ended  |       
|                               |  | March 31,2006      |        |   | March 31,2005  |  
|Total revenues                 |  | $                  | 3,843  |   |                | $ | 3,783  |  
|Net loss                       |  |                    | (4,694 | ) |                |   | (7,494 | )

Other Equity Investments. SWS has two other investment vehicles that are accounted for under the equity
method. One is a limited partnership venture capital fund to which SWS has committed $5,000,000. As of March 31, 2006, SWS had contributed $4,000,000 of this commitment. During the three and nine months ended March 31, 2006, SWS recorded
income of $172,000 and $1,710,000, respectively, related to this investment. In December 2005, SWS received a distribution of $1,547,000. In comparison, during the three and nine months ended March 24, 2005, SWS recorded losses of $583,000 and
income of $683,000, respectively.

SWS remaining equity investment sold its assets to a third party in December 2005, with SWS receiving a
distribution of $83,000 for its portion of the sale proceeds. SWS recorded total losses for the nine months ended March 31, 2006 of $106,600 on this investment. The three and nine-month periods of fiscal 2005 had total losses of $4,000 and
$11,700, respectively.

Variable Interest Entity. SWS consolidates investments which meet the definition of a Variable Interest Entity
as defined in Financial Interpretation (FIN) No. 46R, Consolidation of Variable Interest Entities (as amended)..

In
March 2005, FSB Development contributed $475,000 for a limited partnership interest in a land development limited partnership. The Bank has established a $2,400,000 line of credit with this limited partnership. If drawn this line bears a rate of
prime plus 1%. At March 31, 2006 and June 24, 2005, $1,606,000 and $1,456,000 was outstanding on this line of credit, respectively. The line allows the limited partnership to purchase the land to be used in the development and was amended
in the March 2006 quarter to be payable on September 10, 2007. This entity is consolidated at the Bank level through FSB Development. As of March 31, 2006 and 2005, the Bank consolidated $2,165,000 and $1,933,000 in assets for this
investment, respectively. Net losses of $29,000 and $86,000 were consolidated for the three and nine months ended March 31, 2006, respectively. For the three and nine months ended March 31, 2005, net losses of $6,300 were consolidated for
this investment.

FSB Development had a limited partnership interest of $1,000,000 in a land development limited partnership that was sold on
February 3, 2005 for $1,125,000, resulting in a gain of $223,000. The Bank loaned this limited partnership $3,000,000 with an interest rate of prime plus 1% payable on December 17, 2005 to allow the limited partnership to purchase the land
and finance the second phase of the development. This loan was paid off on August 4, 2005. For the three and nine months ended March 31, 2005, the Bank consolidated $17,000 and $94,000 in net losses for this investment, respectively.



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ASSETS SEGREGATED FOR REGULATORY PURPOSES

At March 31, 2006, SWS had U.S. Treasury securities with a market value of approximately $132,391,000, reverse repurchase agreements of approximately $36,924,000 and related cash and accrued interest of
approximately $157,547,000 segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the 1934 Act. The reverse repurchase agreements were collateralized by U.S. Government securities with a market value
of approximately $37,206,000. At March 31, 2006, SWS had $1,400,000 in special reserve bank accounts for the Proprietary Accounts of Introducing Brokers (PAIB).

At June 24, 2005, SWS had U.S. Treasury securities with a market value of approximately $25,620,000, reverse repurchase agreements of approximately $140,696,000 and related cash and accrued interest of
approximately $164,472,000 segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the 1934 Act. The reverse repurchase agreements were collateralized by U.S. Government securities with a market value
of approximately $141,720,000. SWS had no deposits in special reserve bank accounts for the PAIB at June 24, 2005.

MARKETABLE EQUITY SECURITIES

SWS Group owns shares of common stock that 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
March 31, 2006 and June 24, 2005, SWS Group held 457,154 shares of U.S. Home Systems, Inc. (USHS) with a cost basis of $2,018,000. The market value of the USHS shares was $3,941,000 at March 31, 2006 and $2,208,000 at
June 24, 2005. There were no sales of USHS stock in the three and nine-month periods ended March 31, 2006 and March 24, 2005.

At
March 31, 2006, SWS Group held 8,556 shares of Westwood Holdings Group, Inc. (Westwood) within the deferred compensation plan with a cost basis of $143,000. At June 24, 2005, SWS held 8,954 shares of Westwood within the
deferred compensation plan with a cost basis of $150,650. The market value of the Westwood shares was $169,000 and $164,000 at March 31, 2006 and June 24, 2005, respectively. The reduction in shares results from a distribution from the
deferred compensation plan.

RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

At March 31, 2006 and June 24, 2005, SWS had receivable from and payable to brokers, dealers and clearing organizations related to the following (in thousands):



|                             |  |       |           |      |   |          
|---------------------------- |  | ----- | --------- | ---- | - | ---------
|                             |  | March |           | June
|Receivable                   |  |       |           |      |   |          
|Securities failed to deliver |  | $     | 36,933    |      | $ | 21,459   
|Securities borrowed          |  |       | 2,513,754 |      |   | 2,768,922
|Correspondent broker/dealers |  |       | 22,690    |      |   | 39,940   
|Clearing organizations       |  |       | 11,247    |      |   | 8,196    
|Other                        |  |       | 26,448    |      |   | 16,779   
|                             |  |       |           |      |   |          
|                             |  | $     | 2,611,072 |      | $ | 2,855,296
|                             |  |       |           |      |   |          
|Payable                      |  |       |           |      |   |          
|Securities failed to receive |  | $     | 44,598    |      | $ | 42,916   
|Securities loaned            |  |       | 2,442,743 |      |   | 2,688,266
|Correspondent broker/dealers |  |       | 12,846    |      |   | 14,064   
|Other                        |  |       | 10,574    |      |   | 9,830    
|                             |  |       |           |      |   |          
|                             |  | $     | 2,510,761 |      | $ | 2,755,076
|                             |  |       |           |      |   |          



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SWS participates in the securities borrowing and lending business by lending excess margin securities of its clients as
well as by borrowing and lending securities other than those of its clients. SWS adjusts open positions to market value according to standard industry practices. SWS received collateral of $2,513,754,000 under securities lending agreements, of which
the Company repledged $2,384,481,000 at March 31, 2006. SWS received collateral of $2,768,921,000 under securities lending agreements, of which SWS repledged $2,655,647,000 at June 24, 2005.

LOANS HELD FOR SALE

Loans held for sale are carried at the lower of
aggregate cost or market value. Loans held for sale consisted of first mortgage loans and home improvement loans which had been purchased but had not yet been sold in the secondary market.

LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES

Loans receivable,
excluding loans held for sale, at March 31, 2006 and June 30, 2005 are summarized as follows (in thousands):



|                                                 |  |       |         |   |      |   |         |  
|------------------------------------------------ |  | ----- | ------- | - | ---- | - | ------- | -
|                                                 |  | March |         |   | June |  
|First mortgage loans (principally conventional): |  |       |         |   |      |   |         |  
|Real estate                                      |  | $     | 355,303 |   |      | $ | 308,517 |  
|Construction                                     |  |       | 193,684 |   |      |   | 135,444 |  
|                                                 |  |       |         |   |      |   |         |  
|                                                 |  |       | 548,987 |   |      |   | 443,961 |  
|Commercial and Consumer loans:                   |  |       |         |   |      |   |         |  
|Commercial                                       |  |       | 61,089  |   |      |   | 51,312  |  
|Consumer                                         |  |       | 6,204   |   |      |   | 109,125 |  
|                                                 |  |       |         |   |      |   |         |  
|                                                 |  |       | 67,293  |   |      |   | 160,437 |  
|Factored receivables                             |  |       | 8,127   |   |      |   | 7,803   |  
|                                                 |  |       |         |   |      |   |         |  
|                                                 |  |       | 624,407 |   |      |   | 612,201 |  
|Unearned income                                  |  |       | (3,665  | ) |      |   | (12,894 | )
|Allowance for probable loan losses               |  |       | (5,067  | ) |      |   | (7,450  | )
|                                                 |  |       |         |   |      |   |         |  
|                                                 |  | $     | 615,675 |   |      | $ | 591,857 |  
|                                                 |  |       |         |   |      |   |         |  

Impairment of loans with a recorded investment of approximately $3,176,000 and $4,949,000 at March 31, 2006
and June 30, 2005, 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.

An analysis of the allowance for probable loan losses for the three and nine-months ended March 31, 2006 and 2005 is as follows (in thousands):



|                                    |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |       |  
|----------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                    |  | Three Months EndedMarch 31, |        |   | Nine Months EndedMarch 31, |  
|                                    |  | 2006                        |        |   | 2005                       |   |       | 2006 |  |   | 2005   |  
|Balance at beginning of period      |  | $                           | 7,151  |   |                            | $ | 5,392 |      |  | $ | 7,450  |   |  | $ | 4,643 |  
|Discontinued operations             |  |                             | (2,329 | ) |                            |   | 25    |      |  |   | (3,635 | ) |  |   | 773   |  
|Provision for loan losses           |  |                             | 350    |   |                            |   | (151  | )    |  |   | 1,515  |   |  |   | (42   | )
|Loans charged to the allowance, net |  |                             | (105   | ) |                            |   | 133   |      |  |   | (263   | ) |  |   | 25    |  
|                                    |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |       |  
|Balance at end of period            |  | $                           | 5,067  |   |                            | $ | 5,399 |      |  | $ | 5,067  |   |  | $ | 5,399 |  
|                                    |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |       |  



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SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

At March 31, 2006 and June 24, 2005, SWS had securities owned and securities sold, not yet purchased as follows (in thousands):



|                                                  |  |       |         |      |   |        
|------------------------------------------------- |  | ----- | ------- | ---- | - | -------
|                                                  |  | March |         | June
|Securities owned                                  |  |       |         |      |   |        
|Corporate equity securities                       |  | $     | 16,448  |      | $ | 7,259  
|Municipal obligations                             |  |       | 36,084  |      |   | 32,894 
|U.S. Government and Government agency obligations |  |       | 47,141  |      |   | 30,079 
|Corporate obligations                             |  |       | 89,892  |      |   | 88,877 
|Other                                             |  |       | 10,312  |      |   | 7,845  
|                                                  |  |       |         |      |   |        
|                                                  |  | $     | 199,877 |      | $ | 166,954
|                                                  |  |       |         |      |   |        
|                                                  |  |      
|                                                  |  | March |         | June
|Securities sold, not yet purchased                |  |       |         |      |   |        
|Corporate equity securities                       |  | $     | 2,789   |      | $ | 3,121  
|Municipal obligations                             |  |       | 150     |      |   | 277    
|U.S. Government and Government agency obligations |  |       | 49,594  |      |   | 43,933 
|Corporate obligations                             |  |       | 65,736  |      |   | 58,451 
|Other                                             |  |       | 381     |      |   | 381    
|                                                  |  |       |         |      |   |        
|                                                  |  | $     | 118,650 |      | $ | 106,163
|                                                  |  |       |         |      |   |        

During the quarter, certain of the above securities were pledged to secure short-term borrowings or as security
deposits at clearing organizations for SWS clearing business. Securities deposited as security at clearing organizations were $4,818,000 and $4,669,000 at March 31, 2006 and June 24, 2005, respectively. Additionally, at
March 31, 2006 and June 24, 2005, SWS had deposited firm securities valued at $337,000 and $130,000, respectively, in conjunction with securities lending activities.

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

Prior to the merger, Southwest Securities had an investment in 23,721 shares of Archipelago. At June 24, 2005, the
market value of our Archipelago stock was $948,000. This stock is included in securities owned and is marked to market. Upon the merger, each outstanding share of Archipelago common stock was converted into one share of NYX stock.

Also, in lieu of a seat, on January 4, 2006, Southwest Securities secured the right to a trading license at the inaugural NYSE license auction for $49,290. This
license allows Southwest Securities continued physical and electronic access to the NYSE trading facilities following the close of the merger.

The 80,177
NYX shares received from the merger are restricted shares. These restrictions prohibit any direct or indirect assignment, sale, exchange, transfer, tender or other disposition of NYX stock. The restrictions on the shares lapse based on a
three year vesting schedule, with restrictions lapsing on one-third of the restricted shares annually. There are no restrictions on the 23,721 shares from our investment in Archipelago upon conversion to NYX stock.

The 80,177 NYX shares have been discounted at an overall rate of 19.73% of the market price of NYX stock at March 31, 2006. The discount rate was determined based
on the length of time of the restrictions, expected rate of return for this type of investment and the relative amount of restricted NYX stock versus fully tradable stock.



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The initial valuation of the restricted shares resulted in a gain of $5,100,000 recorded in net gains from principle
transactions on the consolidated statements of income and comprehensive income. As of March 31, 2006, the 103,898 shares were valued at $6,967,000.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Transactions involving purchases of securities under agreements 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 March 31, 2006,
SWS held reverse repurchase agreements totaling $37,970,000, collateralized by U.S. Government and Government agency obligations with a market value of approximately $37,577,000. At June 24, 2005, SWS held reverse repurchase agreements totaling
$28,890,000, collateralized by U.S. Government and Government agency obligations with a market value of approximately $28,885,000.

GOODWILL

SWS accounts for goodwill under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SWS performed its annual
assessment of the fair value of goodwill in June 2005 for fiscal 2005, as required by SFAS No. 142 and based on the results of the valuation, SWS goodwill balance was not impaired. There have been no events in the last nine months that
would trigger an interim assessment on the fair value of goodwill.

At March 31, 2006, SWS has one reporting unit with goodwill, Southwest Securities,
in the Brokerage Group segment. At June 24, 2005, the Banking Group segment also had goodwill. Changes in the carrying value of goodwill during the nine-month period ended March 31, 2006, by segment and in the aggregate, are summarized in
the following table (in thousands):



|                                                                  |  |                |       |              |   |        |                              |  |   |        |  
|----------------------------------------------------------------- |  | -------------- | ----- | ------------ | - | ------ | ---------------------------- |  | - | ------ | -
|                                                                  |  | BrokerageGroup |       | BankingGroup |   |        | Consolidated SWS Group, Inc. | 
|Balance, June 24, 2005                                            |  | $              | 7,466 |              | $ | 4,194  |                              |  | $ | 11,660 |  
|Arising from earn-out provision of completed business combination |  |                | 86    |              |   |       |                              |  |   | 86     |  
|Sale of FSB Financial                                             |  |                |      |              |   | (4,194 | )                            |  |   | (4,194 | )
|                                                                  |  |                |       |              |   |        |                              |  |   |        |  
|Balance, March 31, 2006                                           |  | $              | 7,552 |              | $ |       |                              |  | $ | 7,552  |  
|                                                                  |  |                |       |              |   |        |                              |  |   |        |  

In August 2001, SWS Group acquired OConnor & Company Securities, Inc. (OConnor)
and recorded approximately $744,000 of goodwill on the transaction. The goodwill was allocated to Southwest Securities after the adoption of SFAS No. 142. Pursuant to the terms of the acquisition agreement, contingent consideration based upon
future operating performance of OConnor was calculated on an annual basis through July 2005. The maximum additional earn-out consideration was $2,500,000 which was reached in July 2005. No additional goodwill will be recorded related to this
agreement.

SHORT-TERM BORROWINGS

Southwest Securities
has credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in
customers margin accounts. These lines may also be used to release pledged collateral against day loans. These credit arrangements are provided on an as offered basis and are not committed lines of credit. These arrangements can be
terminated at any time by the lender. Any outstanding balance under these credit arrangements is due on demand and bears interest at rates indexed to the federal funds rate. At March 31, 2006, the amount outstanding under these secured
arrangements was $51,100,000, which was collateralized by securities held for firm accounts valued at $93,826,000. At June 24, 2005, the amount outstanding under these secured arrangements was $63,400,000, which was collateralized by securities
held for firm accounts valued at $88,488,000.



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In addition to the broker loan lines, SWS has a $20,000,000 unsecured line of credit that is due on demand and bears
interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount outstanding on the line and under the unsecured letters of credit at the time of borrowing. At
March 31, 2006 and June 24, 2005, the total amount available for borrowings was $17,036,000 and $11,893,000, respectively. At March 31, 2006 there were no amounts outstanding on this line and $2,964,000 under unsecured letters of
credit. There was $5,000,000 outstanding on this line and $3,107,000 under unsecured letters of credit at June 24, 2005.

SWS also has unsecured
letters of credit, aggregating $2,250,000 at both March 31, 2006 and June 24, 2005, pledged to support its open positions with securities clearing organizations. The unsecured letters of credit bear a 1% commitment fee and are renewable
semi-annually.

At March 31, 2006 and June 24, 2005, SWS had an additional unsecured letter of credit issued for a sub-lease to the sub-lessee of
space previously occupied by Mydiscountbroker.com, Inc., a subsidiary of SWS that was dissolved in July 2004, in the amount of $714,000 and $857,000, respectively. The letter of credit bears a 1% commitment fee and is renewable annually.

SWS has an irrevocable letter of credit agreement aggregating $54,000,000 and $49,000,000 at March 31, 2006 and June 24, 2005, respectively, pledged to
support its 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 $68,839,000 and $66,974,000 at March 31, 2006 and June 24, 2005, respectively.

In addition to using customer securities to collateralize bank loans, SWS also loans client securities as collateral in conjunction with SWS securities lending activities. At March 31, 2006, approximately $484,955,000 of client
securities under customer margin loans was available to be loaned, of which SWS has loaned $57,934,000 under securities loan agreements. At June 24, 2005, approximately $469,399,000 of client securities under customer margin loans was available
to be loaned, of which SWS had loaned $32,156,000 under securities loan agreements.

DEPOSITS

Deposits at March 31, 2006 and June 30, 2005 are summarized as follows (dollars in thousands):



|                                              |  |        |         |         |       |   |        |   |         |  |       |  
|--------------------------------------------- |  | ------ | ------- | ------- | ----- | - | ------ | - | ------- |  | ----- | -
|                                              |  | March  |         |         | June  |  
|                                              |  | Amount |         | Percent |       |   | Amount |   | Percent | 
|Noninterest bearing demand accounts           |  | $      | 44,452  |         | 6.6   | % |        | $ | 34,541  |  | 5.9   | %
|Interest bearing demand accounts              |  |        | 74,843  |         | 11.1  |   |        |   | 48,524  |  | 8.2   |  
|Savings accounts                              |  |        | 442,837 |         | 65.4  |   |        |   | 359,520 |  | 61.1  |  
|Limited access money market accounts          |  |        | 28,757  |         | 4.3   |   |        |   | 19,172  |  | 3.3   |  
|Certificates of deposit, less than $100,000   |  |        | 59,797  |         | 8.8   |   |        |   | 67,704  |  | 11.5  |  
|Certificates of deposit, $100,000 and greater |  |        | 26,041  |         | 3.8   |   |        |   | 58,554  |  | 10.0  |  
|                                              |  |        |         |         |       |   |        |   |         |  |       |  
|                                              |  | $      | 676,727 |         | 100.0 | % |        | $ | 588,015 |  | 100.0 | %
|                                              |  |        |         |         |       |   |        |   |         |  |       |  

The weighted average interest rate on deposits was approximately 4.02% at March 31, 2006 and 2.92% at
June 30, 2005.



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At March 31, 2006, scheduled maturities of certificates of deposit were as follows (in thousands):



|                                              |  |            |        |            |   |            |  |            |       |       |   |       |  |   |       
|--------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- |  | ---------- | ----- | ----- | - | ----- |  | - | ------
|                                              |  | Fiscal2006 |        | Fiscal2007 |   | Fiscal2008 |  | Thereafter |       | Total
|Certificates of deposit, less than $100,000   |  | $          | 43,826 |            | $ | 7,732      |  | $          | 2,679 |       | $ | 5,560 |  | $ | 59,797
|Certificates of deposit, $100,000 and greater |  |            | 19,837 |            |   | 1,542      |  |            | 1,217 |       |   | 3,445 |  |   | 26,041
|                                              |  |            |        |            |   |            |  |            |       |       |   |       |  |   |       
|                                              |  | $          | 63,663 |            | $ | 9,274      |  | $          | 3,896 |       | $ | 9,005 |  | $ | 85,838
|                                              |  |            |        |            |   |            |  |            |       |       |   |       |  |   |       

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase, 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 March 31, 2006 and June 24, 2005 were $31,328,000 and $8,061,000, respectively.

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

At
March 31, 2006 and June 30, 2005, advances from the FHLB were due as follows (in thousands):



|                        |  |       |        |      |   |       
|----------------------- |  | ----- | ------ | ---- | - | ------
|                        |  | March |        | June
|Maturity:               |  |       |        |      |   |       
|Due within one year     |  | $     | 9,916  |      | $ | 58,731
|Due within two years    |  |       | 544    |      |   | 12,487
|Due within five years   |  |       | 11,869 |      |   | 6,556 
|Due within seven years  |  |       | 4,412  |      |   | 3,787 
|Due within ten years    |  |       | 6,908  |      |   | 4,746 
|Due within twenty years |  |       | 13,340 |      |   | 7,232 
|                        |  |       |        |      |   |       
|                        |  | $     | 46,989 |      | $ | 93,539
|                        |  |       |        |      |   |       

Pursuant to collateral agreements, the advances from the FHLB, with interest rates ranging from 2% to 8%, are
collateralized by approximately $186,000,000 of collateral value (as defined by the credit policy of the FHLB) in qualifying loans at March 31, 2006 (calculated at December 31, 2005). At June 30, 2005 (calculated at March 31,
2005), advances with interest rates from 2% to 8% were collateralized by approximately $170,000,000 of collateral value in qualifying loans.

BANK
BORROWINGS

In June 2005, the Bank entered into an agreement with an unaffiliated bank for a $20,000,000 unsecured line of credit for the purchase of
federal funds. The line bears interest at a rate equal to the federal funds rate plus 0.25%. In the third quarter ended March 31, 2006, the agreement was amended to increase the available credit to $30,000,000. 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 March 31, 2006 and June 30, 2005, there were no amounts outstanding on this line of credit.

On June 8, 2005, FSB Financial obtained a secured line of credit from an unaffiliated bank in the amount of $75,000,000. Pursuant to the sale of FSB
Financial in March 2006, this line was terminated and paid in full incurring an early termination fee of $333,000, which is included in other expense on the consolidated statements of income and comprehensive income. At June 30, 2005,
$35,300,000 was outstanding on this line of credit. The note related to this line of credit was to



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mature on June 7, 2008. Interest was paid on a monthly basis at a rate of 30-day LIBOR plus a variable rate that was determined by the status of certain
financial ratios at the time of the advance. The interest rate was 5.38% at June 30, 2005. This line of credit contained certain restrictive covenants that, among other things, limited the ability of FSB Financial to incur indebtedness, engage
in transactions with affiliates, create liens, engage in mergers and consolidations, or sell collateral. The line of credit also required FSB Financial and the Bank to maintain certain financial ratios. FSB Financial and the Bank were in compliance
with all covenants and provisions of the agreement at the date of termination.

FSB Financial also had a line of credit with its parent Bank. This line was
terminated and paid in full pursuant to the sale of FSB Financial in March 2006. At June 30, 2005, the total credit line was $46,000,000 of which FSB Financial had drawn $37,250,000. Participations by third parties totaled $11,850,000 at
June 30, 2005. The loan was to mature on March 27, 2006. SWS Group guaranteed $10,000,000 of this credit line to the Bank. The portion of the credit line from the Bank to FSB Financial was eliminated in consolidation.

FSB Financial had a line of credit with SWS Group up to $5,000,000. This line of credit was also terminated and the outstanding balance was paid in full in conjunction
with the sale of FSB Financial in March 2006. The line of credit with SWS Group bore interest at prime plus 1.0% and was to mature on June 8, 2008. At June 30, 2005, $5,000,000 was outstanding on this line of credit, which was eliminated
in consolidation.

See discussion of the sale of FSB Financial at -Discontinued Operations.

DISCONTINUED OPERATIONS

In March 2006, the Bank sold the assets of
its subsidiary, FSB Financial. The purchase price was $35,870,000 in cash and the retirement of $116,868,000 of related debt. Pursuant to the sale agreement, 10% or $3,587,000 was placed in escrow and will be retained until June 30, 2007 to
secure any purchase price adjustments and to secure sellers indemnifications. This amount is presented as restricted cash in the accompanying Statement of Financial Condition. A gain of $20,453,000 was recognized of which $2,965,000 belongs to the
minority interest holder.

The results of FSB Financial, as summarized below, have been classified as discontinued operations for all periods presented.



|                                        |  |                             |        |                            |   |       |  |      |        |  |   |       
|--------------------------------------- |  | --------------------------- | ------ | -------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                        |  | Three Months EndedMarch 31, |        | Nine Months EndedMarch 31,
|                                        |  | 2006                        |        | 2005                       |   | 2006  |  | 2005
|Net revenues                            |  | $                           | 25,553 |                            | $ | 5,008 |  | $    | 35,312 |  | $ | 13,165
|Net income before taxes                 |  |                             | 20,775 |                            |   | 1,858 |  |      | 22,576 |  |   | 4,775 
|Income tax expense                      |  |                             | 6,227  |                            |   | 605   |  |      | 6,826  |  |   | 1,473 
|Minority interest                       |  |                             | 2,974  |                            |   | 111   |  |      | 3,065  |  |   | 626   
|Net income from discontinued operations |  |                             | 11,574 |                            |   | 1,142 |  |      | 12,685 |  |   | 2,676 

NET CAPITAL REQUIREMENTS

Brokerage Group. The broker/dealer subsidiaries are subject to the SECs Uniform Net Capital Rule (the Net Capital Rule), which requires the maintenance of minimum net capital. Southwest
Securities has elected to use the alternative method, permitted by the Net Capital Rule, which requires that it maintain minimum net capital, as defined in Rule 15c3-1 under the 1934 Act, equal to the greater of $1,000,000 or 2% of aggregate debit
balances, as defined in Rule 15c3-3 under the 1934 Act. At March 31, 2006, Southwest Securities had net capital of $122,888,000, or approximately 23.9% of aggregate debit balances, which was $112,611,000 in excess of its minimum net capital
requirement of $10,277,000 at that date. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn and cash dividends may not be paid if resulting net capital would be less than 5% of aggregate debit items. At
March 31, 2006, Southwest Securities had net capital of $97,196,000 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
minimum net capital of $250,000. At March 31, 2006, the net capital and excess net capital of SWS Financial were $905,000 and $655,000, respectively.

Banking Group. 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 to risk-weighted assets, and of Tier I capital to adjusted total assets (all as defined in 12 CFR 565 and 12 CFR 567). Management believes, as of March 31, 2006 and June 30,
2005, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2006 and June 30, 2005, the Bank is
considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios.

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



|                                        |  |        |        |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|--------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                        |  | Actual |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        |  | Amount |        | Ratio |                             |   | Amount |                                                               | Ratio  |  |     | Amount |  | Ratio |       
|March 31, 2006:                         |  |        |        |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Total capital to risk weighted assets   |  | $      | 90,885 |       | 13.7                        | % |        | $                                                             | 52,952 |  | 8.0 | %      |  | $     | 66,190 |  | 10.0 | %
|Tier I capital to risk weighted assets  |  |        | 85,818 |       | 13.0                        |   |        |                                                               | 26,476 |  | 4.0 |        |  |       | 39,714 |  | 6.0  |  
|Tier I capital to adjusted total assets |  |        | 85,818 |       | 10.4                        |   |        |                                                               | 32,880 |  | 4.0 |        |  |       | 41,101 |  | 5.0  |  
|                                        |  |        |        |       |                             |  
|June 30, 2005:                          |  |        |        |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Total capital to risk weighted assets   |  | $      | 69,874 |       | 10.6                        | % |        | $                                                             | 52,817 |  | 8.0 | %      |  | $     | 66,021 |  | 10.0 | %
|Tier I capital to risk weighted assets  |  |        | 62,425 |       | 9.5                         |   |        |                                                               | 26,409 |  | 4.0 |        |  |       | 39,613 |  | 6.0  |  
|Tier I capital to adjusted total assets |  |        | 62,425 |       | 7.8                         |   |        |                                                               | 32,198 |  | 4.0 |        |  |       | 40,247 |  | 5.0  |  

EARNINGS PER SHARE

A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows for the three and nine-months ended March 31, 2006 and March 24, 2005 (in thousands, except share and
per share amounts):



|                                                       |  |                    |        |                   |   |               |  |               |        |  |   |       
|------------------------------------------------------ |  | ------------------ | ------ | ----------------- | - | ------------- |  | ------------- | ------ |  | - | ------
|                                                       |  | Three Months Ended |        | Nine Months Ended
|                                                       |  | March 31,2006      |        | March 24,2005     |   | March 31,2006 |  | March 24,2005
|Income from continuing operations                      |  | $                  | 8,448  |                   | $ | 4,451         |  | $             | 23,199 |  | $ | 23,346
|Income from discontinued operations                    |  |                    | 11,574 |                   |   | 1,142         |  |               | 12,685 |  |   | 2,676 
|Cumulative effect of a change in accounting principles |  |                    |       |                   |   |              |  |               | 75     |  |   |      
|                                                       |  |                    |        |                   |   |               |  |               |        |  |   |       
|Net income                                             |  | $                  | 20,022 |                   | $ | 5,593         |  | $             | 35,959 |  | $ | 26,022
|                                                       |  |                    |        |                   |   |               |  |               |        |  |   |       



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|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           
|------------------------------------------------------ |  | ------------------ | ---------- | ----------------- | - | ------------- |  | ------------- | ---------- |  | - | ----------
|                                                       |  | Three Months Ended |            | Nine Months Ended
|                                                       |  | March 31,2006      |            | March 24,2005     |   | March 31,2006 |  | March 24,2005
|Weighted average shares outstanding  basic            |  |                    | 17,467,368 |                   |   | 17,275,934    |  |               | 17,382,130 |  |   | 17,194,927
|Effect of dilutive securities:                         |  |                    |            |                   |   |               |  |               |            |  |   |           
|Assumed exercise of stock options                      |  |                    | 140,689    |                   |   | 134,102       |  |               | 111,874    |  |   | 107,722   
|Restricted stock                                       |  |                    | 167,829    |                   |   | 90,991        |  |               | 139,223    |  |   | 87,304    
|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           
|Weighted average shares outstanding  diluted          |  |                    | 17,775,886 |                   |   | 17,501,027    |  |               | 17,633,227 |  |   | 17,389,953
|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           
|Earnings per share  basic                             |  |                    |            |                   |   |               |  |               |            |  |   |           
|Income from continuing operations                      |  | $                  | 0.49       |                   | $ | 0.25          |  | $             | 1.33       |  | $ | 1.36      
|Income from discontinued operations                    |  |                    | 0.66       |                   |   | 0.07          |  |               | 0.73       |  |   | 0.15      
|Cumulative effect of a change in accounting principles |  |                    |           |                   |   |              |  |               | 0.01       |  |   |          
|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           
|Net income                                             |  | $                  | 1.15       |                   | $ | 0.32          |  | $             | 2.07       |  | $ | 1.51      
|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           
|Earnings per share  diluted                           |  |                    |            |                   |   |               |  |               |            |  |   |           
|Income from continuing operations                      |  | $                  | 0.48       |                   | $ | 0.25          |  | $             | 1.32       |  | $ | 1.35      
|Income from discontinued operations                    |  |                    | 0.65       |                   |   | 0.07          |  |               | 0.72       |  |   | 0.15      
|Cumulative effect of a change in accounting principles |  |                    |           |                   |   |              |  |               |           |  |   |          
|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           
|Net income                                             |  | $                  | 1.13       |                   | $ | 0.32          |  | $             | 2.04       |  | $ | 1.50      
|                                                       |  |                    |            |                   |   |               |  |               |            |  |   |           

At March 31, 2006 and March 24, 2005, there were approximately 1.1 million and 1.4 million
options outstanding under the two stock option plans, respectively. See -Stock Option and Restricted Stock Plans. As of March 31, 2006 and March 24, 2005, approximately 18,466 and 110,472 outstanding options, respectively, were
anti-dilutive and therefore were not included in the calculation of weighted average shares outstanding-dilutive.

REPURCHASE OF COMMON STOCK

The Board of Directors has authorized the repurchase of up to 500,000 shares of SWS common stock on or prior to December 31, 2006. In October
2005, 31,090 shares were repurchased at a cost of $478,000, or $15.36 per share, in accordance with the repurchase plan. As of March 31, 2006, 468,910 shares may be repurchased under the plan.

Additionally, the trustee under SWS deferred compensation plan periodically purchases stock in the open market in accordance with the terms of the plan. This stock
is classified as treasury stock in the consolidated financial statements, but participates in future dividends declared by SWS. The plan did not purchase any shares in the three and nine-month periods ended March 31, 2006. The plan purchased
4,014 and 14,786 shares in the three and nine-month periods ended March 24, 2005 at a cost of $77,400 and $238,000, or $19.29 and $16.10 per share, respectively. During the three and nine-month periods ended March 31, 2006, 6,317 and 6,928
shares, respectively, were sold or distributed pursuant to the plan. During the nine-month period ended March 24, 2005, 10,092 shares were sold or distributed pursuant to the plan.

On August 18, 2005, one-third of the shares previously granted under the Restricted Stock Plan on August 18, 2004 vested. The fair value of the vested shares was $391,000. Upon vesting, a portion of the
grantees chose to sell a portion of their vested shares to cover the tax liabilities arising from the vesting. As a result, 3,468 shares were repurchased with a market value of $58,000 or $16.84 per share.

On November 11, 2005, one-third of the shares previously granted under the Restricted Stock Plan on November 11, 2003 vested. The fair value of the vested
shares was $272,000. Upon vesting, a portion of the grantees chose to sell a portion of their vested shares to cover the tax liabilities arising from the vesting. As a result, 2,219 shares were repurchased with a market value of $44,000 or $19.89
per share.



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On January 20, 2006, in conjunction with the sale of the Institutional Sales business, the Board of Directors
approved the immediate vesting of the 3,893 unvested restricted shares held by the employees effected by the sale. The fair value of the vested shares was $84,000. Upon vesting, a portion of the grantees chose to sell a portion of their vested
shares to cover the tax liabilities arising from the vesting. As a result, 1,318 shares were repurchased with a market value of $29,000 or $21.65 per share.

SEGMENT REPORTING

SWS operates three principal segments within the financial services industry: the Brokerage Group, the Asset Management
Group and the Banking Group. There have been no changes in the basis of segmentation or in the basis of measurement of segment profit or loss since last reported. The Brokerage Group no longer includes May Financial as this entity was dissolved on
December 31, 2004. The balances for this entity are included in the amounts presented for the nine-month period ended and as of March 24, 2005, but are not included in the March 31, 2006 amounts.

SWS Capital, an entity within the Asset Management Group, determined that it would not renew its contract as General Manager of LOGIC upon the expiration of the original
agreement on September 4, 2005. LOGIC represented 100% of the assets under management for this entity through the expiration of the agreement.

In
March 2006, FSB Financial, an entity in the Banking Group, was sold and is presented as discontinued operations in the schedule below for all periods. See -Discontinued Operations.

The category Other Consolidated Entities includes SWS Group and SWS Insurance. SWS Group is a holding company that owns various investments, including the
investment in USHS common stock. See -Marketable Equity Securities. SWS Insurance facilitates the sale of insurance and annuities for customers of Southwest Securities and its correspondents. There are no material reconciling adjustments
included in this category.



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|                                                                   |  |                 |           |   |                      |   |              |  |                           |         |  |                            |        |   |  |   |          
|------------------------------------------------------------------ |  | --------------- | --------- | - | -------------------- | - | ------------ |  | ------------------------- | ------- |  | -------------------------- | ------ | - |  | - | ---------
|(in thousands)                                                     |  | Brokerage Group |           |   | AssetManagementGroup |   | BankingGroup |  | OtherConsolidatedEntities |         |  | ConsolidatedSWS Group,Inc.
|Three months ended March 31, 2006                                  |  |                 |           |   |                      |   |              |  |                           |         |  |                            |        |   |  |   |          
|Net revenues from external sources                                 |  | $               | 79,544    |   |                      | $ |             |  | $                         | 16,844  |  | $                          | 807    |   |  | $ | 97,195   
|Net intersegment revenue (expense)                                 |  |                 | (1,082    | ) |                      |   |             |  |                           | 1,124   |  |                            | (42    | ) |  |   |         
|Net interest revenue (expense)                                     |  |                 | 10,517    |   |                      |   |             |  |                           | 10,381  |  |                            | (27    | ) |  |   | 20,871   
|Depreciation and amortization                                      |  |                 | 1,133     |   |                      |   |             |  |                           | 192     |  |                            |       |   |  |   | 1,325    
|Income (loss) from continuing operations before income tax expense |  |                 | 9,223     |   |                      |   |             |  |                           | 4,257   |  |                            | (508   | ) |  |   | 12,972   
|Income from discontinued operations                                |  |                 |          |   |                      |   |             |  |                           | 11,574  |  |                            |       |   |  |   | 11,574   
|Net income (loss)                                                  |  |                 | 5,887     |   |                      |   |             |  |                           | 14,358  |  |                            | (223   | ) |  |   | 20,022   
|Segment assets                                                     |  |                 | 3,601,143 |   |                      |   | 26           |  |                           | 823,827 |  |                            | 23,572 |   |  |   | 4,448,568
|Expenditures for long-lived assets                                 |  |                 | 871       |   |                      |   |             |  |                           | 102     |  |                            |       |   |  |   | 973      
|                                                                   |  |                 |           |   |                     
|Three months ended March 24, 2005                                  |  |                 |           |   |                      |   |              |  |                           |         |  |                            |        |   |  |   |          
|Net revenues from external sources                                 |  | $               | 64,541    |   |                      | $ | 135          |  | $                         | 11,584  |  | $                          | 718    |   |  | $ | 76,978   
|Net intersegment revenue (expense)                                 |  |                 | (785      | ) |                      |   |             |  |                           | 938     |  |                            | (153   | ) |  |   |         
|Net interest revenue (expense)                                     |  |                 | 8,432     |   |                      |   |             |  |                           | 7,872   |  |                            | (36    | ) |  |   | 16,268   
|Depreciation and amortization                                      |  |                 | 1,300     |   |                      |   | 1            |  |                           | 168     |  |                            |       |   |  |   | 1,469    
|Income from continuing operations before income tax expense        |  |                 | 2,607     |   |                      |   | 91           |  |                           | 4,046   |  |                            | 205    |   |  |   | 6,949    
|Income from discontinued operations                                |  |                 |          |   |                      |   |             |  |                           | 1,142   |  |                            |       |   |  |   | 1,142    
|Net income                                                         |  |                 | 1,633     |   |                      |   | 55           |  |                           | 3,769   |  |                            | 136    |   |  |   | 5,593    
|Segment assets                                                     |  |                 | 4,333,101 |   |                      |   | 637          |  |                           | 755,638 |  |                            | 24,524 |   |  |   | 5,113,900
|Expenditures for long-lived assets                                 |  |                 | 230       |   |                      |   |             |  |                           | 426     |  |                            |       |   |  |   | 656      



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|                                                                   |  |                 |           |   |                      |   |     |              |  |                           |         |  |                            |        |   |  |   |          
|------------------------------------------------------------------ |  | --------------- | --------- | - | -------------------- | - | --- | ------------ |  | ------------------------- | ------- |  | -------------------------- | ------ | - |  | - | ---------
|(in thousands)                                                     |  | Brokerage Group |           |   | AssetManagementGroup |   |     | BankingGroup |  | OtherConsolidatedEntities |         |  | ConsolidatedSWS Group,Inc.
|Nine months ended March 31, 2006                                   |  |                 |           |   |                      |   |     |              |  |                           |         |  |                            |        |   |  |   |          
|Net revenues from external sources                                 |  | $               | 238,790   |   |                      | $ | 131 |              |  | $                         | 48,690  |  | $                          | 3,359  |   |  | $ | 290,970  
|Net intersegment revenue (expense)                                 |  |                 | (3,013    | ) |                      |   |    |              |  |                           | 3,245   |  |                            | (232   | ) |  |   |         
|Net interest revenue (expense)                                     |  |                 | 28,914    |   |                      |   |    |              |  |                           | 30,695  |  |                            | (111   | ) |  |   | 59,498   
|Depreciation and amortization                                      |  |                 | 3,526     |   |                      |   | 1   |              |  |                           | 594     |  |                            | 1      |   |  |   | 4,122    
|Income (loss) from continuing operations before income tax expense |  |                 | 22,711    |   |                      |   | (23 | )            |  |                           | 14,221  |  |                            | (1,078 | ) |  |   | 35,831   
|Income from discontinued operations                                |  |                 |          |   |                      |   |    |              |  |                           | 12,685  |  |                            |       |   |  |   | 12,685   
|Net income (loss)                                                  |  |                 | 14,406    |   |                      |   | (15 | )            |  |                           | 21,940  |  |                            | (372   | ) |  |   | 35,959   
|Segment assets                                                     |  |                 | 3,601,143 |   |                      |   | 26  |              |  |                           | 823,827 |  |                            | 23,572 |   |  |   | 4,448,568
|Expenditures for long-lived assets                                 |  |                 | 1,328     |   |                      |   |    |              |  |                           | 563     |  |                            |       |   |  |   | 1,891    
|                                                                   |  |                 |           |   |                     
|Nine months ended March 24, 2005                                   |  |                 |           |   |                      |   |     |              |  |                           |         |  |                            |        |   |  |   |          
|Net revenues from external sources                                 |  | $               | 183,542   |   |                      | $ | 370 |              |  | $                         | 30,903  |  | $                          | 19,861 |   |  | $ | 234,676  
|Net intersegment revenue (expense)                                 |  |                 | (2,286    | ) |                      |   |    |              |  |                           | 2,607   |  |                            | (321   | ) |  |   |         
|Net interest revenue (expense)                                     |  |                 | 25,110    |   |                      |   |    |              |  |                           | 21,687  |  |                            | (59    | ) |  |   | 46,738   
|Depreciation and amortization                                      |  |                 | 4,110     |   |                      |   | 4   |              |  |                           | 469     |  |                            |       |   |  |   | 4,583    
|Income from continuing operations before income tax expense        |  |                 | 9,943     |   |                      |   | 57  |              |  |                           | 10,592  |  |                            | 15,436 |   |  |   | 36,028   
|Income from discontinued operations                                |  |                 |          |   |                      |   |    |              |  |                           | 2,676   |  |                            |       |   |  |   | 2,676    
|Net income                                                         |  |                 | 6,378     |   |                      |   | 32  |              |  |                           | 9,591   |  |                            | 10,021 |   |  |   | 26,022   
|Segment assets                                                     |  |                 | 4,333,101 |   |                      |   | 637 |              |  |                           | 755,638 |  |                            | 24,524 |   |  |   | 5,113,900
|Expenditures for long-lived assets                                 |  |                 | 1,442     |   |                      |   |    |              |  |                           | 1,400   |  |                            | 1      |   |  |   | 2,843    

On the consolidated statements of income and comprehensive income, other comprehensive income (loss) is solely
related to SWS Group, which is included in the Other Consolidated Entities category, above.

COMMITMENTS, CONTINGENCIES and GUARANTEES

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 violation of 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.

Ameritrade: On March 22, 2006, Southwest Securities entered into an agreement with TD Ameritrade Holding Corporation and the Advanced Clearing
division of the companys subsidiary, Ameritrade, Inc., (Ameritrade) to transfer Advanced Clearings 15 correspondent clients to Southwest Securities. Each of the 15 correspondents has been notified and has the choice to select
Southwest Securities or another firm to perform its clearing services. The purchase price is based on the estimated value of the correspondents transferred to Southwest Securities clearing platform. One half of the purchase price will be paid
upon closing, expected to be in July 2006, with the remainder being paid on the one year anniversary of the closing date. Ameritrade will receive 100 percent of the remaining amount if the transferred correspondents meet agreed upon ticket volume
numbers. If these numbers are not met, the second payment will be pro-rated by the ticket volumes incurred compared to the agreed upon ticket volume. The maximum purchase price is approximately $5.8 million.

Fraudulent Mortgages: During the first quarter of fiscal 2003, the Bank provided $3,400,000 ($2,200,000 after tax impact on earnings) to establish a
reserve for fraudulent mortgages purchased



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from one New York based mortgage bank. Sixteen loans, aggregating approximately $3,400,000 were sold twice by the mortgage bank and the Bank is not receiving
payments on these loans. At this time, the likelihood of recovery is not known.

Venture Capital Fund: SWS has committed $5,000,000 to invest
in a limited partnership venture capital fund. As of March 31, 2006, SWS had contributed $4,000,000 of its commitment.

Underwriting:
Through its participation in underwriting, 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. Total open underwritings at
March 31, 2006 were $406,711,000. All open underwritings are generally scheduled to be settled within the next 60 days and are expected to have no material effect on the consolidated financial statements.

Guarantees: In connection with the 2002 spin-off of SWS primary asset management subsidiary, the Westwood Holdings Group, Inc., SWS agreed to
indemnify the Westwood Holdings Group, Inc. from and against any and all past and future liabilities or expenses in excess of $500,000 arising from the Richard A. Boykin Jr. Family Trust (Boykin Trust), for which Westwood Trust currently
serves as trustee. The Boykin Trust is currently in bankruptcy. SWS settled litigation with the beneficiaries of the Boykin Trust in May 2002 for $2,000,000. SWS management believes that the resolution of the remaining issues associated with
the Boykin Trust in bankruptcy will not have a material impact on SWS consolidated financial statements.

The Bank has issued stand-by letters of
credit primarily for assigned notes and real estate. The maximum potential amount of future payments the Bank could be required to make under the letters of credit is $586,000 at March 31, 2006. The recourse provisions of the letters of credit
allow the amount of the letters of credit to become a part of the fully collateralized loans with total repayment. The collateral on these letters of credit consist of assigned notes, real estate, equipment, accounts receivable or furniture and
fixtures.

SWS is a member of an exchange and multiple clearinghouses. Under the membership agreements, members are generally required to guarantee the
performance of other members. Additionally, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. To mitigate these performance risks, the exchange 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 unlikely. Accordingly, no contingent
liability is recorded in the consolidated financial statements for these arrangements.

SUBSEQUENT EVENTS

CSS: In April 2006, SWS signed an agreement with CSS to pay a $1,700,000 maintenance fee to CSS if a specific member of the consortium of broker/dealers has
successfully converted to the CSS system by December 31, 2006. If the conversion is not successful, SWS is not obligated to pay the maintenance fee. However, if the conversion is successful, SWS will make a second payment of $1,700,000 in
calendar 2007. Currently SWS estimates that the likelihood of this conversion by December 31, 2006 is remote.



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

OVERVIEW

SWS Group, Inc. (we, us, SWS or the Company) is engaged in full-service securities brokerage primarily
through Southwest Securities, Inc. (Southwest Securities) and full-service commercial banking through Southwest Securities, FSB (the Bank). 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.

We are currently focused on three aspects of our business: growing our clearing business, taking advantage of our prominence in the
Southwest to become a nationally recognized full-service regional brokerage firm and growing the Banks business.

Brokerage Group

Growth in the U.S. equities market increased in the third quarter of fiscal 2006 as the Dow Jones Industrial Average rose from 10,297.83 at June 24, 2005 to
11,109.32 at March 31, 2006. Trading volumes also increased with average daily volume on the New York Stock Exchange (NYSE) of 1.65 billion shares for the first nine months of fiscal 2006 compared to 1.48 billion in the same period
last year.

The revenues generated by our clearing business are dependent on active markets and sustained growth in volumes is necessary for growth. While
the overall volume of trades we processed in the first nine months of fiscal 2006 was down compared to the same period in the prior year, trades processed in the March 2006 quarter increased 51% over the March 2005 quarter. The third quarter
increase was due to volume increases in the day trading business which is influenced by increasing market volumes. The nine-month period decrease resulted from the departure of one of our high volume trading customers to clear through an affiliate
of its parent beginning in the second quarter of fiscal 2005, offset slightly by increased trades from other trading customers.

Stock loan balances are
also influenced by the volumes in the market, interest rates and competitive factors. Our stock lending balances for the third quarter of fiscal 2006 decreased 17% over the comparable period last year, but were up almost 9% from the December 2005
levels. Stock lending generates an interest spread that is impacted by the overall interest rate environment. As rates have risen, we have had the opportunity to widen the interest spread we earn.

The interest rate environment also impacts our fixed income business. In the first nine months of fiscal 2006, the Federal Reserve Board continued to increase the
discount rate with the rate rising 150 basis points. This negatively impacted revenues in our fixed income business. The volume of our fixed income business is driven by market perception of the direction and volatility of rates and economic
expectations. Management constantly monitors our exposure to interest rate fluctuations to mitigate risk of loss in volatile interest rate environments.

To realize our goal of becoming a nationally recognized full-service regional brokerage firm, it is essential to grow the retail brokerage distribution network. This will be accomplished by hiring additional registered representatives and,
in the future, by opening new branch office locations in the Southwest. Opening new branch offices requires an outlay of capital that is not immediately offset by revenues, which negatively impacts results of operations until new locations become
positive contributors. We are currently focused on filling our existing offices with producing registered representatives and have no present intentions to open any branch offices. Although our number of registered representatives decreased by four
in the third quarter of fiscal 2006, we have hired ten new registered representatives in the first nine months of fiscal 2006 as we are focusing on hiring producers with larger volumes of business.



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We continue to upgrade and enhance the core operating system with investments in technology. Management continually
reviews equipment and communications in an effort to offset some of the costs of software enhancement. Our system was developed by Comprehensive Software Systems, Inc. (CSS), an entity that is backed by a consortium of brokerage firms,
including Southwest Securities. The development of the system required more time and capital from these brokerage firms than was originally anticipated. While the system is fully functional at SWS, other consortium members have yet to completely
install the system. Decisions by these other firms will impact CSS ability to continue to deliver new modules and enhancements and could impact the cost of technology to us. See -Investments in the Notes to the Consolidated
Financial Statements for additional discussion.

Banking Group

A substantial portion of the Banks revenue is generated from the single-family construction loan and single-family mortgage loan markets. While the Banks purchased mortgage loan program is nationwide, the majority of the
Banks other lending is concentrated in North Texas. A strong housing market in North Texas is important to growing the Banks loan portfolio.

Mortgage interest rates increased slightly in the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005. The average balances in the Banks single-family interim loan and single-family lot and development loan
programs, increased 47% and 53%, respectively, over the average balances in the third quarter of fiscal 2005. In the event mortgage interest rates increase significantly, the Bank could experience lower revenues from these operations.

The Banks primary liquidity sources are deposits and Federal Home Loan Bank (FHLB) borrowings. A significant portion of the deposits are generated from
an interest bearing account the Bank offers to customers of Southwest Securities. To fund loan growth in excess of the existing liquidity, the Bank utilized FHLB short-term borrowings and brokered certificates of deposit.

The Bank continued to diversify its lending base through increased commercial lending. The Banks commercial real estate lending was up 17% from the comparable
quarter last year due to a continued focus on the Banks Community Banking division.

Events and Transactions

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

Discontinued operations/FSB Financial. In March 2006, the Bank sold the
assets of its subsidiary, FSB Financial. The purchase price of the transaction was $35,870,000 in cash and the retirement of $116,868,000 of related debt. Pursuant to the sale agreement, 10% of the cash purchase price or $3,587,000 was placed in
escrow and will be retained until June 30, 2007 to secure any purchase price adjustments and to secure sellers indemnifications. This amount is presented as restricted cash in the accompanying Statement of Financial Condition. A gain of
$20,453,000 was recognized of which $2,965,000 belongs to the minority interest holder. The results of FSB Financial have been classified as discontinued operations for all periods presented.



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Sale of certain assets of the Institutional Sales / Trading and Research departments. On January 20,
2006, the sale of certain assets of the Institutional Sales / Trading and Research business was finalized resulting in an immaterial financial statement impact.

Distribution from an equity investment. In December 2005, the limited partnership venture capital fund in which SWS has an equity investment realized a significant gain and made a subsequent distribution to its partners.
SWS portion of this gain was $1,547,000 and is included in other revenue in the consolidated statement of income and comprehensive income. See -Investments in the Notes to the Consolidated Financial Statements.

NYSE / Archipelago. In August 2004, Archipelago Holdings, L.L.C. (Archipelago) declared an approximately 1 for 4.5 reverse stock split. After
the split, we owned 67,435 shares of Archipelago stock. On August 19, 2004, Archipelago completed an initial public offering of its common stock in which we sold 23,714 shares at $10.695 per share, yielding a gain of $254,000 (an after-tax gain
of $165,100). On May 24, 2005, SWS sold 20,000 shares at an average price of $32.97 for a gain of $659,000. After giving effect to these transactions, we owned 23,721 shares of Archipelago stock.

In March 2006, Archipelago and the NYSE merged into a new entity, NYSE Group, Inc. (NYSE Group). Upon the merger, each share of our Archipelago stock was
converted into one share of NYSE Group common stock (NYX). For the three and nine months ended March 31, 2006, we recorded gains of $730,000 and $929,000, respectively, from the market appreciation of the remaining Archipelago
shares which were converted to NYX. Comparably, we recorded $124,000 in losses and $776,000 in gains for the three and nine months ended March 24, 2005, respectively, from the change in the market value of the Archipelago shares.

Additionally, as part of the merger, Southwest Securities surrendered the one NYSE seat which we carried at a cost of $230,000 in return for $300,000 in cash and 80,177
restricted shares of NYX. The gain on this transaction was $5,200,000.

Maturity of DARTSSM.In June 1999, we issued 5% Exchangeable Subordinated Notes in the form of
DARTSSM(or, Derivative Adjustable Ratio SecuritiesSM). The DARTSSMcontained an equity-based derivative designed to hedge changes in the fair value of our investment in Knight Trading Group, Inc. common stock. The embedded derivative was designated as a fair value hedge of our investment in Knight shares. The
DARTSSMmatured on June 30, 2004, at which time we delivered 373,550 shares of Knight stock to the
DARTSSMholders in satisfaction of our obligation in accordance with the terms of the governing agreements. Delivery
of the Knight shares upon maturity of this obligation resulted in a gain of $18,732,000, equal to the difference in the fair value of the Knight stock upon acquisition and the fair value of the Knight stock on the issuance date of the
DARTSSM(i.e., the hedging date).

Investment in Comprehensive Software Systems, Inc.In 1993, SWS became a part owner of CSS, a software development company formed to develop a new brokerage front and back office system. We initially
acquired a 7.96% interest in CSS and accounted for the investment on the cost basis. Through subsequent investments, our ownership in CSS increased to 25.08% in fiscal 2002. Consequently, we implemented the equity method of accounting prescribed by
APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. We were the first company, and to date the only company, to fully implement the CSS system. We completed our installation of the system in
September 2002. At June 28, 2002, we determined that the investment in CSS and its related goodwill were fully impaired based on an analysis of the projected cash flow from the investment.



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To facilitate the continued enhancement of the CSS system, we entered into an agreement in December 2002, amended in June
2003, to loan CSS $3,500,000. This note was ultimately forgiven in January of 2005. In December 2003, we agreed to an additional equity investment of $2,900,000, resulting in the purchase of 5.8 million shares of CSS common stock. The purchases
were made in four equal quarterly installments totaling $2,885,900 (two purchases totaling approximately $1,443,000 were made in fiscals 2004 and 2005) and ultimately resulted in increasing our position in CSS to 30.22%. These investments were made
to insure the continued operation of CSS while development of needed enhancements to the system were built.

We did not participate in CSS equity
offering in January 2005. We have developed many of the functions needed to run the CSS system in-house and are no longer dependent on CSS for enhancements. Subsequent to the equity offering in January 2005, we own 13.7% of CSS. Because no
additional investments were made in CSS in the last half of fiscal 2005 and the first nine months of fiscal 2006, we did not record any equity in losses of CSS. As of March 31, 2006, there is no recorded equity investment in CSS.

For the three and nine-month periods ended March 31, 2006, our pro-rata share of CSS losses was $220,000 and $643,000, respectively, which SWS did not
recognize as there is no recorded equity investment in CSS. For the three and nine-month periods ended March 24, 2005, our pro-rata share of CSS losses was $408,000 and $2,062,000, respectively. These losses were greater than the
$1,443,000 invested during the same period of fiscal 2005 by $619,000. From inception of the investment to date, based on our percentage of ownership, we have recognized $6,386,000 of our pro-rata share of CSS losses of $8,375,000.

See Subsequent Events in the Notes to the Consolidated Financial Statements for discussion of a maintenance fee agreement entered into in April 2006.

RESULTS OF OPERATIONS

Net income for the three and
nine-month periods ended March 31, 2006 was $20,022,000 and $35,959,000, representing an increase of $14,429,000 and $9,937,000, respectively, compared to net income for the comparable periods of fiscal 2005. Net income includes income from
discontinued operations of $11,574,000 and $1,142,000 for the three-month periods of fiscal 2006 and fiscal 2005, respectively. The fiscal 2006 and fiscal 2005 nine-month periods include $12,685,000 and $2,676,000 of income from discontinued
operations, respectively. The three and nine-month periods ended March 31, 2006 contained 62 and 193 trading days, respectively. The comparable periods of fiscal 2005 contained 58 and 189 trading days, respectively.

Our pretax income was $12,972,000 and $35,831,000 for the three and nine-month periods ended March 31, 2006 as compared to $6,949,000 and $36,028,000 for the same
periods of fiscal 2005.

The following is a summary of increases (decreases) in categories of net revenues and operating expenses for the three and
nine-month periods ended March 31, 2006 compared to the three and nine-month periods ended March 24, 2005 (dollars in thousands):



|                                                     |  |                    |        |   |                   |     |   |        |   |         |   |  |     |  
|---------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | --- | - | ------ | - | ------- | - |  | --- | -
|                                                     |  | Three Months Ended |        |   | Nine Months Ended |    
|                                                     |  | Amount             |        |   | %                 |     |   | Amount |   |         | % | 
|Net revenues:                                        |  |                    |        |   |                   |     |   |        |   |         |   |  |     |  
|Net revenues from clearing operations                |  | $                  | 436    |   |                   | 13  | % |        | $ | 211     |   |  | 2   | %
|Commissions                                          |  |                    | (51    | ) |                   |    |   |        |   | 2,546   |   |  | 4   |  
|Net interest                                         |  |                    | 4,603  |   |                   | 28  |   |        |   | 12,760  |   |  | 27  |  
|Investment banking, advisory and administrative fees |  |                    | (1,311 | ) |                   | (19 | ) |        |   | 1,491   |   |  | 7   |  
|Net gains on principal transactions                  |  |                    | 3,252  |   |                   | 71  |   |        |   | (13,676 | ) |  | (45 | )
|Other                                                |  |                    | 779    |   |                   | 16  |   |        |   | 3,059   |   |  | 20  |  
|                                                     |  |                    |        |   |                   |     |   |        |   |         |   |  |     |  
|                                                     |  |                    | 7,708  |   |                   | 14  |   |        |   | 6,391   |   |  | 3   |  
|                                                     |  |                    |        |   |                   |     |   |        |   |         |   |  |     |  



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|                                                  |  |                    |       |   |                   |     |   |        |   |        |   |  |     |   
|------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | --- | - | ------ | - | ------ | - |  | --- | --
|                                                  |  | Three Months Ended |       |   | Nine Months Ended |    
|                                                  |  | Amount             |       |   | %                 |     |   | Amount |   |        | % | 
|Operating expenses:                               |  |                    |       |   |                   |     |   |        |   |        |   |  |     |   
|Commissions and other employee compensation       |  | $                  | 1,163 |   |                   | 3   | % |        | $ | 10,888 |   |  | 11  | % 
|Occupancy, equipment and computer service costs   |  |                    | 23    |   |                   |    |   |        |   | (1,795 | ) |  | (9  | ) 
|Communications                                    |  |                    | (142  | ) |                   | (6  | ) |        |   | (1,568 | ) |  | (18 | ) 
|Floor brokerage and clearing organization charges |  |                    | (834  | ) |                   | (71 | ) |        |   | (1,910 | ) |  | (44 | ) 
|Advertising and promotional                       |  |                    | 398   |   |                   | 75  |   |        |   | (127   | ) |  | (5  | ) 
|Other                                             |  |                    | 1,077 |   |                   | 21  |   |        |   | 1,100  |   |  | 7   |   
|                                                  |  |                    |       |   |                   |     |   |        |   |        |   |  |     |   
|                                                  |  |                    | 1,685 |   |                   | 3   |   |        |   | 6,588  |   |  | 4   |   
|                                                  |  |                    |       |   |                   |     |   |        |   |        |   |  |     |   
|Pretax income                                     |  | $                  | 6,023 |   |                   | 87  | % |        | $ | (197   | ) |  | (1  | )%
|                                                  |  |                    |       |   |                   |     |   |        |   |        |   |  |     |   

Net revenues increased for the third quarter of fiscal 2006 by $7,708,000. The largest components of the increase
were in net interest income and net gains on principal transactions. The increase in net interest income is primarily due to an increase in the Banks average loans outstanding and increased net interest from securities lending. Net gains on
principal transactions increased primarily due to the gain on NYX stock which was offset slightly by a decrease in fixed income trading.

Net revenues for
the first nine months of fiscal 2006 increased $6,391,000 over the same period of fiscal 2005. The largest fluctuations were in net interest and net gains on principal transactions. Net interest revenue increased primarily due to an increase in the
Banks average loans outstanding and increased net interest from securities lending. Net gains on principal transactions decreased $13,676,000 due primarily to the $18,732,000 gain attributable to the DARTSSMmaturity recorded in the first quarter of fiscal 2005, which was offset by the $5,100,000 gain on NYX stock.

Overall operating expenses increased by $1,685,000 for the three months ended March 31, 2006 as compared to the same period of fiscal 2005, primarily resulting from
an increase in commissions and other employee compensation. Increased incentive compensation as well as higher health insurance and other benefit plan expenses contributed to the increase in compensation expense.

Operating expenses increased by $6,588,000 for the nine months ended March 31, 2006 as compared to the same period of fiscal 2005. The increase results from higher
expenses in commissions and other employee compensation (discussed above) offset by reduced floor brokerage, communications and occupancy, equipment and computer service costs. The decrease in floor brokerage expense is related to reduced clearing
fees and the receipt of rebates from the Depository Trust Company. The decrease in communications expense is due primarily to a decrease in quotation costs from a reduction in headcount in equity trading. Occupancy, equipment and computer service
costs decreased due to reduced statement processing costs, rent expense, and leased computer equipment and software licenses expenditures offset by the write-off of leasehold improvements upon renovation of our corporate headquarters.

Net Revenues from Clearing Operations. Net clearing revenues increased $436,000 and $211,000 for the three and nine-month periods ended March 31, 2006
compared to the three and nine-month periods ended March 24, 2005, respectively. We processed 2,668,655 and 7,638,056 transactions in the third quarter and nine months of fiscal 2006 compared to 1,768,825 and 9,061,267 transactions in the same
periods of fiscal 2005. Revenue per ticket decreased to $1.40 from $1.87 when comparing the third quarter of fiscal 2006 to the same period of fiscal 2005 as the increased ticket volume was generated from day trading correspondents with a lower
average ticket charge. In contrast, revenue per ticket increased to $1.43 from $1.18 for the nine-month periods of fiscal 2006 and 2005, respectively. Correspondent count at March 31, 2006 was 208 versus 227 at March 24, 2005.



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Commissions.Commission revenue remained flat and increased 4%, respectively, for the three and
nine-month periods ended March 31, 2006 compared to the three and nine-month periods ended March 24, 2005. Commission revenue by type of representative is as follows (dollars in thousands):



|                              |  |                    |        |                   |   |               |  |               |        |               |   |               |  |     |  |    
|----------------------------- |  | ------------------ | ------ | ----------------- | - | ------------- |  | ------------- | ------ | ------------- | - | ------------- |  | --- |  | ---
|                              |  | Commission Revenue |        | No. of Reps      
|                              |  | Three Months Ended |        | Nine Months Ended |   | As of        
|                              |  | March 31,2006      |        | March 24,2005     |   | March 31,2006 |  | March 24,2005 |        | March 31,2006 |   | March 24,2005
|Southwest Securities brokers: |  |                    |        |                   |   |               |  |               |        |               |   |               |  |     |  |    
|Private Client Group          |  | $                  | 5,583  |                   | $ | 4,426         |  | $             | 17,096 |               | $ | 15,064        |  | 93  |  | 98 
|Fixed Income Sales & Trading  |  |                    | 4,253  |                   |   | 6,218         |  |               | 15,790 |               |   | 18,934        |  | 36  |  | 39 
|Institutional Equity Sales    |  |                    | 108    |                   |   | 1,168         |  |               | 2,462  |               |   | 5,360         |  |    |  | 11 
|SWS Financial Representatives |  |                    | 5,619  |                   |   | 4,918         |  |               | 16,224 |               |   | 15,432        |  | 379 |  | 388
|Portfolio Trading             |  |                    | 3,700  |                   |   | 2,596         |  |               | 13,666 |               |   | 7,649         |  |     |  |    
|Other                         |  |                    | 94     |                   |   | 82            |  |               | 245    |               |   | 498           |  |     |  |    
|                              |  |                    |        |                   |   |               |  |               |        |               |   |               |  |     |  |    
|                              |  | $                  | 19,357 |                   | $ | 19,408        |  | $             | 65,483 |               | $ | 62,937        |  |     |  |    
|                              |  |                    |        |                   |   |               |  |               |        |               |   |               |  |     |  |    

The largest increase for both periods was recorded in Portfolio Trading. The increase in Portfolio Trading for the
nine-month period is due to a significant increase in volume due to a non-recurring expansion in the product line of one customer. The increase in the three-month period was due to increased volume across all customers. Reflecting the improved
market volume and direction, commission revenue from the retail businesses (Private Client Group and SWS Financial) increased in the three and nine month periods by $1,858,000 and $2,824,000, respectively. While the number of account representatives
is down, the recruiting efforts of the last two years have resulted in more productive representatives. These increases were offset by decreases in commission revenue in Institutional Equity Sales and Fixed Income Sales and Trading. The reduction in
Institutional Equity Sales primarily results from the sale or closure of all Institutional Equity Sales offices. Fixed Income Sales and Tradings decrease is the result of reduced sales of corporate and mortgage-backed bonds, primarily due to
the unfavorable interest rate environment.

Net Interest Income.Net interest income from the Brokerage Group 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 from 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 nine month periods ended March 31, 2006 and March 24, 2005 (in thousands):



|                                                                       |  |                    |        |                   |   |               |  |               |         |  |   |       
|---------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------------- |  | ------------- | ------- |  | - | ------
|                                                                       |  | Three Months Ended |        | Nine Months Ended
|                                                                       |  | March 31,2006      |        | March 24,2005     |   | March 31,2006 |  | March 24,2005
|Interest revenue:                                                      |  |                    |        |                   |   |               |  |               |         |  |   |       
|Customer margin accounts and assets segregated for regulatory purposes |  | $                  | 9,676  |                   | $ | 6,574         |  | $             | 28,262  |  | $ | 19,743
|Stock borrowed                                                         |  |                    | 27,367 |                   |   | 19,716        |  |               | 78,924  |  |   | 44,397
|Bank loans                                                             |  |                    | 15,864 |                   |   | 10,592        |  |               | 46,105  |  |   | 28,299
|Other                                                                  |  |                    | 1,899  |                   |   | 812           |  |               | 4,475   |  |   | 2,664 
|                                                                       |  |                    |        |                   |   |               |  |               |         |  |   |       
|                                                                       |  | $                  | 54,806 |                   | $ | 37,694        |  | $             | 157,766 |  | $ | 95,103
|                                                                       |  |                    |        |                   |   |               |  |               |         |  |   |       
|Interest expense:                                                      |  |                    |        |                   |   |               |  |               |         |  |   |       
|Customer funds on deposit                                              |  | $                  | 4,934  |                   | $ | 1,975         |  | $             | 13,659  |  | $ | 4,798 
|Stock loaned                                                           |  |                    | 22,145 |                   |   | 15,911        |  |               | 66,297  |  |   | 35,010
|Bank deposits                                                          |  |                    | 5,353  |                   |   | 2,285         |  |               | 13,811  |  |   | 5,620 
|Federal Home Loan Bank advances                                        |  |                    | 553    |                   |   | 493           |  |               | 2,214   |  |   | 1,252 
|Other                                                                  |  |                    | 950    |                   |   | 762           |  |               | 2,287   |  |   | 1,685 
|                                                                       |  |                    |        |                   |   |               |  |               |         |  |   |       
|                                                                       |  |                    | 33,935 |                   |   | 21,426        |  |               | 98,268  |  |   | 48,365
|                                                                       |  |                    |        |                   |   |               |  |               |         |  |   |       
|Net interest                                                           |  | $                  | 20,871 |                   | $ | 16,268        |  | $             | 59,498  |  | $ | 46,738
|                                                                       |  |                    |        |                   |   |               |  |               |         |  |   |       



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Brokerage Group:For the three and nine months ended March 31, 2006, net interest income
from the Brokerage Group accounted for approximately 17% and 15%, respectively, of our net revenue. Average balances of interest-earning assets and interest-bearing liabilities are as follows (in thousands):



|                                          |  |                    |           |                   |   |               |  |               |           |  |   |          
|----------------------------------------- |  | ------------------ | --------- | ----------------- | - | ------------- |  | ------------- | --------- |  | - | ---------
|                                          |  | Three Months Ended |           | Nine Months Ended
|                                          |  | March 31,2006      |           | March 24,2005     |   | March 31,2006 |  | March 24,2005
|Average interest-earning assets:          |  |                    |           |                   |   |               |  |               |           |  |   |          
|Customer margin balances                  |  | $                  | 333,000   |                   | $ | 361,000       |  | $             | 327,000   |  | $ | 362,000  
|Assets segregated for regulatory purposes |  |                    | 346,000   |                   |   | 356,000       |  |               | 346,000   |  |   | 368,000  
|Stock borrowed                            |  |                    | 2,678,000 |                   |   | 3,259,000     |  |               | 2,580,000 |  |   | 3,172,000
|                                          |  |                    |           |                  
|Average interest-bearing liabilities:     |  |                    |           |                   |   |               |  |               |           |  |   |          
|Customer funds on deposit                 |  |                    | 555,000   |                   |   | 586,000       |  |               | 556,000   |  |   | 596,000  
|Stock loaned                              |  |                    | 2,626,000 |                   |   | 3,180,000     |  |               | 2,511,000 |  |   | 3,080,000

Net interest revenue from customer balances increased 3% for the three months ended March 31, 2006 over the
third quarter of fiscal 2005 due primarily to a slightly longer quarter in fiscal 2006.

The decrease of 2% in net interest revenue from customer balances
for the nine months ended March 31, 2006 over the same period last year is due primarily to the decrease in average balances on customer margin accounts by $35 million and in assets segregated for regulatory purposes of $22 million.

The increase of 37% in net interest revenue generated from securities lending activities for the quarter ended March 31, 2006 is due to an increase in the net
interest spread of 24 basis points offset by reduced average balances.

Net interest revenue from stock lending activities for the nine months ended
March 31, 2006 when compared to March 24, 2005 increased 35% due to the increased net interest spread of 19 basis points offset by reduced balances.

Banking Group:Net interest revenue generated by the Bank accounted for approximately 16% and 14% of net revenue for the three and nine-month periods ended March 31, 2006, respectively. At the
Bank, changes in net interest revenue are generally attributable to the timing of loan payoffs and volume. Changes in net interest revenue are also a result of average balance changes and the overall interest rate environment.



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The following tables set forth an analysis of the Banks net interest income from continuing operations by each
major category of interest-earning assets and interest-bearing liabilities for the three and nine-month periods ended March 31, 2006 and 2005 (dollars in thousands):



|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|---------------------------------------------------- |  | ------------------ | ------- | ---------------------- | -------------- | ---------- |  | --- | -------------- |  | ---------------------- | ------- | ---------- | - | ------ |  | --- | -
|                                                     |  | Three Months Ended |        
|                                                     |  | March 31, 2006     |         |                        | March 31, 2005 |           
|                                                     |  | AverageBalance     |         | InterestIncome/Expense |                | Yield/Rate |  |     | AverageBalance |  | InterestIncome/Expense |         | Yield/Rate |  
|Assets:                                              |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Interest-earning assets:                             |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Real estate  mortgage                               |  | $                  | 155,999 |                        | $              | 3,346      |  | 8.7 | %              |  | $                      | 155,239 |            | $ | 2,638  |  | 6.9 | %
|Real estate  construction                           |  |                    | 185,498 |                        |                | 4,345      |  | 9.5 |                |  |                        | 123,796 |            |   | 2,319  |  | 7.6 |  
|Commercial                                           |  |                    | 251,756 |                        |                | 5,557      |  | 9.0 |                |  |                        | 214,937 |            |   | 4,262  |  | 8.0 |  
|Individual                                           |  |                    | 8,466   |                        |                | 133        |  | 6.4 |                |  |                        | 11,700  |            |   | 147    |  | 5.1 |  
|Land                                                 |  |                    | 104,177 |                        |                | 2,483      |  | 9.7 |                |  |                        | 66,819  |            |   | 1,226  |  | 7.5 |  
|Investments                                          |  |                    | 36,689  |                        |                | 423        |  | 4.7 |                |  |                        | 9,298   |            |   | 58     |  | 2.5 |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  |                    | 742,585 |                        | $              | 16,287     |  | 8.9 | %              |  |                        | 581,789 |            | $ | 10,650 |  | 7.4 | %
|                                                     |  |                    |         |                        |                |           
|Interest-earning assets from discontinued operations |  |                    | 22,747  |                        |                |            |  |     |                |  |                        | 34,721  |            |   |        |  |     |  
|                                                     |  |                    |         |                        |                |           
|Noninterest-earning assets:                          |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Cash and due from banks                              |  |                    | 11,822  |                        |                |            |  |     |                |  |                        | 8,829   |            |   |        |  |     |  
|Other assets                                         |  |                    | 15,497  |                        |                |            |  |     |                |  |                        | 21,827  |            |   |        |  |     |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  | $                  | 792,651 |                        |                |            |  |     |                |  | $                      | 647,166 |            |   |        |  |     |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Liabilities and Stockholders Equity:                |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Interest-bearing liabilities:                        |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Certificates of deposit                              |  | $                  | 84,654  |                        | $              | 735        |  | 3.5 | %              |  | $                      | 102,098 |            | $ | 845    |  | 3.4 | %
|Money market accounts                                |  |                    | 27,154  |                        |                | 167        |  | 2.5 |                |  |                        | 16,311  |            |   | 56     |  | 1.4 |  
|Interest-bearing demand accounts                     |  |                    | 74,736  |                        |                | 534        |  | 2.9 |                |  |                        | 54,610  |            |   | 163    |  | 1.2 |  
|Savings accounts                                     |  |                    | 434,708 |                        |                | 3,917      |  | 3.7 |                |  |                        | 319,071 |            |   | 1,221  |  | 1.6 |  
|Federal Home Loan Bank advances                      |  |                    | 47,969  |                        |                | 553        |  | 4.7 |                |  |                        | 57,710  |            |   | 493    |  | 3.5 |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  |                    | 669,221 |                        |                | 5,906      |  | 3.6 | %              |  |                        | 549,800 |            |   | 2,778  |  | 2.1 | %
|                                                     |  |                    |         |                        |                |           
|Noninterest-bearing liabilities:                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Non interest-bearing demand accounts                 |  |                    | 43,175  |                        |                |            |  |     |                |  |                        | 29,283  |            |   |        |  |     |  
|Other liabilities                                    |  |                    | 5,527   |                        |                |            |  |     |                |  |                        | 4,823   |            |   |        |  |     |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  |                    | 717,923 |                        |                |            |  |     |                |  |                        | 583,906 |            |   |        |  |     |  
|Stockholders equity                                 |  |                    | 74,728  |                        |                |            |  |     |                |  |                        | 63,260  |            |   |        |  |     |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  | $                  | 792,651 |                        |                |            |  |     |                |  | $                      | 647,166 |            |   |        |  |     |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Net interest income                                  |  |                    |         |                        | $              | 10,381     |  |     |                |  |                        |         |            | $ | 7,872  |  |     |  
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Net yield on interest-earning assets                 |  |                    |         |                        |                |            |  | 5.7 | %              |  |                        |         |            |   |        |  | 5.5 | %
|                                                     |  |                    |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  



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##### Table of Contents

|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|---------------------------------------------------- |  | ----------------- | ------- | ---------------------- | -------------- | ---------- |  | --- | -------------- |  | ---------------------- | ------- | ---------- | - | ------ |  | --- | -
|                                                     |  | Nine Months Ended |        
|                                                     |  | March 31, 2006    |         |                        | March 31, 2005 |           
|                                                     |  | AverageBalance    |         | InterestIncome/Expense |                | Yield/Rate |  |     | AverageBalance |  | InterestIncome/Expense |         | Yield/Rate |  
|Assets:                                              |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Interest-earning assets:                             |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Real estate  mortgage                               |  | $                 | 189,394 |                        | $              | 11,810     |  | 8.3 | %              |  | $                      | 151,028 |            | $ | 7,219  |  | 6.4 | %
|Real estate  construction                           |  |                   | 167,113 |                        |                | 11,566     |  | 9.2 |                |  |                        | 116,899 |            |   | 6,227  |  | 7.1 |  
|Commercial                                           |  |                   | 243,419 |                        |                | 15,833     |  | 8.7 |                |  |                        | 197,844 |            |   | 11,253 |  | 7.6 |  
|Individual                                           |  |                   | 9,657   |                        |                | 429        |  | 5.9 |                |  |                        | 12,742  |            |   | 476    |  | 5.0 |  
|Land                                                 |  |                   | 94,547  |                        |                | 6,467      |  | 9.1 |                |  |                        | 56,846  |            |   | 3,124  |  | 7.3 |  
|Investments                                          |  |                   | 18,922  |                        |                | 615        |  | 4.3 |                |  |                        | 22,951  |            |   | 260    |  | 1.5 |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  |                   | 723,052 |                        | $              | 46,720     |  | 8.6 | %              |  |                        | 558,310 |            | $ | 28,559 |  | 6.8 | %
|                                                     |  |                   |         |                        |                |           
|Interest-earning assets from discontinued operations |  |                   | 26,961  |                        |                |            |  |     |                |  |                        | 31,712  |            |   |        |  |     |  
|                                                     |  |                   |         |                        |                |           
|Noninterest-earning assets:                          |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Cash and due from banks                              |  |                   | 10,188  |                        |                |            |  |     |                |  |                        | 8,337   |            |   |        |  |     |  
|Other assets                                         |  |                   | 21,489  |                        |                |            |  |     |                |  |                        | 19,107  |            |   |        |  |     |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  | $                 | 781,690 |                        |                |            |  |     |                |  | $                      | 617,466 |            |   |        |  |     |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Liabilities and Stockholders Equity:                |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Interest-bearing liabilities:                        |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Certificates of deposit                              |  | $                 | 100,734 |                        | $              | 2,533      |  | 3.4 | %              |  | $                      | 106,169 |            | $ | 2,576  |  | 3.2 | %
|Money market accounts                                |  |                   | 23,373  |                        |                | 430        |  | 2.5 |                |  |                        | 16,204  |            |   | 127    |  | 1.0 |  
|Interest-bearing demand accounts                     |  |                   | 64,882  |                        |                | 1,245      |  | 2.6 |                |  |                        | 54,476  |            |   | 360    |  | 0.9 |  
|Savings accounts                                     |  |                   | 403,388 |                        |                | 9,603      |  | 3.2 |                |  |                        | 303,770 |            |   | 2,557  |  | 1.1 |  
|Federal Home Loan Bank advances                      |  |                   | 70,609  |                        |                | 2,214      |  | 4.2 |                |  |                        | 43,277  |            |   | 1,252  |  | 3.9 |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  |                   | 662,986 |                        |                | 16,025     |  | 3.2 | %              |  |                        | 523,896 |            |   | 6,872  |  | 1.8 | %
|Noninterest-bearing liabilities:                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Non interest-bearing demand accounts                 |  |                   | 39,984  |                        |                |            |  |     |                |  |                        | 27,908  |            |   |        |  |     |  
|Other liabilities                                    |  |                   | 6,956   |                        |                |            |  |     |                |  |                        | 3,787   |            |   |        |  |     |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  |                   | 709,926 |                        |                |            |  |     |                |  |                        | 555,591 |            |   |        |  |     |  
|Stockholders equity                                 |  |                   | 71,764  |                        |                |            |  |     |                |  |                        | 61,875  |            |   |        |  |     |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|                                                     |  | $                 | 781,690 |                        |                |            |  |     |                |  | $                      | 617,466 |            |   |        |  |     |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Net interest income                                  |  |                   |         |                        | $              | 30,695     |  |     |                |  |                        |         |            | $ | 21,687 |  |     |  
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  
|Net yield on interest-earning assets                 |  |                   |         |                        |                |            |  | 5.7 | %              |  |                        |         |            |   |        |  | 5.2 | %
|                                                     |  |                   |         |                        |                |            |  |     |                |  |                        |         |            |   |        |  |     |  

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



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##### Table of Contents

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                        |       
|                                 |  | March 31, 2006 compared to March 31, 2005 |       
|                                 |  | TotalChange                               |        |   | Attributed to |  
|                                 |  | Volume                                    |        |   | Rate          |   |       | Mix | 
|Interest income:                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Real estate - mortgage           |  | $                                         | 708    |   |               | $ | 13    |     |  | $ | 692   |   |  | $ | 3     |  
|Real estate - construction       |  |                                           | 2,026  |   |               |   | 1,155 |     |  |   | 581   |   |  |   | 290   |  
|Commercial                       |  |                                           | 1,295  |   |               |   | 730   |     |  |   | 482   |   |  |   | 83    |  
|Individual                       |  |                                           | (14    | ) |               |   | (41   | )   |  |   | 37    |   |  |   | (10   | )
|Land                             |  |                                           | 1,257  |   |               |   | 686   |     |  |   | 366   |   |  |   | 205   |  
|Investments                      |  |                                           | 365    |   |               |   | 141   |     |  |   | 47    |   |  |   | 177   |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|                                 |  | $                                         | 5,637  |   |               | $ | 2,684 |     |  | $ | 2,205 |   |  | $ | 748   |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Interest expense:                |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Certificates of deposit          |  | $                                         | (110   | ) |               | $ | (145  | )   |  | $ | 42    |   |  | $ | (7    | )
|Money market accounts            |  |                                           | 111    |   |               |   | 38    |     |  |   | 44    |   |  |   | 29    |  
|Interest-bearing demand accounts |  |                                           | 371    |   |               |   | 59    |     |  |   | 228   |   |  |   | 84    |  
|Savings accounts                 |  |                                           | 2,696  |   |               |   | 443   |     |  |   | 1,654 |   |  |   | 599   |  
|Federal Home Loan Bank advances  |  |                                           | 60     |   |               |   | 4     |     |  |   | 257   |   |  |   | (201  | )
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|                                 |  |                                           | 3,128  |   |               |   | 399   |     |  |   | 2,225 |   |  |   | 504   |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Net interest income              |  | $                                         | 2,509  |   |               | $ | 2,285 |     |  | $ | (20   | ) |  | $ | 244   |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|                                 | 
|                                 |  | Nine months ended                         |       
|                                 |  | March 31, 2006 compared to March 31, 2005 |       
|                                 |  | TotalChange                               |        |   | Attributed to |  
|                                 |  | Volume                                    |        |   | Rate          |   |       | Mix | 
|Interest income:                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Real estate - mortgage           |  | $                                         | 4,591  |   |               | $ | 1,833 |     |  | $ | 2,199 |   |  | $ | 559   |  
|Real estate - construction       |  |                                           | 5,339  |   |               |   | 2,675 |     |  |   | 1,864 |   |  |   | 800   |  
|Commercial                       |  |                                           | 4,580  |   |               |   | 2,592 |     |  |   | 1,616 |   |  |   | 372   |  
|Individual                       |  |                                           | (47    | ) |               |   | (115  | )   |  |   | 90    |   |  |   | (22   | )
|Land                             |  |                                           | 3,343  |   |               |   | 2,072 |     |  |   | 764   |   |  |   | 507   |  
|Investments                      |  |                                           | 355    |   |               |   | (21   | )   |  |   | 492   |   |  |   | (116  | )
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|                                 |  | $                                         | 18,161 |   |               | $ | 9,036 |     |  | $ | 7,025 |   |  | $ | 2,100 |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Interest expense:                |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Certificates of deposit          |  | $                                         | (43    | ) |               | $ | (132  | )   |  | $ | 94    |   |  | $ | (5    | )
|Money market accounts            |  |                                           | 303    |   |               |   | 56    |     |  |   | 171   |   |  |   | 76    |  
|Interest-bearing demand accounts |  |                                           | 885    |   |               |   | 69    |     |  |   | 685   |   |  |   | 131   |  
|Savings accounts                 |  |                                           | 7,046  |   |               |   | 838   |     |  |   | 4,675 |   |  |   | 1,533 |  
|Federal Home Loan Bank advances  |  |                                           | 962    |   |               |   | 556   |     |  |   | 145   |   |  |   | 261   |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|                                 |  |                                           | 9,153  |   |               |   | 1,387 |     |  |   | 5,770 |   |  |   | 1,996 |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  
|Net interest income              |  | $                                         | 9,008  |   |               | $ | 7,649 |     |  | $ | 1,255 |   |  | $ | 104   |  
|                                 |  |                                           |        |   |               |   |       |     |  |   |       |   |  |   |       |  

Investment Banking, Advisory and Administrative Fees.Investment banking, advisory and
administrative fees include revenue derived from underwriting or distribution of corporate and municipal securities, unit trusts and money market and other mutual funds, as well as revenue generated by the Asset Management Group through September
2005. The $1,311,000 decrease for the three months ended March 31, 2006 as compared to the three months ended March 24, 2005 is primarily due to decreased public and corporate finance fees. The $1,491,000 increase for the nine month period
is primarily due to increased pubic finance fees of $2,067,000 offset by a decrease in corporate finance fees of $773,000.

Average assets under management
by the Asset Management Group were $844,000,000 at March 24, 2005. SWS Capital did not renew its contract as General Manager of LOGIC upon the expiration of the original agreement on September 4, 2005. As a result, there were no assets
under management at March 31, 2006. Revenue generated from the management of these assets was $131,000 and $370,000 for the nine months ended March 31, 2006 and March 24, 2005, respectively.



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##### Table of Contents

Net Gains on Principal Transactions. The increase of $3,252,000 for the three months ended March 31,
2006 compared to the three months ended March 24, 2005 is due in part to the $5,100,000 gain recorded on the receipt of cash and NYX restricted stock in return for the surrender of our NYSE seat. This was offset by a decrease in fixed income
trading gains of $2,400,000.

The decrease in net gains on principal transactions of $13,676,000 for the nine months ended March 31, 2006 versus
March 24, 2005 was due primarily to the $18,732,000 recognized upon the maturity of the DARTSSMduring the
first quarter of fiscal 2005. This amount represents the difference between the fair value of the Knight stock upon acquisition and the Knight stock on the hedging date. Offsetting this decrease was an increase primarily due to the gain reported on
the NYX restricted stock of $5,100,000.

Other Revenue. Other revenue increased approximately $779,000 for the three-month period ended
March 31, 2006 compared to the three-month period ended March 24, 2005. The increase is due primarily to a $577,000 increase in insurance products revenue and increased cash surrender value of life insurance in the deferred compensation
plan of $374,000, offset by a $400,000 reduction in revenue from our equity investments between these two periods.

Other revenue increased approximately
$3,059,000 for the nine-month period ended March 31, 2006 compared to the nine-month period ended March 24, 2005. The increase is due primarily to the $1,547,000 increase in earnings from a venture capital investment, increased insurance
product fees of $1,108,000, and an increase in the cash surrender value of life insurance in the deferred compensation plan of $650,000. Offsetting these increases is a reduction of $160,000 related to non-recurring revenue from the sale of an
investment in the prior year.

Commissions and Other Employee Compensation.Commissions and other employee compensation is generally the most
significant expense, other than interest expense, on our Consolidated Statements of Income and Comprehensive Income. The commission portion is variable in nature based on the level of operating revenues, earnings and the number of registered
representatives employed.

Overall, commissions and other employee compensation increased $1,163,000 for the third quarter of fiscal 2006 over the
comparable period in fiscal 2005. The primary driver of the increase was $388,000 in variable compensation due to increased business line profitability in the brokerage segment. Additionally, an increase of $775,000 in other compensation expense is
a result of increases in profit sharing and deferred compensation plan expenses, offset by reduced salaries expense.

Total commissions and other employee
compensation increased by $10,888,000 for the first nine months of fiscal 2006 over the comparable period in fiscal 2005. An increase of $1,978,000 was due to commissions paid to revenue-producing employees generating higher levels of commission
revenue. We also experienced an increase of $5,824,000 in incentive compensation due to increased business line profitability and improvements in consolidated return on equity. Additionally, an increase of $3,086,000 in other compensation expense is
a result of increases in profit sharing, deferred compensation plan, and health insurance expenses.

Occupancy, Equipment and Computer Services.Expenses for the three month period were flat.The $1,795,000 decrease in the nine-month period ended March 31, 2006 from the comparable period in the prior year is primarily due to decreases of $1,133,000 in statement
processing costs, $450,000 in rent expense and $652,000 from reduced expenditures for leased computer equipment. The reduction in statement processing costs is a result of favorable contract negotiations. Rent expense decreased due to non-recurring
lease termination costs in fiscal 2005 of $213,000 related to the closure of the May Financial office in Brighton, Michigan. The remainder of the decrease in rent is due to a decrease in headquarters rent, which was offset by the write-off of
leasehold improvements upon renovation of our corporate headquarters of $614,000.



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##### Table of Contents

Communications. Communications expense decreased $142,000 for the three-month period ended March 31,
2006 as compared to the same period of the prior year. Quotation costs were down $111,000 due to reduced headcount in equity trading. Additionally, telephone expenses were reduced by $46,000 due to favorable restructuring of our telecommunications
contracts.

Communications expense decreased $1,568,000 for the nine-month period ended March 31, 2006 as compared to the same period of the prior
year. Quotation costs were down $1,190,000 and telephone expenses were down $340,000 due to the reasons noted above. In addition, quotation costs were down due to the closure of two offices (Michigan & Wisconsin) in fiscal 2005.

Floor Brokerage and Clearing Organization Charges. Floor brokerage and clearing organization charges change in relation to the transactions processed in
our clearing business as well as changes in the costs from our clearing agencies. These charges decreased $834,000 and $1,910,000 when comparing the three and nine month periods ended March 31, 2006 to the same period in the prior year,
respectively. The reductions are due to reduced clearing costs as we significantly reduced our market making business in September 2005 and rebates received from the Depository Trust Company.

Advertising and Promotional. Advertising and promotional expense increased $398,000 and decreased $127,000 when comparing the three and nine months ended
March 31, 2006 to the same periods in the prior fiscal year, respectively. The increase for the quarter is due to an increase in expenses in the current fiscal year for a promotional meeting for our top producing brokers and certain
correspondent customers. The decrease for the year reflects the reduction in advertising, external recruiting, and travel and entertainment costs.

Other Expense.Other expenses for the three months ended March 31, 2006 increased $1,077,000 when compared to the same period last year. This increase is due to the write-off of certain receivables related to the
sale of the Institutional Sales business of $327,000. Additionally, the prior year included a $200,000 reserve release related to a lawsuit while this quarter included additional reserves of $400,000. The increase is offset by a decrease in
professional fees related to Sarbanes-Oxley Section 404 (SOX 404) compliance that were incurred in fiscal 2005 that did not recur in fiscal 2006.

Other expenses for the nine months ended March 31, 2006 increased $1,100,000 when compared to the same period last year. The increase is due to the receivable write-off noted above as well as non-recurring legal and other reserves
released last year of $700,000 and additional legal and other reserves this year of $400,000. These increases were offset by reduced losses from CSS and reduced SOX 404 consulting fees.

Income Tax Expense. For the nine months of fiscal 2006, income tax expense (effective rate was 34.9%) differed from the amount that would have otherwise been calculated by applying the federal corporate
tax rate (35%) to income before income taxes and minority interest in consolidated subsidiaries. The effective rate was lower than the statutory rate because of permanently excluded items, primarily meals and entertainment expenses offset by
tax exempt interest, and income from company-owned life insurance policies.

Minority Interest in Consolidated Subsidiaries. The increase in
minority interest in consolidated subsidiaries of $2,863,000 and $2,439,000 for the three and nine months ended March 31, 2006 when compared to similar periods in the prior year is primarily due to the gain realized on the sale of FSB
Financial. The minority interest on the gain was $2,965,000.



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##### Table of Contents

FINANCIAL CONDITION

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

Loans receivable at March 31,
2006 and June 30, 2005 are summarized as follows (in thousands):



|                                      |  |                |         |               |   |        
|------------------------------------- |  | -------------- | ------- | ------------- | - | -------
|                                      |  | March 31, 2006 |         | June 30, 2005
|Real estate  mortgage                |  | $              | 171,331 |               | $ | 225,256
|Real estate  construction            |  |                | 237,135 |               |   | 168,343
|Commercial and commercial real estate |  |                | 219,179 |               |   | 197,045
|Individuals (*)                       |  |                | 4,393   |               |   | 95,382 
|Land                                  |  |                | 103,629 |               |   | 77,854 
|                                      |  |                |         |               |   |        
|                                      |  | $              | 735,667 |               | $ | 763,880
|                                      |  |                |         |               |   |        

---

|(*) | The decrease is due to the sale of FSB Financial. See -Discontinued Operations in the Notes to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

The following table shows the expected life of certain loans at March 31, 2006, and segregates those loans with fixed interest rates from those with floating or
adjustable rates (in thousands):



|                                      |  |                |         |           |   |             |  |       |         |  |   |        
|------------------------------------- |  | -------------- | ------- | --------- | - | ----------- |  | ----- | ------- |  | - | -------
|                                      |  | 1 year or less |         | 1-5 years |   | Over 5years |  | Total
|Real estate  construction            |  | $              | 200,859 |           | $ | 23,167      |  | $     | 13,109  |  | $ | 237,135
|Commercial                            |  |                | 47,325  |           |   | 79,765      |  |       | 92,089  |  |   | 219,179
|                                      |  |                |         |           |   |             |  |       |         |  |   |        
|Total                                 |  | $              | 248,184 |           | $ | 102,932     |  | $     | 105,198 |  | $ | 456,314
|                                      |  |                |         |           |   |             |  |       |         |  |   |        
|Amount of loans based upon:           |  |                |         |           |   |             |  |       |         |  |   |        
|Floating or adjustable interest rates |  | $              | 245,731 |           | $ | 76,429      |  | $     | 78,262  |  | $ | 400,422
|Fixed interest rates                  |  |                | 2,453   |           |   | 26,503      |  |       | 26,936  |  |   | 55,892 
|                                      |  |                |         |           |   |             |  |       |         |  |   |        
|Total                                 |  | $              | 248,184 |           | $ | 102,932     |  | $     | 105,198 |  | $ | 456,314
|                                      |  |                |         |           |   |             |  |       |         |  |   |        

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 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 credited to income on a cash basis.



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##### Table of Contents

Non-performing assets as of March 31, 2006 and June 30, 2005 are as follows (dollars in thousands):



|                                                          |  |               |       |   |               |   |       |  
|--------------------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | -
|                                                          |  | March 31,2006 |       |   | June 30, 2005 |  
|Loans accounted for on a non-accrual basis                |  | $             | 3,176 |   |               | $ | 4,949 |  
|                                                          |  |               |       |   |               |   |       |  
|Non-performing loans as a percentage of total gross loans |  |               | 0.4   | % |               |   | 0.6   | %
|                                                          |  |               |       |   |               |   |       |  
|Loans past due 90 days or more, not included above        |  | $             | 44    |   |               | $ | 804   |  
|                                                          |  |               |       |   |               |   |       |  
|Troubled debt restructurings                              |  | $             | 2,289 |   |               | $ | 2,027 |  
|                                                          |  |               |       |   |               |   |       |  

An analysis of the allowance for probable loan losses for the three and nine-month periods ended March 31,
2006 and 2005 is as follows (dollars in thousands):



|                                                                                                       |  |                             |        |    |                            |   |       |      |  |   |        |    |  |   |       |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | -- | -------------------------- | - | ----- | ---- |  | - | ------ | -- |  | - | ----- | -
|                                                                                                       |  | Three Months EndedMarch 31, |        |    | Nine Months EndedMarch 31, |  
|                                                                                                       |  | 2006                        |        |    | 2005                       |   |       | 2006 |  |   | 2005   |   
|Balance at beginning of period                                                                         |  | $                           | 7,151  |    |                            | $ | 5,392 |      |  | $ | 7,450  |    |  | $ | 4,643 |  
|Charge-offs  commercial                                                                               |  |                             | (34    | )  |                            |   | (567  | )    |  |   | (147   | )  |  |   | (583  | )
|Charge-offs  individual                                                                               |  |                             | (3     | )  |                            |   |      |      |  |   | (3     | )  |  |   | (11   | )
|Charge-offs  real estate-mortgage                                                                     |  |                             | (37    | )  |                            |   |      |      |  |   | (139   | )  |  |   | (81   | )
|Charge-offs  real estate-construction                                                                 |  |                             | (45    | )  |                            |   |      |      |  |   | (45    | )  |  |   |      |  
|Recoveries  commercial                                                                                |  |                             | 13     |    |                            |   | 700   |      |  |   | 70     |    |  |   | 700   |  
|Recoveries  real estate-mortgage                                                                      |  |                             | 1      |    |                            |   |      |      |  |   | 1      |    |  |   |      |  
|                                                                                                       |  |                             |        |    |                            |   |       |      |  |   |        |    |  |   |       |  
|Net (charge-offs) recoveries                                                                           |  |                             | (105   | )  |                            |   | 133   |      |  |   | (263   | )  |  |   | 25    |  
|Additions charged to operations                                                                        |  |                             | 350    |    |                            |   | (151  | )    |  |   | 1,515  |    |  |   | (42   | )
|Discontinued operations                                                                                |  |                             | (2,329 | )  |                            |   | 25    |      |  |   | (3,635 | )  |  |   | 773   |  
|                                                                                                       |  |                             |        |    |                            |   |       |      |  |   |        |    |  |   |       |  
|Balance at end of period                                                                               |  | $                           | 5,067  |    |                            | $ | 5,399 |      |  | $ | 5,067  |    |  | $ | 5,399 |  
|                                                                                                       |  |                             |        |    |                            |   |       |      |  |   |        |    |  |   |       |  
|Ratio of net (charge-offs) recoveries during the period to average loans outstanding during the period |  |                             | (0.01  | )% |                            |   | 0.04  | %    |  |   | (0.02  | )% |  |   | 0.00  | %
|                                                                                                       |  |                             |        |    |                            |   |       |      |  |   |        |    |  |   |       |  

The ratio of the allowance for probable loan losses to total loans as of March 31, 2006 is 0.68%. As of
March 31, 2005, this ratio was 0.54%.

The allowance for probable loan losses is applicable to the following types of loans as of March 31, 2006
and June 30, 2005 (dollars in thousands):



|                              |  |                |       |                              |               |   |        |   |                              |  |       |  
|----------------------------- |  | -------------- | ----- | ---------------------------- | ------------- | - | ------ | - | ---------------------------- |  | ----- | -
|                              |  | March 31, 2006 |       |                              | June 30, 2005 |  
|                              |  | Amount         |       | Percentof loansto totalloans |               |   | Amount |   | Percentof loansto totalloans | 
|Commercial                    |  | $              | 1,740 |                              | 29.8          | % |        | $ | 1,446                        |  | 25.7  | %
|Real estate  construction    |  |                | 1,455 |                              | 32.2          |   |        |   | 1,033                        |  | 22.0  |  
|Real estate  mortgage & land |  |                | 1,847 |                              | 37.4          |   |        |   | 1,313                        |  | 39.5  |  
|Individuals (*)               |  |                | 25    |                              | 0.6           |   |        |   | 3,658                        |  | 12.8  |  
|                              |  |                |       |                              |               |   |        |   |                              |  |       |  
|                              |  | $              | 5,067 |                              | 100.0         | % |        | $ | 7,450                        |  | 100.0 | %
|                              |  |                |       |                              |               |   |        |   |                              |  |       |  

---

|(*) | The decrease is due to the sale of FSB Financial. See -Discontinued Operations in the Notes to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



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Deposits.Average deposits and the average interest rate paid on the deposits for the three and nine-month
periods ended March 31, 2006 and 2005 can be found in the discussion of the Banking Groups net interest income under the caption -Results of Operations-Net Interest Income-Banking Group.

Certificates of deposit of $100,000 or greater were $26,041,000 and $58,554,000 at March 31, 2006 and June 30, 2005, respectively. The Bank funds its loans
through short-term borrowings at the Federal Home Loan Bank (FHLB), internally generated deposits, brokered certificates of deposit and funds on deposit in an FDIC insured interest bearing checking account from Southwest Securities
brokerage customers. The Bank has in excess of $500 million ($506,000,000 at March 31, 2006) in funds on deposit from customers of Southwest Securities. This funding source has reduced the Banks reliance on short-term borrowings from the
FHLB and brokered certificates of deposit.

Advances from Federal Home Loan Bank.The Bank has historically financed its short-term borrowing
needs through advances from the FHLB. This table represents advances from the FHLB which were due within one year (generally two to seven days) during the three and nine-month periods ended March 31, 2006 and 2005 (dollars in thousands):



|                              |  |                              |        |              |                             |   |        |      |              |  |      |        |  |              |        |  |        |   |              |   |        |  |     |  
|----------------------------- |  | ---------------------------- | ------ | ------------ | --------------------------- | - | ------ | ---- | ------------ |  | ---- | ------ |  | ------------ | ------ |  | ------ | - | ------------ | - | ------ |  | --- | -
|                              |  | Three Months Ended March 31, |        |              | Nine Months Ended March 31, |  
|                              |  | 2006                         |        |              | 2005                        |   |        | 2006 |              |  | 2005 |       
|                              |  | Amount                       |        | InterestRate |                             |   | Amount |      | InterestRate |  |      | Amount |  | InterestRate |        |  | Amount |   | InterestRate |  
|At end of period              |  | $                            | 9,916  |              | 3.0                         | % |        | $    | 86,061       |  | 2.9  | %      |  | $            | 9,916  |  | 3.0    | % |              | $ | 86,061 |  | 2.9 | %
|Average during period         |  |                              | 9,970  |              | 3.6                         | % |        |      | 26,243       |  | 2.4  | %      |  |              | 34,587 |  | 3.8    | % |              |   | 8,836  |  | 2.3 | %
|Maximum balance during period |  |                              | 37,284 |              |                            |   |        |      | 86,061       |  |     |        |  |              | 77,442 |  |       |   |              |   | 86,061 |  |    |  

LIQUIDITY AND CAPITAL RESOURCES

Brokerage Group

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, in the judgment of management, that are necessary to adequately absorb losses from known and inherent risks in receivables from clients, clients of correspondents and correspondents. The highly liquid nature of our
assets provides us with flexibility in financing and managing our anticipated operating needs.

Short-Term Borrowings.We have
credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in
customers margin accounts. These credit arrangements are provided on an as offered basis and are not committed lines of credit. Outstanding balances under these credit arrangements are due on demand, bear interest at rates indexed
to the federal funds rate and are collateralized by securities of Southwest Securities and its clients. At March 31, 2006, the amount outstanding under these secured arrangements was $51,100,000, which was collateralized by securities held for
firm accounts valued at $93,826,000.

In addition to the broker loan lines, SWS has a $20,000,000 unsecured line of credit that is due on demand and bears
interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount outstanding on the line and under the unsecured letters of credit at the time of borrowing. There were
no amounts outstanding on this line and $2,964,000 under unsecured letters of credit at March 31, 2006. At March 31, 2006, the total amount available for borrowings was $17,036,000.



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We also have unsecured letters of credit, aggregating $2,250,000 at March 31, 2006, pledged to support our open
positions with securities clearing organizations. The unsecured letters of credit bear a 1% commitment fee and are renewable semi-annually.

At
March 31, 2006, we had an additional unsecured letter of credit issued for a sub-lease to the sub-lessee of space previously occupied by Mydiscountbroker.com, Inc., a subsidiary of SWS dissolved in July 2004, in the amount of $714,000. This
letter of credit bears a 1% commitment fee and is renewable annually.

We also have an irrevocable letter of credit agreement aggregating $54,000,000 at
March 31, 2006 pledged to support our 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. This letter of credit is fully
collateralized by marketable securities held in client and non-client margin accounts with a value of $68,839,000 at March 31, 2006.

In the opinion
of management, these credit arrangements are adequate to meet our operating capital needs of the Brokerage Group for the foreseeable future.

Off-Balance Sheet Arrangements.Off-balance sheet arrangements, as defined by the SEC, include certain contractual arrangements pursuant to which a company has a binding obligation which is not reflected on the balance sheet.
Included are contingent obligations, certain guaranteed contracts, retained or contingent interest in assets transferred to an unconsolidated entity, certain derivative investments classified as equity or material variable interests in
unconsolidated entities that provide financing, liquidity, market risk or credit risk support. We generally do not enter into off-balance sheet arrangements, as defined, other than those described in the Contractual Obligations and Contingent
Payments section of our annual report on Form 10-K for the fiscal year ended June 24, 2005. In addition, our broker/dealer subsidiaries enter into transactions in the normal course of business that expose us to off-balance sheet risk. See Note
25 of the Notes to Consolidated Financial Statements contained in our annual report on Form 10-K for the fiscal year ended June 24, 2005.

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

Banking Group

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, the Bank has borrowing capacity with the FHLB and a $30,000,000 federal funds agreement credit for the purpose of purchasing short-term funds should additional liquidity be
needed. Current net available borrowing capacity at FHLB is $139,007,000. Management believes that the Banks present position is adequate to meet its current and future liquidity needs.

The Banks asset and liability management policy is intended to manage interest rate risk. The Bank accomplishes this through management of the repricing of its
interest-earning assets and its interest-bearing liabilities. See discussion of the Banks gap analysis in Risk Management-Market Risk-Interest Rate Risk/Banking Group. At March 31, 2006, $506,000,000 of the Banks
deposits was from broker customers of Southwest Securities. Events in the securities markets could impact the amount of these funds available to the Bank.



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

The Bank has requested
permission from its regulator to pay an $18 million dividend to the parent. If approved, it is anticipated that this dividend will be paid before the end of fiscal 2006.

Bank Borrowings. In June 2005, the Bank entered into an agreement with an unaffiliated bank for a $20,000,000 unsecured line of credit for the purchase of federal funds. In the third quarter of fiscal
2006, the agreement was amended to increase the available credit to $30,000,000. The unaffiliated bank is not obligated by this agreement to sell federal funds to the Bank. Interest is charged on any borrowed funds at a rate equal to the federal
funds rate plus 0.25%. The line is used by the Bank to support short-term liquidity needs. At March 31, 2006, there were no amounts outstanding on this line of credit.

All amounts outstanding under FSB Financials borrowing arrangements were paid in full during March 2006 with the proceeds from the sale of FSB Financial of $116,868,000. See -Bank Borrowings in the
Notes to the Consolidated Financial Statements.

Cash Flow

Net cash provided by operating activities was $55,588,000 for the nine months ended March 31, 2006 compared to net cash used in operating activities of $122,288,000 for the nine months ended March 24, 2005. The primary reasons for
the increase in cash from operating activities were:



| |  |  | A $52,031,000 decrease in loans held for sale for the nine months ended March 31, 2006 compared to an increase of $66,015,000 for the nine months ended March 24, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securities purchased under agreements to resell increased $9,080,000 for the nine months of fiscal 2006 compared to an increase of $65,571,000 for the nine months of fiscal 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securities owned increased $32,923,000 for the nine months ended March 31, 2006 compared to an increase of $65,900,000 for the nine months ended March 24, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

These increases were offset by securities sold, not yet purchased which increased $12,487,000 for the nine months of fiscal 2006 compared to
an increase of $58,331,000 for the nine months of fiscal 2005.

Net cash used in investing activities for the nine-month periods ended March 31, 2006
and March 24, 2005 was $3,071,000 and $111,696,000, respectively. The primary reason for the decrease in cash used for investing activities was the $104,814,000 in cash flow from discontinued operations offset by increased mortgage
originations.

Net cash flows used in financing activities totaled $5,010,000 for the nine-month period ended March 31, 2006 compared to net cash
flows provided by financing activities of $179,235,000 for the nine-month period ended March 24, 2005. The primary differences were the reduced reliance on borrowings by the Bank from the FHLB due to cash inflows from Southwest Securities
customers and payments on borrowings on the broker/dealers short-term borrowings. Offsetting these are increases in cash proceeds from securities sold under agreements to repurchase and in deposits at the Bank.

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 2006.

Treasury Stock

Periodically, we repurchase our common stock under a
plan approved by our Board of Directors. Currently, we have authorization, which will expire on December 31, 2006, to repurchase 500,000 shares. In October 2005, we repurchased 31,090 shares at a cost of $478,000 or $15.36 per share.



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Additionally, the trustee under our deferred compensation plan periodically purchases stock in the open market in
accordance with the terms of the plan. This stock is classified as treasury stock in our consolidated financial statements, but participates in dividends declared by us. During the three and nine-month periods ended March 31, 2006, 6,317 shares
were sold or distributed pursuant to the plan.

RISK MANAGEMENT

We manage risk exposure through the involvement of various levels of management. We establish, maintain and regularly monitor maximum positions (by industry and issuer) in both trading and inventory accounts. Current and proposed
underwriting, banking and other commitments are subject to due diligence reviews by senior management, as well as professionals in the appropriate business and support units involved. The Bank seeks to reduce the risk of significant adverse effects
of market rate fluctuations by minimizing the difference between rate-sensitive assets and liabilities, referred to as gap, by maintaining an interest rate sensitivity position within a particular timeframe. Credit risk related to
various financing activities is reduced by the industry practice of obtaining and maintaining collateral. We monitor our exposure to counter-party 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 Group. Credit
risk arises from the potential nonperformance by counter-parties, customers or debt security issuers. We are exposed to credit risk as a trading counter-party and as a stock loan counter-party to dealers and customers, as a holder of securities and
as a member of exchanges and clearing organizations. Credit exposure is also associated with customer margin accounts, which are monitored daily. We monitor exposure to individual securities and perform sensitivity analysis on a regular basis in
connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

Banking Group. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms and is inherent in all types of lending provided. 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 United States. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the general
economic conditions of the North Texas area. Policies and procedures, which are in place to manage credit risk, are designed to be responsive to changes in these economic conditions.

Operational Risk

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



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##### Table of Contents

Legal Risk

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

Market Risk

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

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

Banking Group. 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 Office of Thrift and Supervision (OTS) for interest rate sensitivity of the Banks net portfolio. These analyses are conducted on a monthly basis for the
Banks Board of Directors.

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



|                                      |  |                                        
|------------------------------------- |  | ---------------------------------------
|Hypothetical Change in Interest
Rates |  | Projected Change in Net Interest Margin
|+300                                  |  | 3.74%                                  
|+200                                  |  | 2.50%                                  
|+100                                  |  | 1.25%                                  
|0                                     |  | 0%                                     
|-100                                  |  | -1.26%                                 
|-200                                  |  | -2.83%                                 



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The following GAP Analysis table indicates the Banks interest rate sensitivity position at March 31, 2006:



|                                   |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|---------------------------------- |  | ----------------------- | ------- | ----------- | - | ------- | --------- |  | -------- | ------- |  | - | ------- | -
|                                   |  | Repricing Opportunities |        
|(in thousands)                     |  | 0-6 months              |         | 7-12 months |   |         | 1-3 years |  | 3+ years |        
|Earning Assets:                    |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|Loans                              |  | $                       | 669,602 |             | $ | 7,955   |           |  | $        | 26,871  |  | $ | 36,306  |  
|Securities and FHLB Stock          |  |                         | 3,086   |             |   |        |           |  |          |        |  |   | 269     |  
|Interest Bearing Deposits          |  |                         | 42,085  |             |   |        |           |  |          |        |  |   |        |  
|                                   |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|Total Earning Assets               |  |                         | 714,773 |             |   | 7,955   |           |  |          | 26,871  |  |   | 36,575  |  
|                                   |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|Interest Bearing Liabilities:      |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|Transaction Accounts and Savings   |  |                         | 546,437 |             |   |        |           |  |          |        |  |   |        |  
|Certificates of Deposit            |  |                         | 26,738  |             |   | 36,925  |           |  |          | 13,170  |  |   | 9,005   |  
|Borrowings                         |  |                         |        |             |   | 9,916   |           |  |          | 544     |  |   | 36,529  |  
|                                   |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|Total Interest Bearing Liabilities |  |                         | 573,175 |             |   | 46,841  |           |  |          | 13,714  |  |   | 45,534  |  
|                                   |  |                         |         |             |   |         |           |  |          |         |  |   |         |  
|GAP                                |  | $                       | 141,598 |             | $ | (38,886 | )         |  | $        | 13,157  |  | $ | (8,959  | )
|                                   |  |                         |         |            
|Cumulative GAP                     |  | $                       | 141,598 |             | $ | 102,712 |           |  | $        | 115,869 |  | $ | 106,910 |  

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

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



|                                                                                                        |  |                   |        |   |        |   |        |         |  |   |         |   |  |       |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ------ | - | ------ | ------- |  | - | ------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                                                                                        |  | Years to Maturity |       
|                                                                                                        |  | 1 or less         |        |   | 1 to 5 |   |        | 5 to 10 |  |   | Over 10 |   |  | Total |       
|Trading securities, at fair value                                                                       |  |                   |        |   |        |   |        |         |  |   |         |   |  |       |        |   |  |   |        |  
|Municipal obligations                                                                                   |  | $                 | 246    |   |        | $ | 4,281  |         |  | $ | 5,480   |   |  | $     | 25,927 |   |  | $ | 35,934 |  
|U.S. Government and Government agency obligations                                                       |  |                   | 6,460  |   |        |   | 700    |         |  |   | (6,225  | ) |  |       | (3,388 | ) |  |   | (2,453 | )
|Corporate obligations                                                                                   |  |                   | 5,920  |   |        |   | (9,510 | )       |  |   | (4,640  | ) |  |       | 32,386 |   |  |   | 24,156 |  
|                                                                                                        |  |                   |        |   |        |   |        |         |  |   |         |   |  |       |        |   |  |   |        |  
|Total debt securities                                                                                   |  |                   | 12,626 |   |        |   | (4,529 | )       |  |   | (5,385  | ) |  |       | 54,925 |   |  |   | 57,637 |  
|Corporate equity                                                                                        |  |                   |       |   |        |   |       |         |  |   |        |   |  |       | 13,659 |   |  |   | 13,659 |  
|Securities purchased under agreements to resell and securities sold under agreements to repurchase, net |  |                   | (9,205 | ) |        |   | 4,478  |         |  |   | 11,046  |   |  |       | 323    |   |  |   | 6,642  |  
|Other                                                                                                   |  |                   | 9,931  |   |        |   |       |         |  |   |        |   |  |       |       |   |  |   | 9,931  |  
|                                                                                                        |  |                   |        |   |        |   |        |         |  |   |         |   |  |       |        |   |  |   |        |  
|                                                                                                        |  | $                 | 13,352 |   |        | $ | (51    | )       |  | $ | 5,661   |   |  | $     | 68,907 |   |  | $ | 87,869 |  
|                                                                                                        |  |                   |        |   |        |   |        |         |  |   |         |   |  |       |        |   |  |   |        |  



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|                                                                                                        |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------- |  | ----------------- | --- | - | ------ | - | --- | ------- |  | - | ------- | - |  | ----- | ----- | - |  | - | ----- | -
|                                                                                                        |  | Years to Maturity |    
|                                                                                                        |  | 1 or less         |     |   | 1 to 5 |   |     | 5 to 10 |  |   | Over 10 |   |  | Total |      
|Weighted average yield                                                                                  |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |       |   |  |   |       |  
|Municipal obligations                                                                                   |  |                   | 4.1 | % |        |   | 3.9 | %       |  |   | 3.9     | % |  |       | 3.6   | % |  |   | 3.7   | %
|U.S. Government and Government agency obligations                                                       |  |                   | 4.3 | % |        |   | 4.8 | %       |  |   | 4.3     | % |  |       | 5.5   | % |  |   | 4.6   | %
|Corporate obligations                                                                                   |  |                   | 4.4 | % |        |   | 5.4 | %       |  |   | 5.6     | % |  |       | 5.9   | % |  |   | 5.5   | %
|Securities purchased under agreements to resell and securities sold under agreements to repurchase, net |  |                   | 2.5 | % |        |   | 4.6 | %       |  |   | 3.9     | % |  |       | 4.9   | % |  |   | 4.0   | %
|                                                                                                        |  |                   |     |   |       
|Available-for-sale securities, at fair value                                                            |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |       |   |  |   |       |  
|Marketable equity securities                                                                            |  | $                 |    |   |        | $ |    |         |  | $ |        |   |  | $     | 4,110 |   |  | $ | 4,110 |  
|                                                                                                        |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |       |   |  |   |       |  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and
disclosures. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies and methodology used in establishing estimates (primarily related to loan loss reserves and other contingency estimates)
have not changed materially since June 24, 2005. (See our Annual Report on Form 10-K for the fiscal year then ended.)

FORWARD-LOOKING STATEMENTS

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

We caution readers that any forward-looking information we provide is not a guarantee of future
performance. Actual results may differ materially as a result of various factors, some of which are outside of our control.

Our business and future
prospects may fluctuate due to numerous factors, such as:



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



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



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



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



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



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



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



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



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



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



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



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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

The management of SWS, including the principal executive officer and principal
financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of March 31, 2006. Based on such evaluation, the principal executive officer
and principal financial officer have concluded that, as of March 31, 2006, such disclosure controls and procedures were effective for the purpose of ensuring that material information required to be in the reports SWS submits, files, furnishes
or otherwise provides to the SEC is made known to them by others on a timely basis and is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There have not been any changes in our
internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three and nine-month periods ended March 31, 2006 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, SWS Group and/or our subsidiaries have been named as defendants in various pending lawsuits and arbitration proceedings. These claims allege violation of 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.



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

The following table provides information about
purchases by SWS during the quarter ended March 31, 2006 of equity securities that are registered by SWS pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES



|                    |  |                                  |  |                           |       |                                                               |   |                                                                 |        
|------------------- |  | -------------------------------- |  | ------------------------- | ----- | ------------------------------------------------------------- | - | --------------------------------------------------------------- | -------
|                    |  | TotalNumber ofSharesPurchased(1) |  | AveragePricePaid perShare |       | Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlan |   | MaximumNumber ofShares thatMay Yet bePurchasedUnder
thePlans(2)
|12/31/05 to 1/27/06 |  | 1,318                            |  | $                         | 21.65 |                                                               |  |                                                                 | 468,910
|1/28/06 to 2/24/06  |  |                                 |  |                           |      |                                                               |  |                                                                 | 468,910
|2/25/06 to 3/31/06  |  |                                 |  |                           |      |                                                               |  |                                                                 | 468,910
|                    |  |                                  |  |                           |       |                                                               |   |                                                                 |        
|                    |  | 1,318                            |  | $                         | 21.65 |                                                               |  |                                                                 |        
|                    |  |                                  |  |                           |       |                                                               |   |                                                                 |        

---

|(1) | Upon vesting of restricted stock in accordance with the restricted stock plan, a grantee may choose to sell a portion of their vested shares to cover the tax
liabilities arising from the vesting. This amount represents the number repurchased as a result of vesting in January 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | There are 468,910 shares available for purchase under a stock repurchase program approved by our Board of Directors pursuant to which SWS has authorization, which
will expire on December 31, 2006, to repurchase a total of 500,000 shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 3. Defaults upon Senior Securities

None Reportable.

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

None Reportable.

Item 5. Other Information

None Reportable.

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)                                       
|             | 
|May 10, 2006 |  | /S/ Donald W. Hultgren                             
|Date         |  | (Signature)                                        
|             |  | Donald W. Hultgren                                 
|             |  | Chief Executive Officer and Duly Authorized Officer
|             |  | (Principal Executive Officer)                      
|             | 
|May 10, 2006 |  | /S/ Kenneth R. Hanks                               
|Date         |  | (Signature)                                        
|             |  | Kenneth R. Hanks                                   
|             |  | Treasurer and Chief Financial Officer              
|             |  | (Principal Financial Officer)                      
|             | 
|May 10, 2006 |  | /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 November 12, 2004                        
|              | 
|10.19*        |  | Asset Purchase Agreement dated February 16, 2006 by and among Regional Acceptance Corporation, FSB Financial, LTD., Southwest Securities, FSB, FSBF, LLC, and Steven Burke
|              | 
|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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