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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF
1934



For the quarterly period ended March
28, 2003



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)



|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)



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   ü    No

Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).



Yes   ü    No



As of May 7, 2003, there were 16,958,987 shares of the registrants common stock, $.10 par value, outstanding.

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SWS GROUP, INC. AND SUBSIDIARIES



INDEX



|                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------
|FORWARD-LOOKING STATEMENTS                                                                                                                       
|                                                                                                                                                 
|PART I. FINANCIAL INFORMATION                                                                                                                    
|                                                                                                                                                 
|Item 1. Financial Statements                                                                                                                     
|                                                                                                                                                 
|Consolidated Statements of Financial Condition March 28,
2003 (unaudited) and June 28, 2002                                                      
|                                                                                                                                                 
|Consolidated Statements of Income (Loss) and Comprehensive Loss For the three and nine months ended March 28, 2003 and March 28, 2002 (unaudited)
|                                                                                                                                                 
|Consolidated Statements of Cash Flows For the nine months
ended March 28, 2003 and March 28, 2002(unaudited)                                     
|                                                                                                                                                 
|Notes to Consolidated Financial Statements (unaudited)                                                                                           
|                                                                                                                                                 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                    
|                                                                                                                                                 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                               
|                                                                                                                                                 
|Item 4. Controls and Procedures                                                                                                                  
|                                                                                                                                                 
|PART II. OTHER INFORMATION                                                                                                                       
|                                                                                                                                                 
|Item 1. Legal Proceedings                                                                                                                        
|                                                                                                                                                 
|Item 2. Changes in Securities and Use of Proceeds                                                                                                
|                                                                                                                                                 
|Item 3. Defaults Upon Senior Securities                                                                                                          
|                                                                                                                                                 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                      
|                                                                                                                                                 
|Item 5. Other Information                                                                                                                        
|                                                                                                                                                 
|Item 6. Exhibits and Reports on Form 8-K                                                                                                         
|                                                                                                                                                 
|SIGNATURES                                                                                                                                       
|                                                                                                                                                 
|CERTIFICATION BY CHIEF EXECUTIVE OFFICER                                                                                                         
|                                                                                                                                                 
|CERTIFICATION BY CHIEF FINANCIAL OFFICER                                                                                                         
|                                                                                                                                                 
|EXHIBIT INDEX                                                                                                                                    



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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, embody projections or assumptions or that 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 the amount of client assets under management, anticipated expense levels or expectations regarding
financial market conditions.



We caution readers that any
forward-looking information provided by us 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. Included among these factors are those discussed in
Management Discussion and Analysis of Financial Condition and Results of Operation Overview, -Critical Accounting Policies and Estimates and - Market Risk and those discussed in our periodic reports filed
with and available from the Securities and Exchange Commission. All forward-looking statements made by us speak only as of the date on which they are made, and we undertake no obligations 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.





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SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 28, 2003 and June 28, 2002

(In thousands, except par values and share amounts)



|                                                                                                                                                                                                         |  | March (unaudited) |           |   | June |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---- | -
|Assets                                                                                                                                                                                                   |  |                   |           |   |      |  
|Cash and cash equivalents                                                                                                                                                                                |  | $                 | 136,530   |   |      | $
|Assets segregated for regulatory purposes                                                                                                                                                                |  |                   | 487,732   |   |      |  
|Marketable equity securities available for sale                                                                                                                                                          |  |                   | 3,736     |   |      |  
|Receivable from brokers, dealers and clearing organizations                                                                                                                                              |  |                   | 2,484,235 |   |      |  
|Receivable from clients, net                                                                                                                                                                             |  |                   | 309,281   |   |      |  
|Loans held for sale, net                                                                                                                                                                                 |  |                   | 154,527   |   |      |  
|Loans, net                                                                                                                                                                                               |  |                   | 355,561   |   |      |  
|Securities owned, at market value                                                                                                                                                                        |  |                   | 110,765   |   |      |  
|Other assets                                                                                                                                                                                             |  |                   | 96,719    |   |      |  
|                                                                                                                                                                                                         |  |                   |           |   |      |  
|                                                                                                                                                                                                         |  | $                 | 4,139,086 |   |      | $
|                                                                                                                                                                                                         |  |                   |           |   |      |  
|Liabilities and Stockholders Equity                                                                                                                                                                     |  |                   |           |   |      |  
|Short-term borrowings                                                                                                                                                                                    |  | $                 | 45,550    |   |      | $
|Payable to brokers, dealers and clearing organizations                                                                                                                                                   |  |                   | 2,405,110 |   |      |  
|Payable to clients                                                                                                                                                                                       |  |                   | 672,802   |   |      |  
|Deposits                                                                                                                                                                                                 |  |                   | 591,583   |   |      |  
|Securities sold, not yet purchased, at market value                                                                                                                                                      |  |                   | 57,761    |   |      |  
|Drafts payable                                                                                                                                                                                           |  |                   | 29,221    |   |      |  
|Advances from Federal Home Loan Bank                                                                                                                                                                     |  |                   | 15,446    |   |      |  
|Other liabilities                                                                                                                                                                                        |  |                   | 67,596    |   |      |  
|Exchangeable subordinated notes                                                                                                                                                                          |  |                   | 6,340     |   |      |  
|                                                                                                                                                                                                         |  |                   |           |   |      |  
|                                                                                                                                                                                                         |  |                   | 3,891,409 |   |      |  
|                                                                                                                                                                                                        
|Minority interest in consolidated subsidiaries                                                                                                                                                           |  |                   | 1,934     |   |      |  
|                                                                                                                                                                                                        
|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 17,612,940 and
outstanding 16,865,126 shares at March 31,2003; issued 17,601,705 and outstanding 17,240,570 shares at June 28, 2002 |  |                   | 1,761     |   |      |  
|Additional paid-in capital                                                                                                                                                                               |  |                   | 243,340   |   |      |  
|Accumulated deficit                                                                                                                                                                                      |  |                   | (1,245    | ) |      |  
|Accumulated other comprehensive income  unrealized holding gain (loss), net of tax
of $6,169 at March 28, 2003 and $6,177 at June 28, 2002                                                              |  |                   | 11,457    |   |      |  
|Deferred compensation, net                                                                                                                                                                               |  |                   | 1,500     |   |      |  
|Treasury stock (747,814 shares at March 28,2003 and 361,135 shares at June 28, 2002, at
cost)                                                                                                            |  |                   | (11,070   | ) |      |  
|                                                                                                                                                                                                         |  |                   |           |   |      |  
|Total stockholders equity                                                                                                                                                                               |  |                   | 245,743   |   |      |  
|                                                                                                                                                                                                        
|Commitments and contingencies                                                                                                                                                                            |  |                   |           |   |      |  
|                                                                                                                                                                                                         |  |                   |           |   |      |  
|                                                                                                                                                                                                         |  | $                 | 4,139,086 |   |      | $
|                                                                                                                                                                                                         |  |                   |           |   |      |  



See accompanying
Notes to Consolidated Financial Statements.



1



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SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss) and Comprehensive Loss

For the three and nine months ended March 28,2003 and March 28, 2002

(In thousands, except per share and share amounts)

(Unaudited)



|                                                                                                                                                                                                      |  | For the Three Months Ended |            |   | For the Nine Months Ended |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | -
|                                                                                                                                                                                                      |  | Fiscal 2003                |            |   | Fiscal 2002 Restated      |  
|Net revenues from clearing operations                                                                                                                                                                 |  | $                          | 4,034      |   |                           | $
|Commissions                                                                                                                                                                                           |  |                            | 19,701     |   |                           |  
|Interest                                                                                                                                                                                              |  |                            | 22,352     |   |                           |  
|Investment banking, advisory and administrative fees                                                                                                                                                  |  |                            | 5,579      |   |                           |  
|Net gains on principal transactions (including net gains on the sale of Knight Trading
Group, Inc. (Knight) common stock of $4,312 and $19,788 for the three and nine months ended March 28, 2002.) |  |                            | 4,578      |   |                           |  
|Other                                                                                                                                                                                                 |  |                            | 3,017      |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|                                                                                                                                                                                                      |  |                            | 59,261     |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Commissions and other employee compensation                                                                                                                                                           |  |                            | 30,365     |   |                           |  
|Interest                                                                                                                                                                                              |  |                            | 8,667      |   |                           |  
|Occupancy, equipment and computer service costs                                                                                                                                                       |  |                            | 7,853      |   |                           |  
|Communications                                                                                                                                                                                        |  |                            | 3,590      |   |                           |  
|Floor brokerage and clearing organization charges                                                                                                                                                     |  |                            | 1,325      |   |                           |  
|Advertising and promotional                                                                                                                                                                           |  |                            | 763        |   |                           |  
|Other                                                                                                                                                                                                 |  |                            | 7,413      |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|                                                                                                                                                                                                      |  |                            | 59,976     |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Income (loss) before income taxes and minority interest in consolidated
subsidiaries                                                                                                                  |  |                            | (715       | ) |                           |  
|Income tax expense (benefit)                                                                                                                                                                          |  |                            | (477       | ) |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Income (loss) before minority interest in consolidated subsidiaries                                                                                                                                   |  |                            | (238       | ) |                           |  
|Minority interest in consolidated subsidiaries                                                                                                                                                        |  |                            | (472       | ) |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Net income (loss)                                                                                                                                                                                     |  |                            | (710       | ) |                           |  
|Other comprehensive loss:                                                                                                                                                                             |  |                            |            |   |                           |  
|Holding loss arising during the three and nine months ended March 28, 2003 and March 28,
2002, net of tax of $ 3, $69, $770, and $336, respectively,                                                  |  |                            | (130       | ) |                           |  
|Reclassification for hedging activities, net of tax of $99 and $158 for the three and
nine months ended March 28, 2003 and $507 and $464 for the three and nine months ended March 28, 2002           |  |                            | 185        |   |                           |  
|Reclassification adjustment for gains realized in net income on the sale of Knight
common stock, net of tax of $(1,509) and $(6,926) for the three and nine months ended March 28, 2002               |  |                            |           |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Net income (loss ) recognized in other comprehensive income (loss)                                                                                                                                    |  |                            | 55         |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Comprehensive loss                                                                                                                                                                                    |  | $                          | (655       | ) |                           | $
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Earnings per share  basic                                                                                                                                                                            |  |                            |            |   |                           |  
|Net income (loss)                                                                                                                                                                                     |  | $                          | (0.04      | ) |                           | $
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Weighted average shares outstanding  basic                                                                                                                                                           |  |                            | 16,866,511 |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Earnings per share  diluted                                                                                                                                                                          |  |                            |            |   |                           |  
|Net income (loss)                                                                                                                                                                                     |  | $                          | (0.04      | ) |                           | $
|                                                                                                                                                                                                      |  |                            |            |   |                           |  
|Weighted average shares outstanding  diluted                                                                                                                                                         |  |                            | 16,866,511 |   |                           |  
|                                                                                                                                                                                                      |  |                            |            |   |                           |  



See accompanying
Notes to Consolidated Financial Statements.



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SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the nine months ended March 28, 2003 and March 28, 2002

(In thousands)

(Unaudited)



|                                                                                     |  | Fiscal 2003 |          |   | Fiscal 2002 Restated |  
|------------------------------------------------------------------------------------ |  | ----------- | -------- | - | -------------------- | -
|Cash flows from operating activities:                                                |  |             |          |   |                      |  
|Net income (loss)                                                                    |  | $           | (171     | ) |                      | $
|Adjustments to reconcile net income (loss) to net cash used in operating
activities: |  |             |          |   |                      |  
|Depreciation and amortization                                                        |  |             | 3,754    |   |                      |  
|Provision for doubtful accounts                                                      |  |             | 753      |   |                      |  
|Provision for loss on mortgage loans                                                 |  |             | 3,423    |   |                      |  
|Write-off of correspondent margin loan                                               |  |             | (5,964   | ) |                      |  
|Deferred income tax expense                                                          |  |             | 3,967    |   |                      |  
|Deferred compensation                                                                |  |             | (403     | ) |                      |  
|Gain on sale of marketable equity securities                                         |  |             |         |   |                      |  
|Gain on sale of First Consumer Credit LLC                                            |  |             |         |   |                      |  
|Gain on sale of fixed assets                                                         |  |             | (104     | ) |                      |  
|Compensation expense on spin-off of the Westwood Group                               |  |             |         |   |                      |  
|Compensation expense on stock options                                                |  |             |         |   |                      |  
|Reclassification from other comprehensive income for SFAS No. 133                    |  |             | 5        |   |                      |  
|Equity in undistributed loss of Comprehensive Software Systems
(CSS)               |  |             | 813      |   |                      |  
|Net change in minority interest in consolidated subsidiaries                         |  |             | 172      |   |                      |  
|Change in operating assets and liabilities:                                          |  |             |          |   |                      |  
|Increase in assets segregated for regulatory purposes                                |  |             | (45,025  | ) |                      |  
|Net change in broker, dealer and clearing organization accounts                      |  |             | (73,811  | ) |                      |  
|Net change in client accounts                                                        |  |             | 86,829   |   |                      |  
|Net change in loans held for sale                                                    |  |             | (51,403  | ) |                      |  
|(Increase) decrease in securities owned                                              |  |             | (6,802   | ) |                      |  
|(Increase) decrease in other assets                                                  |  |             | 980      |   |                      |  
|Increase (decrease) in drafts payable                                                |  |             | (5,310   | ) |                      |  
|Increase (decrease) in securities sold, not yet purchased                            |  |             | 38,104   |   |                      |  
|Increase (decrease) in other liabilities                                             |  |             | 4,975    |   |                      |  
|                                                                                     |  |             |          |   |                      |  
|Net cash used in operating activities                                                |  |             | (45,218  | ) |                      |  
|                                                                                     |  |             |          |   |                      |  
|                                                                                    
|Cash flows from investing activities:                                                |  |             |          |   |                      |  
|Purchase of fixed assets                                                             |  |             | (5,059   | ) |                      |  
|Proceeds from the sale of fixed assets                                               |  |             | 111      |   |                      |  
|Net change in loans                                                                  |  |             | (15,986  | ) |                      |  
|Cash received from sale of First Consumer Credit LLC                                 |  |             |         |   |                      |  
|Cash paid for purchase of OConnor, net of cash acquired                             |  |             | (1,065   | ) |                      |  
|Cash paid to CSS to finance operations                                               |  |             | (813     | ) |                      |  
|Cash received for sale of minority interest of Westwood Holdings Group,
Inc.         |  |             |         |   |                      |  
|Proceeds from sale of marketable equity securities                                   |  |             |         |   |                      |  
|                                                                                     |  |             |          |   |                      |  
|Net cash used in investing activities                                                |  |             | (22,812  | ) |                      |  
|                                                                                     |  |             |          |   |                      |  
|                                                                                    
|Cash flows from financing activities:                                                |  |             |          |   |                      |  
|Increase in short-term borrowings                                                    |  |             | 7,950    |   |                      |  
|Increase (decrease) in deposits                                                      |  |             | 326,213  |   |                      |  
|Increase (decrease) in advances from Federal Home Loan Bank                          |  |             | (145,022 | ) |                      |  
|Payment of cash dividends on common stock                                            |  |             | (5,075   | ) |                      |  
|Net proceeds from exercise of stock options                                          |  |             | 141      |   |                      |  
|Proceeds related to Deferred Compensation Plan                                       |  |             | 255      |   |                      |  
|Purchase of treasury stock                                                           |  |             | (4,679   | ) |                      |  
|                                                                                     |  |             |          |   |                      |  
|Net cash provided by financing activities                                            |  |             | 179,783  |   |                      |  
|                                                                                     |  |             |          |   |                      |  
|Net increase (decrease) in cash                                                      |  |             | 111,753  |   |                      |  
|Cash at beginning of period                                                          |  |             | 24,777   |   |                      |  
|                                                                                     |  |             |          |   |                      |  
|Cash at end of period                                                                |  | $           | 136,530  |   |                      | $
|                                                                                     |  |             |          |   |                      |  
|                                                                                    
|Supplemental disclosure of cashflow information:                                     |  |             |          |   |                      |  
|Cash paid during the period for:                                                     |  |             |          |   |                      |  
|Interest                                                                             |  | $           | 30,788   |   |                      | $
|                                                                                     |  |             |          |   |                      |  
|Taxes                                                                                |  |             |         |   |                      |  
|                                                                                     |  |             |          |   |                      |  



See accompanying
Notes to Consolidated Financial Statements.



3



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SWS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Three and Nine Months Ended March 28,2003 and March 28, 2002

(Unaudited)



GENERAL AND BASIS OF PRESENTATION



The interim consolidated financial statements as of March 28, 2003, and for the three and nine-month periods ended March 28, 2003 and March 28, 2002, 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 28, 2002 filed on Form 10-K. Amounts included for June 28, 2002 are 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. (Parent) and its consolidated subsidiaries listed below (collectively, SWS):



|Brokerage Group                                                                            |  |                                 
|------------------------------------------------------------------------------------------ |  | --------------------------------
|Southwest Securities, Inc.*                                                                |  | Southwest Securities          
|SWS Financial Services, Inc.                                                               |  | SWS Financial                 
|Mydiscountbroker.com, Inc.                                                                 |  | Mydiscountbroker              
|Southwest Clearing Corp.                                                                   |  | Southwest Clearing            
|May Financial Corporation                                                                  |  | May Financial                 
|Asset Management Group                                                                     |  |                                 
|SWS Capital Corporation                                                                    |  | SWS Capital                   
|Southwest Investment Advisors, Inc.                                                        |  | Southwest Advisors            
|Banking Group                                                                              |  |                                 
|First Savings Bank, FSB                                                                    |  | FSB, First Savings or Bank
|FSBF, LLC (75%)                                                                            |  | FSBF                          
|FSB Financial, LTD (73.5%)                                                                 |  | FSB Financial                 
|FSB Development, LLC                                                                       |  | FSB Development               
|Other                                                                                      |  |                                 
|SWS Technologies Corporation                                                               |  | SWS Technologies              
|                                                                                          
|* On February 3, 2003, SWS Securities, Inc. changed its name to Southwest Securities, Inc.



Brokerage Group.Southwest Securities is a New York Stock Exchange (NYSE) registered broker/dealer and SWS Financial, Mydiscountbroker, Southwest Clearing and May Financial are National Association of Securities Dealers (NASD) registered
broker/dealers under the Securities Exchange Act of 1934 (1934 Act).



Asset Management Group.Effective June 28, 2002, SWS distributed its shares of Westwood Holdings Group, Inc. and subsidiaries (Westwood Group) to its stockholders, leaving SWS Capital as the primary subsidiary in
the asset management group. The Westwood Group, comprised of Westwood Management Corporation and Westwood Trust, was included in the financial statements in fiscal 2002, but is not included in fiscal 2003. Summarized results of operations of the
Westwood Group for the three and nine months ended March 28, 2002 are as follows (in thousands):



4



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|                   |  | Three Months Ended |       | Nine Months Ended |  
|------------------ |  | ------------------ | ----- | ----------------- | -
|                   |  | March 28, 2002     |      
|Revenues           |  | $                  | 5,327 |                   | $
|Operating expenses |  |                    | 3,391 |                   |  
|                   |  |                    |       |                   |  
|                   |  |                    | 1,936 |                   |  
|Income taxes       |  |                    | 755   |                   |  
|                   |  |                    |       |                   |  
|Net income (loss)  |  | $                  | 1,181 |                   | $
|                   |  |                    |       |                   |  



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



Banking Group.First Savings is a federally chartered savings association regulated by the Office of Thrift Supervision. FSB Financial purchases non-prime automobile loans and FSB Development
develops single- family residential lots.



Other Consolidated
Entities.In the first quarter of fiscal 2003, SWS sold SWS Technologies internet service provider (ISP) customer list and accounts receivable to a third party for $75,000. Later in fiscal 2003, SWS may receive additional
compensation from the purchaser based upon the successful transition and retention of the ISP customers. SWS will be reimbursed by the purchaser for operating costs incurred during the transition. SWS will be responsible for contract
termination costs incurred during the transition to the purchaser and expects these costs to partially offset the additional compensation that will ultimately be received from the purchaser.



Variable Interest Entities.Financial Interpretation No. 46 
Consolidation of Variable Interest Entities, was issued by the Financial Accounting Standards Board on January 17, 2003. In accordance with FIN No. 46, SWS has determined that it has two potential variable interest entities, Southwest
Insurance Agency, Inc. and Southwest Financial Insurance Agency, Inc. Southwest Insurance Agency, Inc. has one subsidiary, Southwest Insurance Agency of Alabama. Southwest Insurance Agency, Inc. and Southwest Financial Insurance Agency, Inc. and its
subsidiary hold insurance agency licenses in forty-two states for the purpose of facilitating the sale of insurance and annuities for Southwest Securities, Inc. and SWS Financial Services. For the three months ended March 28, 2003, Southwest
Insurance Agency, Inc. and Southwest Financial Insurance Agency, Inc. would have contributed a net loss of $18,000 to SWS net loss if consolidated. For the nine months ended March 28, 2003, Southwest Insurance Agency, Inc. and Southwest
Financial Insurance Agency, Inc. would have contributed net income of $91,000 to SWS net loss if consolidated. Effective April 28, 2003, Southwest Insurance Agency, Inc. and Southwest Financial Insurance Agency, Inc., together with its
subsidiary, became consolidated subsidiaries of SWS due to the purchase by SWS of their outstanding stock.



STOCK OPTION PLANS



At March 28, 2003, 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s common stock for issuance to eligible employees of SWS or its subsidiaries, as well as to non-employee members of the Board of Directors. The 1997 Plan reserves shares of SWSs common stock for eligible employees or potential
employees of SWS 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. Options granted to non-employee directors under the 1996 Plan are fully vested six months after grant and have a five-year term.



At the discretion of the Compensation Committee, the stock options outstanding
and shares reserved for issuance, as well as the options exercise prices, were adjusted for various stock dividends declared by the



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Board of Directors from 1997 through 2001. In fiscal 2002, all stock options and exercise prices were
adjusted to reflect the spin-off of the Westwood Group. Shares issued and remaining for future issuance under these option plans reflect stock dividends issued by the Company, as well as the adjustment for the Westwood Group spin-off.



The Company applies APB 25, Accounting for Stock Issued to
Employees and related interpretations in accounting for its option plans. Accordingly, no compensation cost has been recognized for its stock options. Had compensation cost been determined consistent with SFAS 123, Accounting for
Stock-Based Compensation, for the options granted, the Companys net income (loss) and earnings per share would have been the pro forma amounts indicated below for the three and nine months ended March 28, 2003 and March 28, 2002 (in
thousands, except share and per share amounts):



|                            |  | Three Months Ended |       | Nine Months Ended
|--------------------------- |  | ------------------ | ----- | -----------------
|                            |  | March 28, 2003     |       |                  
|Net income (loss):          |  |                    |       |                  
|As Reported                 |  | $                  | (710  | )                
|Pro forma                   |  |                    | (801  | )                
|                           
|Earnings per sharebasic:   |  |                    |       |                  
|As Reported                 |  | $                  | (0.04 | )                
|Pro forma                   |  |                    | (0.05 | )                
|                           
|Earnings per sharediluted: |  |                    |       |                  
|As Reported                 |  | $                  | (0.04 | )                
|Pro forma                   |  |                    | (0.05 | )                



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 28, 2003 and March 28, 2002:



|                        |  | Three Months Ended |   |  | Nine Months Ended |  
|----------------------- |  | ------------------ | - |  | ----------------- | -
|                        |  | March 28, 2003     |   |  | March 28, 2002    |  
|Expected volatility     |  | 51.9               | % |  | 50.5              | %
|Risk-free interest rate |  | 3.16               | % |  | 4.16              | %
|Expected dividend yield |  | 2.57               | % |  | 2.57              | %
|Expected life           |  | 5 years            |   |  | 5 years           |  



CASH & CASH
EQUIVALENTS



The Company includes as cash and cash
equivalents cash on hand, cash in banks and highly liquid investments with original maturities of three months or less.



EQUITY METHOD INVESTMENT



SWS is a part owner of Comprehensive Software Systems, Ltd. (CSS), a software development company formed in 1993 to develop a new brokerage
front- and back-office system. SWS initially acquired a 7.96% interest in CSS and accounted for the investment on the cost basis. Through subsequent investments by SWS, SWS ownership in CSS increased in fiscal 2002 to 25.08%. Consequently, SWS
implemented the equity method of accounting, prescribed by Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, with respect to its investment in CSS. Summarized
financial information of CSS is as follows (in thousands):



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|                     |  | March 28, 2003     |         |   | June 28, 2002  |  
|-------------------- |  | ------------------ | ------- | - | -------------- | -
|Total assets         |  | $                  | 7,250   |   |                | $
|Total liabilities    |  |                    | 5,866   |   |                |  
|Shareholders equity |  |                    | 1,384   |   |                |  
|                    
|                     |  | Three Months Ended |        
|                     |  | March 28, 2003     |         |   | March 28, 2002 |  
|Total revenues       |  | $                  | 1,041   |   |                | $
|Net loss             |  |                    | (4,350  | ) |                |  
|                    
|                     |  | Nine Months Ended  |        
|                     |  | March 28, 2003     |         |   | March 28, 2002 |  
|Total revenues       |  | $                  | 3,153   |   |                | $
|Net loss             |  |                    | (12,599 | ) |                |  



As required by APB
Opinion No. 18, SWS restated its fiscal 2002 unaudited quarterly financial statements to record its share of undistributed loss from CSS operations, as well as amortization expense on the portion of the investment designated as goodwill. For
the three and nine months ended March 28, 2002, SWS proportionate share of the undistributed net loss was $773,000 and $2,057,000, respectively, and amortization expense on the designated goodwill was $93,000 and $278,000, respectively.



The following table summarizes the impact on our financial
results from applying the equity method of accounting in the three and nine months ended March 28, 2002 (in thousands, except per share amounts):



|                                                 |  | Three Months Ended March 28, 2002 |       
|------------------------------------------------ |  | --------------------------------- | ------
|                                                 |  | Previously Reported               |       
|Total revenues                                   |  | $                                 | 77,519
|Total expenses                                   |  |                                   | 75,124
|                                                 |  |                                   |       
|Income before income taxes and minority interest |  |                                   | 2,395 
|Income taxes                                     |  |                                   | 920   
|                                                 |  |                                   |       
|Income before minority interest                  |  |                                   | 1,475 
|Minority interest                                |  |                                   | (428  
|                                                 |  |                                   |       
|Net income                                       |  | $                                 | 1,047 
|                                                 |  |                                   |       
|Earnings per sharebasic                         |  | $                                 | 0.06  
|                                                 |  |                                   |       
|Earnings per sharediluted                       |  | $                                 | 0.06  
|                                                 |  |                                   |       



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|                                                 |  | Nine Months Ended March 28, 2002 |        
|------------------------------------------------ |  | -------------------------------- | -------
|                                                 |  | Previously Reported              |        
|Total revenues                                   |  | $                                | 255,874
|Total expenses                                   |  |                                  | 245,986
|                                                 |  |                                  |        
|Income before income taxes and minority interest |  |                                  | 9,888  
|Income taxes                                     |  |                                  | 4,782  
|                                                 |  |                                  |        
|Income before minority interest                  |  |                                  | 5,106  
|Minority interest                                |  |                                  | (352   
|                                                 |  |                                  |        
|Net income                                       |  | $                                | 4,754  
|                                                 |  |                                  |        
|Earnings per sharebasic                         |  | $                                | 0.28   
|                                                 |  |                                  |        
|Earnings per sharediluted                       |  | $                                | 0.28   
|                                                 |  |                                  |        



In the fourth quarter of
fiscal 2002, SWS determined that the investment in CSS and its related goodwill was fully impaired based on an analysis of the projected cash flow from the investment. Therefore, SWS wrote-off the investment in CSS. SWS made no additional equity
investments in CSS in the first three quarters of fiscal 2003. However, on December 6, 2002, SWS entered into a loan agreement with CSS under which SWS agreed to advance to CSS the principal sum of $3,250,000 in quarterly installments of $812,500
beginning January 6, 2003. The unpaid principal balance of the note bears interest at 6% per annum. The note is payable in equal monthly installments beginning January 1, 2008 with the final payment due January 1, 2013.



SWS has resumed recording its share of the undistributed losses of CSS due to
this loan agreement. SWS share of the undistributed losses of CSS for the quarter ended March 28, 2003 was $1,091,000. SWSs percentage of losses was greater than the $812,500 loaned during the quarter by $279,000. As a result, there is
no recorded equity investment or loan receivable from CSS at March 28, 2003.



ASSETS SEGREGATED FOR REGULATORY PURPOSES



At March 28, 2003, SWS had U.S. Treasury securities with a market value of approximately $247,439,000, reverse repurchase agreements of approximately $239,212,000 and related cash and accrued interest of approximately $57,000
segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the 1934 Act. These reverse repurchase agreements were collateralized by U.S. Government securities with a market value of approximately
$241,188,000. SWS also had approximately $1,023,000 in reverse repurchase agreements and related cash and accrued interest of approximately $1,000 in special reserve bank accounts for the Proprietary Accounts of Introducing Brokers
(PAIB) at March 28, 2003. The reverse repurchase agreements in the PAIB accounts were collateralized by U.S. Government securities with a market value of approximately $1,058,000.



At June 28, 2002, SWS had U.S. Treasury securities with a market value of
approximately $226,273,000, reverse repurchase agreements of approximately $207,582,000, cash of $51,000 and related accrued interest of approximately $51,000 segregated in the special reserve bank accounts for the exclusive benefit of customers.
These reverse repurchase agreements were collateralized by U.S. Government securities with a market value of approximately $210,592,000. SWS also had approximately $8,748,000 in reverse repurchase agreements, cash of $1,000 and related accrued
interest of approximately $1,000 in special reserve bank accounts for the PAIB at June 28, 2002. The reverse repurchase agreements in the PAIB accounts were collateralized by U.S. Government securities with a market value of approximately
$8,924,000.



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MARKETABLE EQUITY SECURITIES



SWSs shares of Knight Trading Group, Inc. (Knight) and U.S. Home Systems, Inc. (USHS) common
stock 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 28, 2003 and June 28, 2002, SWS held 373,550 shares of Knight common stock with a cost basis of $48,000 and 365,723 shares of USHS with a cost basis of $936,000. The market value of the Knight shares was $1,505,000 at March 28,
2003 and $1,957,000 at June 28, 2002. The market value of the USHS shares was $2,231,000 at March 31, 2003 and $1,975,000 at June 28, 2002.



The specific identification method is used to determine the cost of marketable securities sold. At March 28, 2003 and June 28, 2002, all of
the Knight shares held were hedged by the 5% Exchangeable Subordinated Notes (Notes) issued in the form of DARTSSM(orDerivative Adjustable Ratio SecuritiesSM) and subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended.



In December 2000, SWS
repurchased and retired 640,782 DARTS and a like number of Knight shares were released from the hedge. Upon sale of previously hedged shares of Knight stock, SWS recognized non-cash gains of approximately $23.50 per share, net of tax, equal to the
decrease in the value of Knight stock from the hedging date (June 16, 1999), to the termination date of hedge accounting (December 20, 2000).



There were no sales of Knight stock in the three and nine-month periods ending March 28, 2003. SWS disposed of 100,000 shares and 426,000 shares of Knight
stock with proceeds from the sales totaling $710,000 and $4,442,000 in the three and nine-month periods ended March 28, 2002, respectively, and realized cash gains on these sales totaling $697,000 and $4,387,000, respectively. All of the shares sold
in the three and nine-month periods ending March 28, 2002 were previously hedged stock. Consequently, in accordance with SFAS No. 133, SWS recorded non-cash gains of $3,615,000 and $15,401,000, respectively, related to the shares sold in the
accompanying consolidated statements of income (loss) and comprehensive loss. Therefore, totals gains related to the sales of Knight common stock were $4,312,000 and $19,788,000 during the three and nine-month periods ended March 28, 2002.



RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS



At March 28, 2003 and June 28, 2002, 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 |  | $     | 18,569    |     
|Securities borrowed          |  |       | 2,434,009 |     
|Correspondent broker/dealers |  |       | 20,533    |     
|Clearing organizations       |  |       | 4,463     |     
|Other                        |  |       | 6,661     |     
|                             |  |       |           |     
|                             |  | $     | 2,484,235 |     
|                             |  |       |           |     
|Payable                      |  |       |           |     
|Securities failed to receive |  | $     | 38,789    |     
|Securities loaned            |  |       | 2,347,683 |     
|Correspondent broker/dealers |  |       | 15,747    |     
|Other                        |  |       | 2,891     |     
|                             |  |       |           |     
|                             |  | $     | 2,405,110 |     
|                             |  |       |           |     



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SWS participates in the
securities borrowing and lending business by borrowing and lending securities other than those of its clients. SWS adjusts open positions to market value according to standard industry practices. SWS has received collateral of $2,434,009,000 under
securities lending agreements, of which the Company has repledged $2,330,263,000 at March 28, 2003. At June 28, 2002, the Company had collateral of $1,693,083,000 under securities lending agreements, of which the Company had repledged
$1,675,205,000.



LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES



Loans receivable, excluding loans held for sale, at March
28, 2003 and June 28, 2002 are summarized as follows (in thousands):



|                                                 |  | March |         |   | June |  
|------------------------------------------------ |  | ----- | ------- | - | ---- | -
|First mortgage loans (principally conventional): |  |       |         |   |      |  
|Real estate                                      |  | $     | 196,192 |   |      | $
|Construction                                     |  |       | 101,932 |   |      |  
|                                                 |  |       |         |   |      |  
|                                                 |  |       | 298,124 |   |      |  
|                                                 |  |       |         |   |      |  
|Consumer and other loans:                        |  |       |         |   |      |  
|Commercial                                       |  |       | 22,150  |   |      |  
|Other                                            |  |       | 54,270  |   |      |  
|                                                 |  |       |         |   |      |  
|                                                 |  |       | 76,420  |   |      |  
|                                                 |  |       |         |   |      |  
|Factored receivables                             |  |       | 6,372   |   |      |  
|                                                 |  |       |         |   |      |  
|                                                 |  |       | 380,916 |   |      |  
|Unearned income                                  |  |       | (20,614 | ) |      |  
|Allowance for probable loan losses               |  |       | (4,741  | ) |      |  
|                                                 |  |       |         |   |      |  
|                                                 |  | $     | 355,561 |   |      | $
|                                                 |  |       |         |   |      |  



Impairment of loans with
a recorded investment of approximately $15,111,000 and $7,423,000 at March 28, 2003 and June 28, 2002, respectively, has been recognized in conformity with SFAS No. 114, Accounting by Creditors for Impairment of a Loanan Amendment of
FASB Statements No. 5 and No. 15, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosuresan Amendment of FASB Statement No. 114.



An analysis of the allowance for probable loan losses for the three and
nine-month periods ended March 28, 2003 and March 28, 2002 is as follows (in thousands):



|                                    |  | Three Months Ended |        |   | Nine Months Ended |  
|----------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                    |  | March 28, 2003     |        |   | March 28, 2002    |  
|Balance at beginning of period      |  | $                  | 5,657  |   |                   | $
|Provision for loan losses           |  |                    | 723    |   |                   |  
|Sale of First Consumer Credit, LLC  |  |                    |       |   |                   |  
|Loans charged to the allowance, net |  |                    | (1,639 | ) |                   |  
|                                    |  |                    |        |   |                   |  
|Balance at end of period            |  | $                  | 4,741  |   |                   | $
|                                    |  |                    |        |   |                   |  



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SECURITIES OWNED AND
SECURITIES SOLD, NOT YET PURCHASED



At March 28, 2003 and
June 28, 2002, SWS held securities owned and securities sold, not yet purchased as follows (in thousands):



|                                                  |  | March |         | June
|------------------------------------------------- |  | ----- | ------- | ----
|Securities owned                                  |  |       |         |     
|Corporate equity securities                       |  | $     | 6,223   |     
|Municipal obligations                             |  |       | 24,512  |     
|U.S. Government and Government agency obligations |  |       | 26,265  |     
|Corporate obligations                             |  |       | 44,578  |     
|Other                                             |  |       | 9,187   |     
|                                                  |  |       |         |     
|                                                  |  | $     | 110,765 |     
|                                                  |  |       |         |     
|Securities sold, not yet purchased                |  |       |         |     
|Corporate equity securities                       |  | $     | 2,671   |     
|Municipal obligations                             |  |       | 48      |     
|U.S. Government and Government agency obligations |  |       | 6,925   |     
|Corporate obligations                             |  |       | 47,858  |     
|Other                                             |  |       | 259     |     
|                                                  |  |       |         |     
|                                                  |  | $     | 57,761  |     
|                                                  |  |       |         |     



Certain of the above
securities have been pledged to secure short-term borrowings and as security deposits at clearing organizations for SWS clearing business. Securities pledged as security deposits at clearing organizations were $1,828,000 and $1,987,000 at
March 28, 2003 and June 28, 2002, respectively. Additionally, at March 28, 2003 and June 28, 2002, SWS had pledged firm securities valued at $195,000 and $406,000, respectively, in conjunction with securities lending activities.



SOFTWARE DEVELOPMENT



In accordance with Statement of Position No. 98-1 Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, SWS has capitalized $469,000 and $623,000 of software development up-grade costs associated with the CSS technology platform for the three and nine months ended March 28, 2003,
respectively. These capitalized costs are primarily labor related and will be depreciated over a three-year period beginning in the fourth quarter of 2003.



GOODWILL



SWS adopted SFAS No. 142, Goodwill and Other Intangible Assets, as of the beginning of fiscal 2003. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill. This
statement also addresses how goodwill and other intangibles should be accounted for after they have been initially recognized in the financial statements. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually. The statement also provides specific guidance for impairment testing.



In accordance with the transition provisions of SFAS No. 142, SWS performed the first step of transition impairment testing, determining fair value of the
reporting units with goodwill, during the second quarter of fiscal 2003. Based on the results of the valuation, SWSs goodwill balance is not impaired. SWS has two reporting units with goodwillSouthwest Securities and the Bank.
Changes in the carrying amount of goodwill during the nine-month period ended March 28, 2003, by company and in the aggregate, are summarized in the following table (in thousands):



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|                                                                  |  | Brokerage Group |       | Banking Group |   | Consolidated SWS Group, Inc.
|----------------------------------------------------------------- |  | --------------- | ----- | ------------- | - | ----------------------------
|Balance, June 28, 2002                                            |  | $               | 5,237 |               | $ | 1,256                       
|Arising from earn-out provision of completed business combination |  |                 | 1,065 |               |   |                            
|                                                                  |  |                 |       |               |   |                             
|Balance, March 28, 2003                                           |  | $               | 6,302 |               | $ | 1,256                       
|                                                                  |  |                 |       |               |   |                             



Prior to the spin-off of
the Westwood Group and the write-off of the Parents equity method investment in CSS in the fourth quarter of fiscal 2002, both the Asset Management Group and Other Consolidated Entities reported Goodwill. Changes in the carrying amount of
goodwill, which is included in other assets in the consolidated statement of financial condition, during the nine month period ended March 28, 2002, by segment and in the aggregate, are summarized in the following table (in thousands):



|                                             |  | Brokerage Group |       |   | Asset Management Group |   |       | Banking Group |  | Other Consolidated Entities |       |  | Consolidated SWS Group, Inc. |      
|-------------------------------------------- |  | --------------- | ----- | - | ---------------------- | - | ----- | ------------- |  | --------------------------- | ----- |  | ---------------------------- | -----
|Balance, June 29, 2001                       |  | $               | 4,482 |   |                        | $ | 2,339 |               |  | $                           |      |  | $                            | 1,482
|Arising from completed business combinations |  |                 | 1,100 |   |                        |   |      |               |  |                             | 1,223 |  |                              |     
|Amortization expense                         |  |                 | (171  | ) |                        |   | (37   | )             |  |                             |      |  |                              | (278 
|Adjustment to equity method goodwill         |  |                 |      |   |                        |   |      |               |  |                             |      |  |                              | (166 
|                                             |  |                 |       |   |                        |   |       |               |  |                             |       |  |                              |      
|Balance, March 28, 2002                      |  | $               | 5,411 |   |                        | $ | 2,302 |               |  | $                           | 1,223 |  | $                            | 1,038
|                                             |  |                 |       |   |                        |   |       |               |  |                             |       |  |                              |      



In accordance with SFAS
No. 142, SWS ceased amortizing its goodwill at the date of adoption, and recorded no amortization expense in the three and nine-month periods ended March 28, 2003. SWS recorded amortization expense of $151,000 and $486,000 ($98,000 and $315,000
after tax) for the three and nine months ended March 28, 2002, including $93,000 and $278,000 related to SWS equity method investment in CSS. The following table adjusts net income and earnings per sharebasic & dilutedto
exclude the amortization of goodwill as if SFAS No. 142 had been adopted on June 30, 2001 (in thousands, except per share amounts):



|                                   |  | Three Months Ended |       | Nine Months Ended
|---------------------------------- |  | ------------------ | ----- | -----------------
|                                   |  | March 28, 2003     |       |                  
|Net income, as reported            |  | $                  | (710  | )                
|Amortization expense, net of tax   |  |                    |      |                  
|                                   |  |                    |       |                  
|Adjusted net income                |  | $                  | (710  | )                
|                                   |  |                    |       |                  
|                                  
|Earnings per sharebasic & diluted |  |                    |       |                  
|Net income, as reported            |  | $                  | (0.04 | )                
|Amortization expense, net of tax   |  |                    |      |                  
|                                   |  |                    |       |                  
|Adjusted net income                |  | $                  | (0.04 | )                
|                                   |  |                    |       |                  



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SHORT-TERM BORROWINGS



SWS has credit arrangements with commercial banks, which
include broker loan lines up to $350,000,000. 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 28, 2003, the amount outstanding under these secured arrangements was $44,250,000, which was collateralized by
securities held for firm accounts valued at $57,607,000, and $1,300,000, which was collateralized by securities held for non customer accounts valued at $24,958,000. At June 28, 2002, the amount outstanding under these secured arrangements was
$31,000,000, which was collateralized by securities held for firm accounts valued at $36,053,000, and $6,600,000, which was collateralized by securities held for non customer accounts valued at $27,703,000.



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, none of which was outstanding at either March 28, 2003 or June 28, 2002. This arrangement can be terminated at any time by the lender.



SWS has an irrevocable letter of credit agreement aggregating $38,000,000 and
$45,000,000 at March 28, 2003 and June 28, 2002, 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. This letter of credit is fully collateralized by marketable securities held in client and non-client margin accounts with a value of $48,265,000 and $75,502,000 at March 28, 2003 and June 28, 2002, respectively. SWS also has unsecured
letters of credit, aggregating $2,250,000 and $4,845,000 at March 28, 2003 and June 28, 2002, respectively, pledged to support its open positions with securities clearing organizations. The unsecured letters of credit bear interest at the prime rate
plus 3%, if drawn, and portions of each letter of credit are renewable quarterly or semi-annually.



In addition to using customer securities to finance bank loans as discussed above, SWS also pledges client securities as collateral in conjunction with SWS securities lending activities. At March
28, 2003, approximately $376,645,000 of client securities under customer margin loans is available to be repledged, of which SWS has pledged $16,552,000 under securities loan agreements. At June 28, 2002, $488,500,000 of client securities under
customer margin loans is available to be pledged, of which the Company has repledged $22,829,000 under securities loan agreements.



At March 28, 2003 and June 28, 2002, SWS had no repurchase agreements outstanding.



DEPOSITS



Deposits at March 28, 2003 and June 28, 2002 are summarized as follows (dollars in thousands):



|                                              |  | March  |         |         | June  |  
|--------------------------------------------- |  | ------ | ------- | ------- | ----- | -
|                                              |  | Amount |         | Percent |       |  
|Noninterest bearing demand accounts           |  | $      | 25,779  |         | 4.4   | %
|Interest bearing demand accounts              |  |        | 326,228 |         | 55.2  |  
|Savings accounts                              |  |        | 1,420   |         | 0.2   |  
|Limited access money market accounts          |  |        | 16,603  |         | 2.8   |  
|Certificates of deposit, less than $100,000   |  |        | 109,625 |         | 18.5  |  
|Certificates of deposit, $100,000 and greater |  |        | 111,928 |         | 18.9  |  
|                                              |  |        |         |         |       |  
|                                              |  | $      | 591,583 |         | 100.0 | %
|                                              |  |        |         |         |       |  



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The weighted average interest
rate on deposits was approximately 2.1% at March 28, 2003 and 3.3% at June 28, 2002.



At March 28, 2003, scheduled maturities of certificates of deposit were as follows (in thousands):



|                                              |  | Fiscal 2003 |         | Fiscal 2004 |   | Fiscal 2005 |  | Thereafter |        | Total
|--------------------------------------------- |  | ----------- | ------- | ----------- | - | ----------- |  | ---------- | ------ | -----
|Certificates of deposit, less than $100,000   |  | $           | 70,750  |             | $ | 17,799      |  | $          | 16,892 |      
|Certificates of deposit, $100,000 and greater |  |             | 96,393  |             |   | 7,148       |  |            | 7,396  |      
|                                              |  |             |         |             |   |             |  |            |        |      
|                                              |  | $           | 167,143 |             | $ | 24,947      |  | $          | 24,288 |      
|                                              |  |             |         |             |   |             |  |            |        |      



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



At March 28, 2003
and June 28, 2002, advances from the FHLB were due as follows (in thousands):



|                        |  | March |        | June
|----------------------- |  | ----- | ------ | ----
|Maturity:               |  |       |        |     
|Due within one year     |  | $     |       |     
|Due within five years   |  |       | 3,135  |     
|Due within seven years  |  |       | 685    |     
|Due within ten years    |  |       | 5,571  |     
|Due within twenty years |  |       | 6,055  |     
|                        |  |       |        |     
|                        |  | $     | 15,446 |     
|                        |  |       |        |     



Pursuant to collateral
agreements, the advances from the FHLB, with interest rates ranging from 4.0% to 7.7%, are collateralized by approximately $98,000,000 of collateral value (as defined) in qualifying first mortgage loans at March 28, 2003. At June 28, 2002, advances
with interest rates from 1.9% to 7.7% were collateralized by approximately $176,200,000 of collateral value in qualifying first mortgages.



EXCHANGEABLE SUBORDINATED NOTES



SWS adopted SFAS No. 133 effective July 1, 2000. SFAS No. 133 is applicable to the Notes due 2004 with a face value of $21.2 million. SWS issued the Notes
in June 1999 in the form of DARTSSM, or Derivative Adjustable Ratio SecuritiesSM. 373,550 DARTS were outstanding at both March 28, 2003 and June 28, 2002.



SFAS No. 133 requires fair value recognition of the Notes embedded derivative by adjusting the Notes liability
account in the consolidated statements of financial condition. The following table reflects the activity in the Notes liability account for the three and nine-month periods ended March 28, 2003 and March 28, 2002 (in thousands):



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|                                       |  | Fiscal 2003 |       |   | Fiscal 2002 |  
|-------------------------------------- |  | ----------- | ----- | - | ----------- | -
|Balance at beginning of period         |  | $           | 6,785 |   |             | $
|Change in value of embedded derivative |  |             | (447  | ) |             |  
|                                       |  |             |       |   |             |  
|Balance at end of first quarter        |  | $           | 6,338 |   |             | $
|Change in value of embedded derivative |  |             | 286   |   |             |  
|                                       |  |             |       |   |             |  
|Balance at end of second quarter       |  | $           | 6,624 |   |             | $
|Change in value of embedded derivative |  |             | (284  | ) |             |  
|                                       |  |             |       |   |             |  
|Balance at end of third quarter        |  | $           | 6,340 |   |             | $
|                                       |  |             |       |   |             |  



Changes in the fair
value of the embedded derivative are required to be recognized in earnings, along with the change in fair value of the hedged Knight shares. For the three and nine-month periods ended March 28, 2003, the change in the time value of the embedded
equity option in the DARTS was immaterial to the consolidated financial statements. For these same periods ended March 28, 2002, SWS recognized losses of $109,000 and $232,000, respectively. Under SFAS No. 133, such gain or loss will be calculated
on a quarterly basis until such time as the embedded derivative ceases to exist. SWS also reclassified losses of $185,000 and $294,000 from other comprehensive loss, net of tax of $99,000 and $158,000, to earnings to record the change in value of
the hedged Knight shares in earnings for the three and nine months ended March 28, 2003. For these same periods ended March 28, 2002, SWS reclassified losses of $942,000 and $862,000, respectively, from other comprehensive loss, net of tax of
$507,000 and $464,000, respectively.



NET CAPITAL REQUIREMENTS



Brokerage Group. The broker/dealer subsidiaries are
subject to the Securities and Exchange Commissions (SEC) Uniform Net Capital Rule (the Rule), which requires the maintenance of minimum net capital. Southwest Securities has elected to use the alternative method,
permitted by the Rule, which requires that it maintain minimum net capital equal to the greater of $1,500,000 or 2% of aggregate debit balances, as defined in Rule 15c3 under the 1934 Act. At March 28, 2003, Southwest
Securities had net capital of $82,343,000, or approximately 20.8% of aggregate debit balances, which is $74,442,000 in excess of its minimum net capital requirement of $7,901,000 at that date. Additionally, the net capital rule of the NYSE provides
that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debit items. At March 28, 2003, Southwest Securities had net capital of $62,590,000 in excess of 5% of aggregate debit items.



Southwest Clearing and May Financial also follow the alternative
method and are both required to maintain minimum net capital of $250,000. At March 28, 2003, the net capital and excess net capital for Southwest Clearing was $1,350,000 and $1,100,000, respectively, and May Financial had net capital and excess net
capital of $427,000 and $177,000, respectively.



SWS Financial
and Mydiscountbroker follow the primary (aggregate indebtedness) method under Rule 15c3-1, which requires the maintenance of minimum net capital of $250,000. At March 28, 2003, the net capital and excess net capital of SWS Financial was $306,000 and
$56,000, respectively, and Mydiscountbroker had net capital and excess net capital of $2,333,000 and $2,083,000, respectively.



Banking Group. First Savings is subject to various regulatory capital requirements administered by federal agencies. Quantitative measures,
established by regulation to ensure capital adequacy, require maintaining minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, as of March 28, 2003 and June 28, 2002, that the Bank meets all capital adequacy requirements to which it is subject.



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As of March 28, 2003 and June
28, 2002, First Savings 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 Capital Adequacy Purposes |   |        | To Be Well Capitalized Under Prompt Corrective
Action Provisions |       
|----------------------------------------- |  | ------ | ------ | ----- | ----------------------------- | - | ------ | ---------------------------------------------------------------- | ------
|                                          |  | Amount |        | Ratio |                               |   | Amount |                                                                  | Ratio 
|March 28, 2003:                           |  |        |        |       |                               |   |        |                                                                  |       
|Total capital (to risk weighted assets)   |  | $      | 52,390 |       | 11.1                          | % |        | $                                                                | 37,790
|Tier I capital (to risk weighted assets)  |  |        | 49,325 |       | 10.4                          |   |        |                                                                  | 18,895
|Tier I capital (to adjusted total assets) |  |        | 49,325 |       | 7.4                           |   |        |                                                                  | 26,664
|                                         
|June 28, 2002:                            |  |        |        |       |                               |   |        |                                                                  |       
|Total capital (to risk weighted assets)   |  | $      | 47,808 |       | 11.5                          | % |        | $                                                                | 33,369
|Tier I capital (to risk weighted assets)  |  |        | 44,805 |       | 10.7                          |   |        |                                                                  | 16,684
|Tier I capital (to adjusted total assets) |  |        | 44,805 |       | 9.3                           |   |        |                                                                  | 19,258



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 28, 2003 and March 28, 2002 (in thousands, except share and per share amounts):



|                                              |  | Three Months Ended |            | Nine Months Ended
|--------------------------------------------- |  | ------------------ | ---------- | -----------------
|                                              |  | March 28, 2003     |            |                  
|Net income                                    |  | $                  | (710       | )                
|                                              |  |                    |            |                  
|Weighted average shares outstanding  basic   |  |                    | 16,866,511 |                  
|Effect of dilutive securities:                |  |                    |            |                  
|Assumed exercise of stock options             |  |                    |           |                  
|                                              |  |                    |            |                  
|Weighted average shares outstanding  diluted |  |                    | 16,866,511 |                  
|                                              |  |                    |            |                  
|Earnings per sharebasic                      |  | $                  | (0.04      | )                
|                                              |  |                    |            |                  
|Earnings per sharediluted                    |  | $                  | (0.04      | )                
|                                              |  |                    |            |                  



As a result of the net
losses reported in the third quarter and year-to-date of fiscal 2003, all options are considered antidilutive and are thus not included in the calculation of diluted weighted average shares outstanding and diluted earnings per share.



REPURCHASE OF TREASURY STOCK



In August 2002, SWS Board of Directors reaffirmed managements
previous authorization to repurchase up to one million shares of SWS common stock in the open market. In February 2003, the Board of Directors of SWS approved the repurchase of up to 500,000 additional SWS shares of common stock. SWS



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did not repurchase shares in the three months ended March 28, 2003. For the nine-month period ended March
28, 2003, SWS repurchased 364,800 shares at a cost of $4,425,000. In the three months ended March 28, 2002, SWS did not repurchase any shares under the Board authorized repurchase program. In the nine months ended March 28, 2002, SWS repurchased
80,000 shares at a cost of $1,325,000. There are 836,200 shares remaining that are authorized to be repurchased under the Board Resolution.



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. However, due to the spin-off of the Westwood Group effective June 28, 2002, the Westwood Groups results are not
included in the Asset Management Group in fiscal 2003.



The
category other consolidated entities includes the Parent and SWS Technologies. The Parent is a holding company that owns various investments, including the investments in Knight and U.S. Home Systems, Inc. common stocks. SWS Technologies
provides limited Internet-related services. (See discussion of SWS Technologies in General and Basis of Presentation footnote.) There are no material reconciling adjustments included in this category.



|(in thousands)                                                                       |  | Brokerage Group |         |   | Asset Management Group |   | Banking Group |  |   | Other Consolidated Entities |   |  | Consolidated SWS Group, Inc. |       
|------------------------------------------------------------------------------------ |  | --------------- | ------- | - | ---------------------- | - | ------------- |  | - | --------------------------- | - |  | ---------------------------- | ------
|Three months ended March 28, 2003                                                    |  |                 |         |   |                        |   |               |  |   |                             |   |  |                              |       
|Net revenues from external sources                                                   |  | $               | 46,801  |   |                        | $ | 417           |  | $ | 11,956                      |   |  | $                            | 87    
|Net intersegment revenue (expense)                                                   |  |                 | 531     |   |                        |   |              |  |   | (531                        | ) |  |                              |      
|Income (loss) before income taxes and minority
interest in consolidated subsidiaries |  |                 | (3,714  | ) |                        |   | 139           |  |   | 4,217                       |   |  |                              | (1,357
|Net income (loss)                                                                    |  |                 | (2,504  | ) |                        |   | 90            |  |   | 2,585                       |   |  |                              | (881  
|                                                                                    
|Three months ended March 28, 2002                                                    |  |                 |         |   |                        |   |               |  |   |                             |   |  |                              |       
|Net revenues from external sources                                                   |  | $               | 57,003  |   |                        | $ | 5,806         |  | $ | 10,129                      |   |  | $                            | 4,581 
|Net intersegment revenue (expense)                                                   |  |                 | (1,262  | ) |                        |   | 205           |  |   |                            |   |  |                              | 1,057 
|Income (loss) before income taxes and minority interest in consolidated
subsidiaries |  |                 | (4,189  | ) |                        |   | 2,134         |  |   | 2,009                       |   |  |                              | 1,575 
|Net income (loss)                                                                    |  |                 | (2,219  | ) |                        |   | 1,035         |  |   | 1,203                       |   |  |                              | 465   
|                                                                                     |  |                 |         |   |                        |   |               |  |   |                             |   |  |                              |       
|Nine months ended March 28, 2003                                                     |  |                 |         |   |                        |   |               |  |   |                             |   |  |                              |       
|Net revenues from external sources                                                   |  | $               | 155,167 |   |                        | $ | 1,202         |  | $ | 34,817                      |   |  | $                            | 220   
|Net intersegment revenue (expense)                                                   |  |                 | (301    | ) |                        |   |              |  |   | (645                        | ) |  |                              | 946   
|Income (loss) before income taxes and minority interest in consolidated
subsidiaries |  |                 | (4,293  | ) |                        |   | 426           |  |   | 7,131                       |   |  |                              | (2,921
|Net income (loss)                                                                    |  |                 | (2,419  | ) |                        |   | 277           |  |   | 4,202                       |   |  |                              | (2,231
|                                                                                    
|Nine months ended March 28, 2002                                                     |  |                 |         |   |                        |   |               |  |   |                             |   |  |                              |       
|Net revenues from external sources                                                   |  | $               | 186,645 |   |                        | $ | 16,323        |  | $ | 36,051                      |   |  | $                            | 16,855
|Net intersegment revenue (expense)                                                   |  |                 | (3,946  | ) |                        |   | 598           |  |   | (22                         | ) |  |                              | 3,370 
|Income (loss) before income taxes and minority interest in consolidated
subsidiaries |  |                 | (12,870 | ) |                        |   | 1,905         |  |   | 9,435                       |   |  |                              | 9,083 
|Net income (loss)                                                                    |  |                 | (6,708  | ) |                        |   | 240           |  |   | 5,639                       |   |  |                              | 4,065 



On the consolidated
statements of income (loss) and comprehensive loss, minority interest is solely related to the Banking Group and other comprehensive loss is solely related to the Parent, which is included in the Other category.



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COMMITMENTS, CONTINGENCIES
and GUARANTEES



During the first quarter of fiscal 2003,
First Savings provided $3.4 million ($2.2 million after-tax impact on earnings) to establish a reserve for potentially fraudulent mortgages purchased from one New York based mortgage bank. Sixteen loans, aggregating approximately $3.4 million, were
sold twice by the mortgage bank. Of these sixteen loans, First Savings has recorded assignments on fourteen. First Savings has received ten of the fourteen assignments back; with nine indicating First Savings has a first lien and one indicating a
second lien. Details of any potential asset or collateral recovery are unknown at this time. First Savings filed a claim with its insurance carrier. The insurance company has subsequently rejected the claim and First Savings has decided to pursue
the recovery through litigation. A court appointed receiver for the New York mortgage bank is investigating all aspects of the fraud including the potential recovery of fraudulently received funds.



SWS has capital lease obligations of $1.5 million at March 28, 2003 and
$300,000 at June 28, 2002. These obligations bear interest at a weighted average borrowing rate of 2.51%, with principal and interest payable for 26-29 months from the date of financing. The capital leases are collateralized by computer equipment.



Under the terms of a severance agreement, SWS is obligated to
pay a former executive officer a total of $1 million for consulting services. SWS is paying the former executive $50,000 per month through August 15, 2003.



On October 21, 1999, SWS filed an arbitration claim with the NASD against a former correspondent broker/dealer and its principal for non-performance under
the correspondent clearing agreement relating to a $5.7 million margin loan. In January 2001, SWS obtained a $4.7 million award against the correspondent broker/dealer, but was unsuccessful in its case against the individual principal of the
correspondent firm. This loan was fully reserved. SWS exhausted its collection efforts and wrote off this margin loan in January of 2003.



In the general course of its brokerage business and the business of clearing for other brokerage firms, SWS 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.



The Company has committed $5 million to invest in a limited partnership venture capital fund. As of March 28, 2003, the
Company had contributed $2 million of its commitment. Under the terms of the agreement, no more than 30% of the commitment will be drawn in any twelve-month period. The company contributed $500,000 to the partnership during the previous twelve
months.



SWS implemented Financial Interpretation No. 45 
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5-Contingencies, 57-Related Party, and 107-Disclosure of Fair Value of
Financial Instruments and rescission of FASB Interpretation No. 34, (FIN 45) effective for reporting periods ending after December 15, 2002. Implementation of this statement had no material impact on the financial condition or
results of operations.



In connection with the spin-off of
Westwood, SWS agreed to indemnify the Westwood Group 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



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in May 2002 for $2 million. SWSs management believes that the resolution of the remaining issues
associated with the Boykin Trust in bankruptcy will not have a material impact on the consolidated financial statements.



In March 2002, SWS issued a loan guarantee for FSB Financial for $10 million. The guarantee is based on a loan agreement between FSB Financial and the
Bank. SWS has agreed to guarantee funds drawn on the loan in excess of $25 million, up to a maximum of $35 million. At March 28, 2003, the Bank had loaned $28,125,000 to FSB Financial. As a result of this loan, if FSB Financial defaults on the loan
to the Bank, SWS would be liable for $3,125,000 of the total loan outstanding. SWS has not recorded a liability for the guarantee in its financial statements as FIN 45 requires only disclosure of guarantees issued between parents and their
subsidiaries.



The Bank has stand-by letters of credit primarily
issued 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 $936,000. 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.



SUBSEQUENT EVENTS



On April 22, 2003, SWS Group, Inc. and Mydiscountbroker signed a definitive
agreement to sell the accounts of Mydisountbroker to Ameritrade, Inc. and Ameritrade Canada, Inc., subsidiaries of Ameritrade Holding Corporation. The purchase price will be based on the actual accounts transferred at closing. Mydiscountbroker
currently has approximately 20,000 accounts. The purchase price is expected to range from $3 million to $5 million for an estimated after-tax gain to SWS of between 11 and 19 cents per share. Closing is expected to take place prior to the end of the
fiscal year.



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



OVERVIEW



SWS Group, Inc. and subsidiaries (collectively, SWS) are primarily engaged in securities execution and clearance, securities brokerage, investment banking, securities lending and borrowing,
and trading as a principal in equity and fixed income securities. SWS also engages in full-service banking and asset management. All of these activities are highly competitive. SWS business and future prospects may fluctuate due to numerous
factors, such as:



| |  |  | the volume of trading in securities and general level of securities prices and interest rates;
| | - |  | ----------------------------------------------------------------------------------------------

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

| |  |  | the credit-worthiness of correspondents in the event of a material adverse change in the values of margined securities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------

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

| |  |  | the ability to maintain investment management and administrative fees at profitable levels;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | the total value and composition of assets under management; and
| | - |  | ---------------------------------------------------------------

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



SWS future operating results are also dependent upon its 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 SWS infrastructure; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

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



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While brokerage revenues are
dependent upon the level of trading and underwriting volume, which may fluctuate significantly, a large portion of SWS expenses remains fixed. Consequently, net operating results can vary significantly from period to period. SWS 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 SWS business and results of operations.



Brokerage Group.The U.S. equities markets continued to
experience challenging conditions in the first nine months of fiscal 2003. The average daily volume on the New York Stock Exchange (NYSE) was 1.4 billion shares in March 2003 versus 1.6 billion shares in June 2002. The Dow Jones
Industrial Average was 9,243.30 at the end of June 2002 versus 8,145.77 at March 28, 2003. The volumes and thus the revenues in our clearing business are dependent on active markets. Until the U.S. equity markets show continued sustained growth, we
expect volumes and revenues in the clearing business to remain stagnant or decline. As noted in the detailed analyses that follow, the decline in volumes was most pronounced in our high-volume trading correspondents. We expect this overall trend to
continue until the equity markets recover.



Additionally, average
margin balances reported by NYSE member firms averaged $146 billion in June 2002 and were down to $136 billion in March 2003. SWS relies on margin lending to its customers to generate revenue. SWS margin account balances declined in the first
nine months of 2003 and generally follow industry trends; therefore, we do not expect improvement in margin interest revenue until industry conditions become more favorable or interest rates increase. Stock loan balances are also influenced by these
same market conditions. Improvement in balances and related earnings will be limited until the environment improves.



When interest rates begin to rise and equity markets strengthen, fixed income results will likely decline. Additionally, municipalities, whose volume of
financings has been at record levels as well, could be under pressure with rising interest rates and decreasing tax revenues. The fixed income business accounted for 35% of SWSs operating revenue in the March quarter and 32% of operating
revenue for the nine-month period.



While SWS completed its
conversion to its new brokerage system in August of 2002, ongoing efforts to upgrade and enhance the core system will result in some additional costs in the technology area. Management continues to review equipment and communications in an effort to
offset some of the costs of software enhancement. See Equity Method Investment in the notes to consolidated financial statements.



Management reviewed all areas of the companys operations in the first six months of calendar 2002. This review resulted in $6.4 million in charges
in the fourth quarter of fiscal 2002 related primarily to fixed asset and lease impairments from the consolidation of geographic locations. Management is continuing to review all areas of our operations in light of the current business environment
to properly focus the company for profitability. Additional actions could be taken in the future by management that could result in additional charges for lease terminations, asset impairments or other charges.



Management is focusing on growing the brokerage distribution network through
the hiring of additional retail brokers and the opening of new branch office locations in the Southwest. As a result of this effort, SWS increased the number of retail brokers by seven in the third quarter of fiscal year 2003, opening new branches
in the quarter in Oklahoma City and Austin. Expansion of this network will require outlay of capital that may not be immediately offset by revenues, which will negatively impact results of operations until new locations become positive contributors.
Breakeven points for new office locations generally take 9-12 months to achieve.



Banking Group.A substantial portion of the Banks revenue is generated from the single-family construction loan and single-family mortgage loan market. While the banks purchased mortgage loan program is
nationwide, the majority of the banks other lending is concentrated in the North Texas



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geographic region. The housing market in North Texas has slowed and additional deterioration in the
housing market could impede the banks ability to maintain current levels of loans.



The purchased mortgage loan program was at record levels during the March 2003 quarter due to the high level of mortgage refinancing transactions driven by lower mortgage interest rates. Should mortgage interest rates begin
to rise, volumes in this business could decline. Additionally, during fiscal 2003, management reduced credit lines and eliminated certain customers in this line of business to reflect more stringent internal control guidelines.



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 28, 2002. See our Annual Report on Form 10-K for the fiscal year then
ended.



RESULTS OF OPERATIONS



Net loss for the three and nine-month periods ended March 28, 2003 was
$710,000 and $171,000, respectively, representing a decrease in income over the comparable three and nine-month periods ended March 28, 2002 of $1,194,000 or 247% and $3,407,000 or 105%, respectively. The three-month and nine-month periods ended
March 28, 2003 contained 60 and 188 trading days, respectively, while the comparable periods of fiscal 2002 contained 60 and 183 trading days, respectively.



In addition to the general decline in the equity markets, comparisons to prior periods are negatively impacted by the sales of Knight stock and the
Westwood spin-off in the prior year partially offset by savings in operating costs.



SFAS No. 133 and Sales of Knight Stock.The adoption of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, creates a non-cash earnings impact on our financial statements. SFAS No. 133 is applicable to the Notes, issued in the form of DARTSSM(or, Derivative Adjustable Ratio SecuritiesSM). The
DARTS contain an equity-based derivative designed to hedge changes in fair value of SWS investment in Knight common stock. At the option of SWS, the principal of the Notes can be paid in shares of the Knight at maturity. This embedded
derivative has been designated as a fair value hedge of SWS investment in Knight shares.



SFAS No. 133 requires fair value recognition of the DARTS embedded derivative in the consolidated statements of financial condition. Changes in the fair value of the embedded derivative are
required to be recognized in earnings, along with the change in fair value of the Knight shares. For the three and nine months ended March 28, 2003, the impact on the consolidated statements of income (loss) and comprehensive loss, representing the
change in the time value of money in the embedded derivative was immaterial. For the same comparable periods ended March 28, 2002, SWS recognized losses of $109,000 and $232,000, respectively. Under SFAS No. 133, the related change in the time value
of money in the embedded derivative and the changes in the fair value of the embedded derivative, along with the change in fair value of the hedged Knight shares, will be calculated on a quarterly basis and recognized in the consolidated statements
of income (loss) and comprehensive loss until such time as the fair value hedge ceases to exist.



In December 2000, SWS repurchased 640,782, or 63%, of SWS 1,014,332 outstanding DARTS at a cost of approximately $17 million and recorded no material gain or loss on the repurchase. A like number
of Knight shares was released from the hedging provisions of SFAS No. 133. Upon final disposition of these previously hedged shares of Knight stock, SWS recognized a non-cash gain of approximately $23.50 per



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share, equal to the decrease in the value of Knight stock from the hedging date (June 16, 1999), to the
termination date of hedge accounting (December 20, 2000).



There
were no sales of Knight stock in the three and nine-month periods ending March 28, 2003. SWS disposed of 100,000 shares and 426,000 shares of Knight stock with proceeds from the sales totaling $710,000 and $4,442,000 in the three and nine-month
periods ended March 28, 2002, respectively, and realized cash gains on these sales totaling $697,000 and $4,387,000, respectively. All of the shares sold in the three and nine-month periods ending March 28, 2002 were previously hedged stock.
Consequently, in accordance with SFAS No. 133, SWS recorded non-cash gains of $3,615,000 and $15,401,000, respectively, related to the shares sold in the accompanying consolidated statements of income (loss) and comprehensive loss. Therefore, totals
gains related to the sales of Knight common stock were $4,312,000 and $19,788,000 during the three and nine-month periods ended March 28, 2002.



The Knight shares sold in the first and second quarters of fiscal 2002 were sold to fund the advertising commitment of Mydiscountbroker, SWS on-line
brokerage subsidiary.



At March 28, 2003 and June 28, 2002, SWS
held 373,550 shares of Knight common stock and had 373,550 DARTS outstanding.



Westwood Group Spin-Off.Effective June 28, 2002, SWS spun-off Westwood Holdings Group, Inc. and subsidiaries (Westwood Group) to its stockholders. The Westwood Group, comprised of Westwood Management
Corporation and Westwood Trust, was included in the financial statements in fiscal 2002, but is not included in fiscal 2003. The Westwood Group contributed $5,327,000 and $15,203,000 to revenues and $1,181,000 and $(444,000) to net income in the
three and nine-month periods ended March 28, 2002.



Equity
Method Investment.SWS is a part owner of Comprehensive Software Systems, Ltd. (CSS), a software development company formed in 1993 to develop a new brokerage front- and back-office system. SWS initially acquired a 7.96%
interest in CSS and accounted for the investment on the cost basis. Through subsequent investments by SWS, SWS ownership in CSS increased to 25.08% in fiscal 2002. Consequently, SWS implemented the equity method of accounting, prescribed by
Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investment in Common Stock, with respect to its investment in CSS. As required by APB Opinion No. 18, SWS restated its fiscal 2002
unaudited quarterly financial statements to record its share of undistributed loss from CSS operations, as well as amortization expense on the portion of the investment designated as goodwill. For the three and nine-month periods ended March
28, 2002, SWS proportionate share of the undistributed net loss was $773,000 and $2,057,000, respectively, and amortization expense on the designated goodwill was $93,000 and $278,000, respectively.



In the fourth quarter of fiscal 2002, SWS determined that the investment in
CSS and its related goodwill was fully impaired based on an analysis of the projected cash flow from the investment. Therefore, SWS wrote-off the investment in CSS. SWS made no additional equity investments in CSS during the first three quarters of
fiscal 2003.



However, the continued enhancement of SWS
brokerage system is important to the growth of SWS clearing and retail brokerage business. To insure the continued enhancement of the systems developed by CSS, SWS entered into a loan agreement dated December 6, 2002 with CSS that calls for a
total advance to CSS of $3,250,000 in quarterly installments of $812,500 beginning January 6, 2003. Because of this commitment, SWS began recognizing its share of the undistributed losses of CSS in January of 2003. During the quarter ended March 28,
2003, SWSs percentage interest in CSSs losses for the quarter was $1.1 million. SWSs percentage of losses was greater than the $812,500 loaned during the quarter by $279,000. As a result, there is no recorded equity investment or
loan receivable from CSS at March 28, 2003.



22



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##### Table of Contents



Sale of First Consumer
Credit. In October 2001, First Savings Bank, FSB (FSB, First Savings or the Bank) sold its interest in its minority-owned subsidiary First Consumer Credit, LLC (First Consumer), receiving
$1,050,000 and approximately 366,000 common shares of U.S. Home Systems, Inc. (USHS), a company publicly traded on NASDAQ. The shares of USHS were paid to the Parent as a dividend and were recorded at fair market value. FSB recorded a
gain of approximately $1,163,000 on the sale of First Consumer.



Mortgage Loan Charge.In the first quarter of fiscal 2003, First Savings provided $3.4 million ($2.2 million after-tax impact on earnings) to establish a reserve for potentially fraudulent mortgages purchased
from one New York based mortgage bank. Sixteen loans, aggregating approximately $3.4 million, were sold twice. Of these sixteen loans, First Savings has recorded assignments on fourteen. First Savings has received ten of the fourteen assignments
back; with nine indicating First Savings has a first lien and one indicating a second lien. Details of any potential asset or collateral recovery are unknown at this time. First Savings filed a claim with its insurance carrier. The insurance company
has subsequently rejected the claim and First Savings has decided to pursue the recovery through litigation. A court appointed receiver for the New York mortgage bank is investigating all aspects of the fraud including the potential recovery of
fraudulently received funds.



Income Before Income Tax
Expense and Minority Interest in Consolidated Subsidiaries (Pretax Income).SWS pretax loss was $715,000 for the three months ended March 28, 2003 and pretax income was $343,000 for the nine months ended March 28,
2003 versus pretax income of $1,529,000 and $7,553,000 in the same comparable periods ending March 28, 2002.



Analysis of Operations.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
28, 2003 and March 28, 2002 (dollars in thousands):



Three Months Ended



Nine Months EndedAmount


%


Amount


%Net revenues:Net revenues from clearing operations

$
(4,213
)

(51
)%

$
(10,723
)

(43
)%Commissions


224


1



4,773


9Net interest


(563
)

(4
)


(2,463
)

(6
)Investment banking, advisory and administrative fees


(4,773
)

(46
)


(11,077
)

(36
)Net gains on principal transactions


(4,390
)

(49
)


(19,903
)

(58
)Other


(462
)

(13
)


(371
)

(3
)(14,177
)

(22
)


(39,764
)

(20
)Operating expenses:Commissions and other employee compensation


(2,189
)

(7
)


(8,933
)

(9
)Occupancy, equipment and computer service costs


(4,696
)

(37
)


(11,155
)

(31
)Communications


(1,636
)

(31
)


(3,040
)

(21
)Floor brokerage and clearing organization charges


(900
)

(40
)


(1,297
)

(21
)Advertising and promotional


(302
)

(28
)


(4,278
)

(63
)Other


(2,210
)

(23
)


(3,851
)

(14
)(11,933
)

(19
)


(32,554
)

(17
)Pretax income

$
(2,244
)

(147
)%

$
(7,210
)

(95
)%




23



---

##### Table of Contents



Net Revenues declined for the
quarter and the year by $14.2 million and $39.8 million, respectively. Of the total change, the spin-off of Westwood Holdings represents $5.3 million and $15.2 million, respectively. An additional $4.3 million and $19.8 million, respectively, relate
to gains on the sale of Knight stock in fiscal 2002.



Operating
expenses declined $11.9 million and $32.6 million for the quarter and nine months ended March 28, 2003. The spin-off of Westwood Holdings accounted for $3.4 million and $13.7 million of this decline, respectively. Additionally, $4.3 million and $9.4
million, respectively, of the savings in operating expenses relates to the clearing business acquired in October 2001 through an SIPC liquidation. That business was operated on a separate system from the rest of our operations until April 2002. Upon
completion of the conversion to SWSs internal system, the personnel and systems relating to that business were eliminated.



Net Revenues from Clearing Operations.Net revenues from clearing decreased from $8.2 million for the three months ended March 28,
2002 to $4.0 million, or 51%, for the three months ended March 28, 2003 as a result of reduced transaction volumes. Total transactions processed in the third quarter of fiscal 2003 were 6 million verses 15 million in the third quarter of fiscal
2002. Total transactions processed in the nine months of fiscal 2003 decreased 52% to approximately 20.1 million from approximately 42.1 million in fiscal 2002. Net clearing revenue decreased from $24.9 million for the nine months ended March 28,
2002 to $14.2 million or 43% for the nine months ended March 28, 2003. The decline in transactions processed was most pronounced in the companys high volume trading correspondents. Revenue per transaction increased over the prior year as lower
volumes led to reduced discounts for clearing customers in the second quarter of fiscal 2003 over the prior year. Revenue per transaction was $0.67 in the third quarter of fiscal 2003 verses $0.55 in the third quarter of fiscal 2002.



Commissions.Commission revenue increased slightly for
the quarter and was up 9% for the nine-month period. Increases in fixed income commissions due to a strong bond market, as well as increases in commissions from the hiring of additional sales personnel in institutional equity sales, contributed to
the improvement. These increases were offset by decreased commissions from the private client group and the independent contractor network and reduced commissions in the portfolio trading area. Commission revenue by type of representative is as
follows (dollars in thousands):



March 28, 2003

March 28, 2002Three Months Ended

Nine Months Ended

No. of Reps

Three Months Ended

Nine Months Ended

No. of RepsSouthwest Securities brokers:Private client group

$
3,850

$
13,776

90

$
4,384

$
14,024

77Fixed income sales


7,949


22,657

34


6,083


15,798

35Institutional sales


1,984


7,307

13


1,783


4,855

11Independent contractors


3,952


11,979

414


4,739


13,610

411Portfolio Trading


1,404


2,717




1,566


4,211Other


562


1,934




922


3,099$
19,701

$
60,370



$
19,477

$
55,597




Net Interest
Income.SWS net interest income is dependent upon the level of customer and stock loan balances as well as the spread between the rates SWS earns on those assets compared with the cost of funds. Net interest is the primary source
of income for First Savings 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 28, 2003 and March 28, 2002 (in thousands):



24



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##### Table of Contents



Three Months Ended

Nine Months EndedMarch 28, 2003

March 28, 2002

March 28, 2003

March 28, 2002Interest revenue:Customer margin accounts

$
3,473

$
7,240

$
11,967

$
22,938Assets segregated for regulatory purposes


1,300


1,991


5,114


7,209Stock borrowed


5,443


6,239


18,735


30,468Loans


10,936


9,885


31,702


32,149Other


1,200


1,641


3,845


5,766$
22,352

$
26,996

$
71,363

$
98,530Interest expense:Customer funds on deposit

$
1,412

$
2,807

$
5,270

$
11,911Stock loaned


3,691


4,656


13,285


24,779Deposits


2,760


3,172


7,583


11,493Other


804


2,113


3,657


6,3168,667


12,748


29,795


54,499Net interest

$
13,685

$
14,248

$
41,568

$
44,031




Brokerage
Group.For the three and nine months ended March 28, 2003, net interest income accounted for 10% and 12%, respectively, of SWS net revenue versus 13% for both comparable periods ended March 28, 2002. Average balances of interest-earning
assets and interest-bearing liabilities are as follows (in thousands):



Three Months Ended

Nine Months EndedMarch 28, 2003

March 28, 2002

March 28, 2003

March 28, 2002Average interest-earning assets:Customer margin balances

$
290,000

$
596,000

$
306,000

$
531,000Assets segregated for regulatory purposes


472,000


494,000


490,000


470,000Stock borrowed


2,122,000


1,875,000


2,009,000


1,941,000Average interest-bearing liabilities:Customer funds on deposit


615,000


791,000


643,000


776,000Stock loaned


2,061,000


1,845,000


1,979,000


1,915,000




Interest revenue
from customer margin balances and interest expense from customer funds on deposit decreased due to both lower interest rates and reduced balances in the first, second and third quarters of fiscal 2003 over the first, second and third quarters of
fiscal 2002. Interest revenue on assets segregated for regulatory purposes also decreased due to lower interest rates. Net interest revenue generated from securities lending activities has decreased slightly from the quarter and the year due to
reduced spreads. The types of securities borrowed or loaned and the interest rate environment influence these spreads.



Banking Group.Net interest revenue generated by the Bank accounted for approximately 17% and 14% of net revenue in the three and nine-month
periods ended March 28, 2003 and 9% for both the three and nine month periods ended March 28, 2002. At First Savings, changes in net interest revenue are generally attributable to the timing of loan payoffs and volume. The following table sets forth
an analysis of the



25



---

##### Table of Contents

Banks net interest income by each major category of interest-earning assets and interest-bearing
liabilities for the three-month periods ended March 28, 2003 and March 28, 2002 (dollars in thousands):



|                                         |  | Three Months Ended |        
|---------------------------------------- |  | ------------------ | -------
|                                         |  | Fiscal 2003        |        
|                                         |  | Average Balance    |        
|Assets:                                  |  |                    |        
|Interest-earning assets:                 |  |                    |        
|Real estate  mortgage                   |  | $                  | 174,377
|Real estate  construction               |  |                    | 109,469
|Commercial                               |  |                    | 143,178
|Individual                               |  |                    | 40,138 
|Land                                     |  |                    | 41,890 
|Investments                              |  |                    | 153,405
|                                         |  |                    |        
|                                         |  |                    | 662,457
|Noninterest-earning assets:              |  |                    |        
|Cash and due from banks                  |  |                    | 2,076  
|Other assets                             |  |                    | 11,822 
|                                         |  |                    |        
|                                         |  | $                  | 676,355
|                                         |  |                    |        
|Liabilities and Stockholders Equity:    |  |                    |        
|Interest-bearing liabilities:            |  |                    |        
|Certificates of deposit                  |  | $                  | 300,835
|Money market accounts                    |  |                    | 14,884 
|Interest-bearing demand accounts         |  |                    | 251,482
|Savings accounts                         |  |                    | 1,374  
|Federal Home Loan Bank (FHLB) advances |  |                    | 24,549 
|Notes payable                            |  |                    | 2,383  
|                                         |  |                    |        
|                                         |  |                    | 595,507
|Noninterest-bearing liabilities:         |  |                    |        
|Non interest-bearing demand accounts     |  |                    | 24,409 
|Other liabilities                        |  |                    | 7,335  
|                                         |  |                    |        
|                                         |  |                    | 627,251
|Stockholders equity                     |  |                    | 49,104 
|                                         |  |                    |        
|                                         |  | $                  | 676,355
|                                         |  |                    |        
|                                         |  |                    |        
|Net interest income                      |  |                    |        
|                                         |  |                    |        
|Net yield on interest-earning assets     |  |                    |        
|                                         |  |                    |        



The following table sets
forth an analysis of the Banks net interest income by each major category of interest-earning assets and interest-bearing liabilities for the nine-month periods ended March 28, 2003 and March 28, 2002 (dollars in thousands):



26



---

##### Table of Contents



|                                         |  | Nine Months Ended |        
|---------------------------------------- |  | ----------------- | -------
|                                         |  | Fiscal 2003       |        
|                                         |  | Average Balance   |        
|Assets:                                  |  |                   |        
|Interest-earning assets:                 |  |                   |        
|Real estatemortgage                     |  | $                 | 189,460
|Real estateconstruction                 |  |                   | 114,052
|Commercial                               |  |                   | 135,096
|Individual                               |  |                   | 34,666 
|Land                                     |  |                   | 41,325 
|Investments                              |  |                   | 62,095 
|                                         |  |                   |        
|                                         |  |                   | 576,694
|Noninterest-earning assets:              |  |                   |        
|Cash and due from banks                  |  |                   | 3,630  
|Other assets                             |  |                   | 11,771 
|                                         |  |                   |        
|                                         |  | $                 | 592,095
|                                         |  |                   |        
|Liabilities and Stockholders Equity:    |  |                   |        
|Interest-bearing liabilities:            |  |                   |        
|Certificates of deposit                  |  | $                 | 281,558
|Money market accounts                    |  |                   | 14,765 
|Interest-bearing demand accounts         |  |                   | 111,612
|Savings accounts                         |  |                   | 1,168  
|Federal Home Loan Bank (FHLB) advances |  |                   | 100,431
|Notes payable                            |  |                   | 5,192  
|                                         |  |                   |        
|                                         |  |                   | 514,726
|Noninterest-bearing liabilities:         |  |                   |        
|Non interest-bearing demand accounts     |  |                   | 22,713 
|Other liabilities                        |  |                   | 6,600  
|                                         |  |                   |        
|                                         |  |                   | 544,039
|Stockholders equity                     |  |                   | 48,056 
|                                         |  |                   |        
|                                         |  | $                 | 592,095
|                                         |  |                   |        
|                                         |  |                   |        
|Net interest income                      |  |                   |        
|                                         |  |                   |        
|Net yield on interest-earning assets     |  |                   |        
|                                         |  |                   |        



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



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):



27



---

##### Table of Contents



|                                 |  | Three months ended Fiscal 2003 vs. 2002 |        |   | Nine months ended Fiscal 2003 vs. 2002 |     
|-------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | ----
|                                 |  | Total Change                            |        |   | Attributed to                          |     
|                                 |  |                                         | Volume |   |                                        | Rate
|Interest income:                 |  |                                         |        |   |                                        |     
|Real estatemortgage             |  | $                                       | 45     |   |                                        | $   
|Real estateconstruction         |  |                                         | (466   | ) |                                        |     
|Commercial                       |  |                                         | 497    |   |                                        |     
|Individual                       |  |                                         | 974    |   |                                        |     
|Land                             |  |                                         | 1      |   |                                        |     
|Investments                      |  |                                         | 403    |   |                                        |     
|                                 |  |                                         |        |   |                                        |     
|                                 |  | $                                       | 1,454  |   |                                        | $   
|                                 |  |                                         |        |   |                                        |     
|Interest expense:                |  |                                         |        |   |                                        |     
|Certificates of deposit          |  | $                                       | (927   | ) |                                        | $   
|Money market accounts            |  |                                         | (17    | ) |                                        |     
|Interest-bearing demand accounts |  |                                         | 531    |   |                                        |     
|Savings accounts                 |  |                                         | 1      |   |                                        |     
|Federal Home Loan Bank advances  |  |                                         | (448   | ) |                                        |     
|Notes payable                    |  |                                         | (10    | ) |                                        |     
|                                 |  |                                         |        |   |                                        |     
|                                 |  |                                         | (870   | ) |                                        |     
|                                 |  |                                         |        |   |                                        |     
|Net interest income              |  | $                                       | 2,324  |   |                                        | $   
|                                 |  |                                         |        |   |                                        |     



Investment
Banking, Advisory and Administrative Fees.The Westwood Group was spun-off to SWS stockholders on June 28, 2002 and is no longer a part of SWS ongoing operations. Advisory fee revenue generated by the Westwood Group in the
three and nine-month periods ended March 28, 2002 totaled $5.1 million and $14.6 million, respectively. Investment banking, advisory and administrative fees increased $369,000 and $3.5 million over the prior fiscal year after accounting for Westwood
revenues. The primary reason for the increase in fiscal 2003 fees over the prior year is increased revenue in municipal finance underwriting and advisory deals.



Net Gains on Principal Transactions.Substantially all of the change in net gains on principal
transactions was from sales of Knight stock. There were no sales of Knight stock in the first, second or third quarters of fiscal 2003. For the three and nine month periods ended March 28, 2002, net gains on principal transactions includes
$4,312,000 and $19,788,000 of gains realized on the sale of Knight common stock, respectively.



Commissions and Other Employee Compensation.The level of operating revenues, earnings and the number of employees generally affect commissions and other employee compensation.
Overall, commissions and other employee compensation declined $2.2 million and $8.9 million, respectively, for the quarter and the year over comparable periods in fiscal 2002. The decline from the third quarter of 2002 is due primarily to the
spin-off of Westwood. Of the $8.9 million decline for the nine-month period, Westwood accounted for $10.3 million with an offsetting increase in commission expense of $2.3 million.



Occupancy, Equipment and Computer Services.The decrease in the three and nine-month periods ended March 28,
2003 from the comparable prior year periods is primarily due to the conversion of the business received in an SIPC liquidation in October of 2001. The conversion of this business to SWSs internal brokerage system reduced occupancy and
equipment expenses by $2.3 million in the quarter and $5.4 million for the fiscal year to date. Additional contributors to the decline include a decrease in equipment lease expense due to the completion of the conversion to SWS new operating
system in the first quarter of 2003, as well as reduced rent and depreciation charges from the consolidation of offices which occurred in the fourth quarter of fiscal 2002.



28



---

##### Table of Contents

Communications.Communications expense decreased due to a reduction in quote expense in the
three and nine-month periods ended March 28, 2003 versus the three and nine-month periods ended March 28, 2002 as well as the conversion of the SIPC liquidation accounts discussed above.



Floor Brokerage and Clearing Organization Charges.Floor brokerage expenses were down 40% and 21% in the
three and nine-month periods ended March 28, 2003 versus the comparable periods in the prior fiscal year. These charges are impacted by the volume of transactions cleared which has declined over 50% in both the three and nine-month periods.



Advertising and Promotional.Advertising
and promotional expense decreased in fiscal 2003 over the prior year as a result of eliminating the Mydiscountbroker ad campaign at the end of the second quarter of fiscal 2002. This campaign was funded through the sale of Knight stock.



Other Expense.Excluding the $3.4 million
charge for fraudulent loans at the Bank in the first quarter of fiscal 2003, other expense decreased $2.2 million and $7.3 million for the three and nine-month periods ended March 28, 2003 when compared to the same periods in fiscal 2002. The
Westwood spin-off accounted for $620,000 and $1,765,000, respectively of the decrease in the three and nine-month periods. The remaining decreases for the quarter and fiscal year to date were primarily due to reduced contract labor expenses and
non-income taxes in the Brokerage Group.



Income Tax
Expense(Benefit). Income tax expense (effective rate 66.7% for the quarter ended March 28, 2003 and 117.5% for the nine month period ended March 28, 2003) differed from the amount that would otherwise have been calculated by applying the
federal corporate tax rate (35%) to income (loss) before income taxes and minority interest in consolidated subsidiaries. The effective rate was unusually high because of an increase in the ratio of tax-exempt income and other permanently excluded
items to net income (loss) before tax.



FINANCIAL CONDITION



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



Loans
receivable at March 28, 2003 and June 28, 2002 are summarized as follows (in thousands):



|                           |  | March 28, 2003 |         | June 28, 2002
|-------------------------- |  | -------------- | ------- | -------------
|Real estate  mortgage     |  | $              | 187,457 |              
|Real estate  construction |  |                | 108,581 |              
|Commercial                 |  |                | 133,113 |              
|Individuals                |  |                | 38,809  |              
|Land                       |  |                | 42,128  |              
|                           |  |                |         |              
|                           |  | $              | 510,088 |              
|                           |  |                |         |              



The following table
shows the expected life of certain loans at March 28, 2002, and segregates those loans with fixed interest rates from those with floating or adjustable rates (in thousands):



29



---

##### Table of Contents



|                                      |  | 1 year or less |         | 1-5 years |   | Over 5 years |  | Total
|------------------------------------- |  | -------------- | ------- | --------- | - | ------------ |  | -----
|                                     
|Real estate  construction            |  | $              | 103,077 |           | $ | 2,253        |  | $    
|Commercial                            |  |                | 26,867  |           |   | 37,284       |  |      
|                                      |  |                |         |           |   |              |  |      
|Total                                 |  | $              | 129,944 |           | $ | 39,537       |  | $    
|                                      |  |                |         |           |   |              |  |      
|Amount of loans based upon:           |  |                |         |           |   |              |  |      
|Floating or adjustable interest rates |  | $              | 121,464 |           | $ | 31,716       |  | $    
|Fixed interest rates                  |  |                | 8,480   |           |   | 7,821        |  |      
|                                      |  |                |         |           |   |              |  |      
|Total                                 |  | $              | 129,944 |           | $ | 39,537       |  | $    
|                                      |  |                |         |           |   |              |  |      



Loans may be 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. A standardized review process exists 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. Non-performing assets as of March 28,
2003 and June 28, 2002 are as follows (dollars in thousands):



|                                                                   |  | March 28, 2003 |        |   | June 28, 2002 |  
|------------------------------------------------------------------ |  | -------------- | ------ | - | ------------- | -
|                                                                  
|Loans accounted for on a non-accrual basis                         |  | $              | 15,111 |   |               | $
|                                                                   |  |                |        |   |               |  
|                                                                  
|Non-performing loans as a percentage of total loans                |  |                | 3.0    | % |               |  
|                                                                   |  |                |        |   |               |  
|                                                                  
|Loans past due 90 days or more, but
performing, not included above |  | $              | 3,978  |   |               | $
|                                                                   |  |                |        |   |               |  
|                                                                  
|Troubled debt restructurings                                       |  | $              | 3,559  |   |               | $
|                                                                   |  |                |        |   |               |  



An analysis of the
allowance for probable loan losses for the three and nine-month periods ended March 28, 2003 and March 28, 2002 is as follows (dollars in thousands):



30



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##### Table of Contents



|                                                                                          |  | Three Months Ended |        |   | Nine Months Ended |  
|----------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                                          |  | March 28, 2003     |        |   | March 28, 2002    |  
|                                                                                         
|Balance at beginning of period                                                            |  | $                  | 5,657  |   |                   | $
|                                                                                         
|Charge-offs  individual                                                                  |  |                    | 364    |   |                   |  
|Charge-offs  real estate  construction                                                  |  |                    |       |   |                   |  
|Charge-offs  real estate  mortgage                                                      |  |                    |       |   |                   |  
|Charge-offs  commercial, financial and agricultural                                      |  |                    | 1,317  |   |                   |  
|Recoveries  individual                                                                   |  |                    | (42    | ) |                   |  
|                                                                                          |  |                    |        |   |                   |  
|Net charge-offs                                                                           |  |                    | (1,639 | ) |                   |  
|Additions charged to operations                                                           |  |                    | 723    |   |                   |  
|                                                                                          |  |                    |        |   |                   |  
|Balance at end of period                                                                  |  | $                  | 4,741  |   |                   | $
|                                                                                          |  |                    |        |   |                   |  
|Ratio of net charge-offs during the period
to average loans outstanding during the period |  |                    | 0.32   | % |                   |  
|                                                                                          |  |                    |        |   |                   |  



The allowance for
probable loan losses is applicable to the following types of loans as of March 28, 2003 and June 28, 2002 (dollars in thousands):



|                              |  | March 28, 2003 |       |                                 | June 28, 2002 |  
|----------------------------- |  | -------------- | ----- | ------------------------------- | ------------- | -
|                              |  | Amount         |       | Percent of loans to total loans |               |  
|Commercial                    |  | $              | 1,790 |                                 | 26.2          | %
|Real estate  construction    |  |                | 1,183 |                                 | 21.3          |  
|Real estate  mortgage & land |  |                | 1,062 |                                 | 44.8          |  
|Individuals                   |  |                | 706   |                                 | 7.7           |  
|                              |  |                |       |                                 |               |  
|                              |  | $              | 4,741 |                                 | 100.0         | %
|                              |  |                |       |                                 |               |  



Deposits.Average deposits and the average interest rate paid on the deposits for the three and nine-month periods ended March 28, 2003 and March 28, 2002 can be found in the discussion of the Banking Groups net interest income under the caption
Net Interest Income-Banking Group. Certificates of deposit of $100,000 or greater were $111,928,000 and $69,123,000 at March 28, 2003 and June 28, 2002, respectively. Prior to January 2003, the bank funded its loans through short-term
borrowings at the FHLB, internally generated deposits and brokered certificates of deposit. In early fiscal 2003, the Bank began offering an FDIC NOW account to customers of Southwest Securities. In January of 2003, Southwest Securities began using
this product as one of the primary products in its cash management accounts. Consequently, the Bank now has in excess of $300 million ($321.4 million at March 28, 2003) in funds on deposit from customers of Southwest Securities. This funding source
will replace the brokered certificates of deposit as they mature and will lower the cost of funds to the Bank. The final block of brokered certificates of deposit matured on April 15, 2003. These funds have also reduced the Banks reliance on
short-term borrowings from the FHLB.



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Advances from Federal Home Loan Bank (FHLB).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 1-90 days, during the three and six-month periods ended March 28, 2003 and
March 28, 2002 (dollars in thousands):



|                                      |  | Three Months Ended |         |               | Nine Months Ended |  
|------------------------------------- |  | ------------------ | ------- | ------------- | ----------------- | -
|                                      |  | March 28, 2003     |         |               | March 28, 2002    |  
|                                      |  | Amount             |         | Interest Rate |                   |  
|At end of period                      |  | $                  |        |               |                  | %
|Average during period                 |  |                    | 9,159   |               | 1.7               | %
|Maximum month-end balance during year |  |                    | 110,000 |               |                  |  



LIQUIDITY AND CAPITAL
RESOURCES



Brokerage Group.SWS
assets are substantially liquid in nature and consist mainly of cash or assets readily convertible into cash. SWS equity capital, short-term bank borrowings, interest bearing and non-interest bearing client credit balances, correspondent
deposits and other payables finance these assets. SWS maintains 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.



Short-Term Borrowings.SWS has credit arrangements with commercial banks, which include broker loan lines up to $350,000,000. 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 SWS and its clients. At March 28, 2003, the amount outstanding under these secured arrangements was $44,250,000, which
was collateralized by securities held for firm accounts valued at $57,607,000, and $1,300,000, which was collateralized by securities held for non customer accounts valued at $24,958,000.



SWS has an irrevocable letter of credit agreement aggregating $38,000,000 at March 28, 2003 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. This letter of credit is fully collateralized by marketable securities held in
client and non-client margin accounts with a value of $48,265,000 at March 28, 2003. SWS also has unsecured letters of credit, aggregating $2,250,000 at March 28, 2003, pledged to support its open positions with securities clearing organizations.
The unsecured letters of credit bear interest at the prime rate plus 3%, if drawn, and portions of each letter of credit are renewable quarterly or semi-annually.



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, none of which was outstanding at March 28, 2003.



In the opinion of management, these credit arrangements are adequate to meet the short-term operating needs of SWS.



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Exchangeable Subordinated Notes.SWS has issued $57.5 million of Notes due June 30, 2004. At
maturity, the principal of the Notes will be paid in shares of the Class A common stock of Knight or, at the option of SWS, their cash equivalent. The Notes, which are in the form of DARTSSM(or, Derivative Adjustable Ratio SecuritiesSM), were issued in denominations of $56.6875, the closing bid price of Knight on June 10, 1999. At maturity, Note holders are entitled to one share of Knight common stock for each DARTS if the average price for the 20
days immediately preceding the Notes maturity is equal to or less than the DARTS issue price. Note holders are entitled to .833 shares of Knight common stock for each DARTS if the average price of Knights common stock is 20% or more
greater than the DARTS issue price. If the average price of the Knight common stock is between the Notes issue price and 20% greater than the issue price, the exchange rate will be determined by a formula. At March 28, 2003, SWS had
373,550 DARTS outstanding with a face value of $21.2 million. After adjusting for the impact of SFAS No. 133, the DARTS are recorded at $6.3 million on the consolidated statements of financial condition at March 28, 2003.



Capital Lease Obligations.SWS has capital lease
obligations of $1.5 million at March 28, 2003. These obligations bear interest at a weighted average borrowing rate of 2.51% with principal and interest payable for 26-29 months from the date of financing. The capital leases are secured by computer
equipment.



Net Capital Requirements.SWS broker/dealer subsidiaries are subject to the requirements of the Securities and Exchange Commission relating to liquidity, capital standards and the use of client funds and securities. SWS has historically operated in excess of the
minimum net capital requirements. See Net Capital Requirements in the Notes to Consolidated Financial Statements.



Banking Group.The Banks asset and liability management policy is intended to manage interest rate risk. First Savings
accomplishes this through management of the repricing of its interest-earning assets and its interest-bearing liabilities. Overall interest rate risk is monitored through reports showing both sensitivity ratios, a simulation model and existing
gap data.



Liquidity is monitored daily to ensure the
ability to support asset growth, meet deposit withdrawals, lending needs, maintain reserve requirements and otherwise sustain operations. The Banks liquidity is maintained in the form of readily marketable loans, balances with the FHLB, vault
cash and advances from the FHLB. In addition, First Savings has borrowing capacity with the FHLB for the purpose of purchasing short-term funds should additional liquidity be needed. Management believes that the Banks present position is
adequate to meet its current and future liquidity needs.



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



Cash Flow.Net cash
used in operating activities was $45,218,000 for the nine-month period ended March 28, 2003 compared to $143,943,000 for the nine-month period ended March 28, 2002. Use of operating cash in fiscal 2003 was primarily due to increased loans held for
sale at the Bank. Operating cash flow in the brokerage group reflects increases in net customer accounts and short security positions off set by reduced net receivables from broker dealers and reduced assets held in the regulatory reserve account.
Cash flows from financing activities reflect the reduced reliance on borrowings from the FHLB due to cash inflows from Southwest Securities customers discussed above.



Treasury Stock.In August 2002, SWS Board of Directors reaffirmed managements previous
authorization to repurchase up to one million shares of SWS common stock in the open market. In the nine month period ended March 28, 2003, SWS repurchased 364,800 shares at a cost of $4,425,000. In February 2003, the Board of Directors of SWS
approved the repurchase of up to 500,000 additional SWS shares of common stock. On the date of approval, there were 336,200 shares remaining that were



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authorized to be repurchased under the program. As a result of the action taken by the Board of Directors,
there are 836,200 shares remaining that are authorized to be repurchased under the program. Additionally, SWS periodically purchases stock in the open market for certain employee benefit plans. This stock is classified as treasury stock in
SWSs consolidated financial statements, but would participate in future dividends declared by SWS.



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.
SWS exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading activities.



Interest Rate Risk.Interest rate risk is a consequence of maintaining inventory positions and trading in
interest-rate-sensitive financial instruments. SWS does not maintain material positions in interest-rate-sensitive financial instruments. SWS fixed income activities also expose it 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. At the Bank, interest rate risk arises when an interest-earning asset matures or when
its rate of interest changes in a timeframe different from that of the supporting interest-bearing liability.



Equity Price Risk.SWS is 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.



In accordance with the Securities and Exchange Commissions risk disclosure requirements, the following table
categorizes securities owned, net of securities sold, not yet purchased which are in SWS trading portfolio, as well as marketable equity securities in SWS available-for-sale portfolio, which are subject to interest rate and equity price
risk (dollars in thousands):



|                                                  |  | Years to Maturity |       
|------------------------------------------------- |  | ----------------- | ------
|                                                  |  | 1 or less         |       
|Trading securities, at fair value                 |  |                   |       
|Municipal obligations                             |  | $                 |      
|U.S. Government and Government agency obligations |  |                   | 1,644 
|Corporate obligations                             |  |                   | (2,470
|                                                  |  |                   |       
|Total debt securities                             |  |                   | (826  
|Corporate equity                                  |  |                   |      
|Other                                             |  |                   | 8,928 
|                                                  |  |                   |       
|                                                  |  | $                 | 8,102 
|                                                  |  |                   |       
|Weighted average yield                            |  |                   |       
|Municipal obligations                             |  |                   |      
|U.S. Government and Government agency obligations |  |                   | 5.04  
|Corporate obligations                             |  |                   | (2.12 
|                                                 
|Available-for-sale securities, at fair value      |  |                   |       
|Marketable equity securities                      |  | $                 |      
|                                                  |  |                   |       



Exchangeable
Subordinated Debt.In addition to the financial instruments included in the above table, SWS has 373,550 DARTS outstanding with a face value of $21.2 million. These Notes mature June 30,



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2004 and bear a fixed coupon of 5%. Market risks associated with the DARTS include equity price risk, in
that the amount that SWS will pay at maturity depends on the value of Knight common stock. As such, these Notes contain an embedded equity derivative that is subject to accounting treatment under SFAS No. 133. SFAS No. 133 requires fair value
recognition of the DARTS embedded derivative in the consolidated statements of financial condition. Changes in the fair value of the embedded derivative are required to be recognized in earnings, along with the change in fair value of the
Knight shares.



Credit Risk.Credit risk arises
from the potential nonperformance by counterparties, customers or debt security issuers. SWS is exposed to credit risk as a trading counterparty to dealers and customers, as a holder of securities and as a member of exchanges and clearing
organizations. Credit exposure is also associated with customer margin accounts, which are monitored daily. SWS monitors exposure to industry sectors and individual securities and performs sensitivity analysis on a regular basis in connection with
its margin lending activities. SWS adjusts its margin requirements if it believes its risk exposure is not appropriate based on market conditions.



Managing Risk Exposure.SWS manages risk exposure through the involvement of various levels of management. Position limits in trading and
inventory accounts are well established and monitored on an ongoing basis. 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. SWS monitors its exposure to
counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits.



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 Market Risk.



Item 4. Controls and Procedures



Within the 90-day period prior to the filing of this report, SWS carried out an evaluation, under the supervision and with the participation of SWS management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of SWS disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that SWS disclosure controls and procedures are effective, providing them with material information relating to SWS and its consolidated subsidiaries as required to be disclosed in SWS periodic filings with the Securities and
Exchange Commission. There have been no significant changes in SWS internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



In the
general course of its brokerage business and the business of clearing for other brokerage firms, SWS 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



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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.



Item 2. Changes in Securities and Use of Proceeds



None Reportable.



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 and Reports on Form 8-K



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.



SWS filed one Report on Form 8-K during the three-month period ended March 28, 2003:



|Date Filed       |  | Description                                                                                                                         
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|January 24,
2003 |  | Reported under Item 5. Other Events SWSs financial results for the quarter ended December 31, 2002. Press
release attached thereto.



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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 12, 2003Date |  |  |  | /S/ Donald W. Hultgren(Signature) Donald W. Hultgren Chief Executive Officer (Principal Executive Officer)          
|                
|May 12, 2003Date |  |  |  | /S/ Kenneth R. Hanks(Signature) Kenneth R. Hanks Treasurer and Chief Financial Officer (Principal Financial Officer)
|                
|May 12, 2003Date |  |  |  | /S/ Stacy Hodges(Signature) Stacy Hodges Principal Accounting Officer (Principal Accounting Officer)                





|
|





|
|

|
|



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CERTIFICATION BY CHIEF EXECUTIVE OFFICER



I, Donald W. Hultgren, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of SWS Group, Inc.;
|-- |  | ----------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|May 12, 2003 |  |  |  | /S/ Donald W. Hultgren                    
|------------ |  |  |  | ------------------------------------------
|Date         |  |  |  | Donald W. Hultgren Chief Executive Officer





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CERTIFICATION BY CHIEF FINANCIAL OFFICER



I, Kenneth R. Hanks, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of SWS Group, Inc.;
|-- |  | ----------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|May 12, 2003 |  |  |  | /S/ Kenneth R. Hanks                    
|------------ |  |  |  | ----------------------------------------
|Date         |  |  |  | Kenneth R. Hanks Chief Financial Officer



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SWS GROUP, INC. AND SUBSIDIARIES



INDEX TO EXHIBITS



|Exhibit Number |   |  | Description                                                                                                                                                       
|-------------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|3.1            |   |  | Certificate of Incorporation of the Registrant incorporated by reference to the Registrants Registration
Statement No. 33-42338 filed August 21, 1991            
|              
|3.2            |   |  | By-laws of the Registrant incorporated by reference to Amendment No. 1 to the Registrants Registration Statement
No. 33-42338 filed October 7, 1991              
|              
|3.3            |   |  | Certificate of Amendment of Certificate of Incorporation incorporated by reference to the Registrants Annual
Report on Form 10-K filed September 25, 1997        
|              
|10.1+          |   |  | Deferred Compensation Plan incorporated by reference to the Registrants Annual Report on Form 10-K filed
September 23, 1999                                      
|              
|10.2+          |   |  | Employee Stock Purchase Plan incorporated by reference to the Registrants Registration Statement on Form S-8,
filed November 10, 1994 (Registration No. 33-86234)
|              
|10.3+          |   |  | Stock Option Plan incorporated by reference to the Registrants Proxy Statement filed September 24,
1996                                                          
|              
|10.4+          |   |  | Phantom Stock Plan incorporated by reference to the Registrants Proxy Statement filed September 24,
1996                                                         
|              
|10.5+          |   |  | 1997 Stock Option Plan incorporated by reference to the Registrants Annual Report on Form 10-K filed September
24, 1998                                          
|              
|10.6+          |   |  | Stock Purchase Plan (Restated) incorporated by reference to the Registrants Quarterly Report on Form 10-Q filed
February 16, 1999                                
|              
|10.7+          |   |  | Deferred Compensation Plan filed April 7, 2000                                                                                                                    
|              
|10.8+          |   |  | Stock Purchase Plan (Restated) post-effective amendment filed April 7, 2000                                                                                       
|              
|10.9+          |   |  | Agreement between Registrant and David Glatstein, effective as of December 28, 2001                                                                               
|              
|99.1           | * |  | Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                   
|              
|99.2           | * |  | Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                   

---

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

|+ |  | Management contract or compensatory plan or arrangement
|- |  | -------------------------------------------------------