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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



Form 10-Q





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



For the quarterly period ended September 26, 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



SWS GROUP, INC.

(Exact name of
registrant as specified in its charter)



|Delaware                                                      |  | 75-2040825                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|1201 Elm Street, Suite 3500, Dallas, Texas                    |  | 75270                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



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



_____________________________________________________________

(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 þ No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No ̈



As of November 5, 2003, there were 17,115,187 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 September 26, 2003 (unaudited) and June 27, 2003                                                          
|                              |  |                                                                                                                                                          
|                              |  | Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) For the three months ended September 26, 2003 and September 27, 2002 (unaudited)
|                              |  |                                                                                                                                                          
|                              |  | Consolidated Statements of Cash Flows For the three months ended September 26, 2003 and September 27, 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                    |  | 37                                                                                                                                                       
|                              | 
|EXHIBIT INDEX                 |  | 38                                                                                                                                                       





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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 we provide is not a guarantee of future performance. Actual results may differ materially as a result of various
factors, some of which are outside of our control.



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 in this Report and
those discussed in our other reports filed with and available from the Securities and Exchange Commission. All forward-looking statements we make 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

September 26, 2003 and June 27, 2003

(In thousands, except par values and share amounts)



|                                                                                                                                                                                                              |  | September (unaudited) |           |   | June |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | --------- | - | ---- | -
|                                                                                                                                                                                                              |  |                      
|Assets                                                                                                                                                                                                        |  |                       |           |   |      |  
|Cash and cash equivalents                                                                                                                                                                                     |  | $                     | 233,690   |   |      | $
|Assets segregated for regulatory purposes                                                                                                                                                                     |  |                       | 505,310   |   |      |  
|Marketable equity securities available for sale                                                                                                                                                               |  |                       | 8,640     |   |      |  
|Receivable from brokers, dealers and clearing organizations                                                                                                                                                   |  |                       | 2,868,283 |   |      |  
|Receivable from clients, net                                                                                                                                                                                  |  |                       | 362,122   |   |      |  
|Loans held for sale, net                                                                                                                                                                                      |  |                       | 105,379   |   |      |  
|Loans, net                                                                                                                                                                                                    |  |                       | 362,350   |   |      |  
|Securities owned, at market value                                                                                                                                                                             |  |                       | 136,416   |   |      |  
|Goodwill                                                                                                                                                                                                      |  |                       | 7,700     |   |      |  
|Other assets                                                                                                                                                                                                  |  |                       | 81,922    |   |      |  
|                                                                                                                                                                                                              |  |                       |           |   |      |  
|                                                                                                                                                                                                              |  | $                     | 4,671,812 |   |      | $
|                                                                                                                                                                                                              |  |                       |           |   |      |  
|                                                                                                                                                                                                              |  |                      
|Liabilities and Stockholders Equity                                                                                                                                                                          |  |                       |           |   |      |  
|Short-term borrowings                                                                                                                                                                                         |  | $                     | 48,400    |   |      | $
|Payable to brokers, dealers and clearing organizations                                                                                                                                                        |  |                       | 2,795,337 |   |      |  
|Payable to clients                                                                                                                                                                                            |  |                       | 738,644   |   |      |  
|Deposits                                                                                                                                                                                                      |  |                       | 632,757   |   |      |  
|Securities sold, not yet purchased, at market value                                                                                                                                                           |  |                       | 70,584    |   |      |  
|Drafts payable                                                                                                                                                                                                |  |                       | 32,857    |   |      |  
|Advances from Federal Home Loan Bank                                                                                                                                                                          |  |                       | 18,010    |   |      |  
|Other liabilities                                                                                                                                                                                             |  |                       | 72,909    |   |      |  
|Exchangeable subordinated notes                                                                                                                                                                               |  |                       | 9,086     |   |      |  
|                                                                                                                                                                                                              |  |                       |           |   |      |  
|                                                                                                                                                                                                              |  |                       | 4,418,584 |   |      |  
|Minority interest in consolidated subsidiaries                                                                                                                                                                |  |                       | 2,029     |   |      |  
|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 17,773,849 and outstanding 17,020,079 shares at September 26,
2003; issued 17,707,998 and outstanding 16,957,287 shares at June 27, 2003 |  |                       | 1,777     |   |      |  
|Additional paid-in capital                                                                                                                                                                                    |  |                       | 244,155   |   |      |  
|Retained Earnings                                                                                                                                                                                             |  |                       | 1,272     |   |      |  
|Accumulated other comprehensive income  unrealized holding gain (loss), net of tax of $7,305 at September 26, 2003 and
$6,824 at June 27, 2003                                                               |  |                       | 13,566    |   |      |  
|Deferred compensation, net                                                                                                                                                                                    |  |                       | 1,611     |   |      |  
|Treasury stock (753,770 shares at September 26, 2003 and 750,711 shares at June 27, 2003, at cost)                                                                                                            |  |                       | (11,182   | ) |      |  
|                                                                                                                                                                                                              |  |                       |           |   |      |  
|Total stockholders equity                                                                                                                                                                                    |  |                       | 251,199   |   |      |  
|Commitments and contingencies                                                                                                                                                                                 |  |                       |           |   |      |  
|                                                                                                                                                                                                              |  |                       |           |   |      |  
|                                                                                                                                                                                                              |  | $                     | 4,671,812 |   |      | $
|                                                                                                                                                                                                              |  |                       |           |   |      |  



See accompanying
Notes to Consolidated Financial Statements.



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##### Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES



Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the three months ended September 26, 2003
and September 27, 2002

(In thousands, except per share and share amounts)

(Unaudited)



|                                                                                                         |  | Fiscal 2004 |            |   | Fiscal 2003 |  
|-------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ----------- | -
|Net revenues from clearing operations                                                                    |  | $           | 5,276      |   |             | $
|Commissions                                                                                              |  |             | 21,858     |   |             |  
|Interest                                                                                                 |  |             | 24,403     |   |             |  
|Investment banking, advisory and administrative fees                                                     |  |             | 6,045      |   |             |  
|Net gains on principal transactions                                                                      |  |             | 3,453      |   |             |  
|Other                                                                                                    |  |             | 2,735      |   |             |  
|                                                                                                         |  |             |            |   |             |  
|                                                                                                         |  |             | 63,770     |   |             |  
|                                                                                                         |  |             |            |   |             |  
|Commissions and other employee compensation                                                              |  |             | 32,620     |   |             |  
|Interest                                                                                                 |  |             | 8,169      |   |             |  
|Occupancy, equipment and computer service costs                                                          |  |             | 7,364      |   |             |  
|Communications                                                                                           |  |             | 3,095      |   |             |  
|Floor brokerage and clearing organization charges                                                        |  |             | 1,768      |   |             |  
|Advertising and promotional                                                                              |  |             | 771        |   |             |  
|Other                                                                                                    |  |             | 7,873      |   |             |  
|                                                                                                         |  |             |            |   |             |  
|                                                                                                         |  |             | 61,660     |   |             |  
|                                                                                                         |  |             |            |   |             |  
|Income (loss) before income tax expense (benefit) and minority interest in consolidated subsidiaries     |  |             | 2,110      |   |             |  
|Income tax expense (benefit)                                                                             |  |             | 527        |   |             |  
|                                                                                                         |  |             |            |   |             |  
|Income before minority interest in consolidated subsidiaries                                             |  |             | 1,583      |   |             |  
|Minority interest in consolidated subsidiaries                                                           |  |             | (300       | ) |             |  
|                                                                                                         |  |             |            |   |             |  
|Net income (loss)                                                                                        |  |             | 1,283      |   |             |  
|Other comprehensive income (loss):                                                                       |  |             |            |   |             |  
|Holding gain (loss) arising during period, net of tax of $1,064 in fiscal 2004 and ($190) in fiscal 2003 |  |             | 2,073      |   |             |  
|Reclassification for hedging activities, net of tax of ($635) in fiscal 2004 and $158 in fiscal 2003     |  |             | (1,180     | ) |             |  
|                                                                                                         |  |             |            |   |             |  
|Net income (loss) recognized in other comprehensive income (loss)                                        |  |             | 893        |   |             |  
|                                                                                                         |  |             |            |   |             |  
|Comprehensive income (loss)                                                                              |  | $           | 2,176      |   |             | $
|                                                                                                         |  |             |            |   |             |  
|                                                                                                         |  |            
|Earnings per share  basic                                                                               |  |             |            |   |             |  
|Net income (loss)                                                                                        |  | $           | 0.08       |   |             | $
|                                                                                                         |  |             |            |   |             |  
|Weighted average shares outstanding  basic                                                              |  |             | 17,001,684 |   |             |  
|                                                                                                         |  |             |            |   |             |  
|                                                                                                         |  |            
|Earnings per share  diluted                                                                             |  |             |            |   |             |  
|Net income (loss)                                                                                        |  | $           | 0.07       |   |             | $
|                                                                                                         |  |             |            |   |             |  
|Weighted average shares outstanding  diluted                                                            |  |             | 17,206,521 |   |             |  
|                                                                                                         |  |             |            |   |             |  



See accompanying
Notes to Consolidated Financial Statements.



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SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the three months ended September 26, 2003 and September 27, 2002

(In thousands)

(Unaudited)



|                                                                                                   |  | Fiscal 2004 |         |   | Fiscal 2003 |  
|-------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | -
|                                                                                                   |  |            
|Cash flows from operating activities:                                                              |  |             |         |   |             |  
|Net income (loss)                                                                                  |  | $           | 1,283   |   |             | $
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |             |         |   |             |  
|Depreciation and amortization                                                                      |  |             | 1,460   |   |             |  
|Provision for doubtful accounts                                                                    |  |             | 806     |   |             |  
|Provision for loss on mortgage loans                                                               |  |             |        |   |             |  
|Deferred income tax benefit (expense)                                                              |  |             | 1,267   |   |             |  
|Deferred compensation                                                                              |  |             | 108     |   |             |  
|Equity in undistributed (earnings) loss on investments                                             |  |             | 1,265   |   |             |  
|Net change in minority interest in consolidated subsidiaries                                       |  |             | 207     |   |             |  
|Change in operating assets and liabilities:                                                        |  |             |         |   |             |  
|Increase in assets segregated for regulatory purposes                                              |  |             | (64,126 | ) |             |  
|Net change in broker, dealer and clearing organization accounts                                    |  |             | 9,635   |   |             |  
|Net change in client accounts                                                                      |  |             | (31,479 | ) |             |  
|Net change in loans held for sale                                                                  |  |             | 95,886  |   |             |  
|(Increase) decrease in securities owned                                                            |  |             | (13,627 | ) |             |  
|(Increase) decrease in other assets                                                                |  |             | 2,203   |   |             |  
|Increase (decrease) in drafts payable                                                              |  |             | 3,526   |   |             |  
|Increase (decrease) in securities sold, not yet purchased                                          |  |             | 29,964  |   |             |  
|Increase (decrease) in other liabilities                                                           |  |             | 554     |   |             |  
|                                                                                                   |  |             |         |   |             |  
|Net cash provided by (used in) operating activities                                                |  |             | 38,932  |   |             |  
|                                                                                                   |  |             |         |   |             |  
|                                                                                                   |  |            
|Cash flows from investing activities:                                                              |  |             |         |   |             |  
|Purchase of fixed assets                                                                           |  |             | (1,431  | ) |             |  
|Loan originations and purchases, net of repayments                                                 |  |             | 2,617   |   |             |  
|Cash paid for purchase of OConnor, net of cash acquired                                           |  |             | (142    | ) |             |  
|Cash paid to CSS to finance operations                                                             |  |             | (938    | ) |             |  
|Cash received on investments                                                                       |  |             | 40      |   |             |  
|                                                                                                   |  |             |         |   |             |  
|Net cash provided by (used in) investing activities                                                |  |             | 146     |   |             |  
|                                                                                                   |  |             |         |   |             |  
|                                                                                                   |  |            
|Cash flows from financing activities:                                                              |  |             |         |   |             |  
|Increase (decrease) in short-term borrowings                                                       |  |             | 48,400  |   |             |  
|Payments on capital leases                                                                         |  |             | (83     | ) |             |  
|Increase in deposits                                                                               |  |             | 104,242 |   |             |  
|Increase (decrease) in advances from Federal Home Loan Bank                                        |  |             | (31,875 | ) |             |  
|Payment of cash dividends on common stock Parent                                                  |  |             | (1,702  | ) |             |  
|Net proceeds from exercise of stock options                                                        |  |             | 924     |   |             |  
|Proceeds related to Deferred Compensation Plan                                                     |  |             | 63      |   |             |  
|Purchase of treasury stock                                                                         |  |             | (63     | ) |             |  
|                                                                                                   |  |             |         |   |             |  
|Net cash provided by financing activities                                                          |  |             | 119,906 |   |             |  
|                                                                                                   |  |             |         |   |             |  
|Net increase in cash                                                                               |  |             | 158,984 |   |             |  
|Cash at beginning of period                                                                        |  |             | 74,706  |   |             |  
|                                                                                                   |  |             |         |   |             |  
|Cash at end of period                                                                              |  | $           | 233,690 |   |             | $
|                                                                                                   |  |             |         |   |             |  
|                                                                                                   |  |            
|Supplemental disclosure of cash flow information:                                                  |  |             |         |   |             |  
|                                                                                                   |  |            
|Cash paid during the period for:                                                                   |  |             |         |   |             |  
|Interest                                                                                           |  | $           | 8,550   |   |             | $
|                                                                                                   |  |             |         |   |             |  
|Taxes                                                                                              |  | $           | 100     |   |             | $
|                                                                                                   |  |             |         |   |             |  



See accompanying
Notes to Consolidated Financial Statements.



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SWS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Three Months Ended September 26, 2003 and September 27, 2002

(Unaudited)



GENERAL AND BASIS OF
PRESENTATION



The interim consolidated financial statements
as of September 26, 2003, and for the three-month periods ended September 26, 2003 and September 27, 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 27, 2003 filed on Form 10-K. Amounts included for June 27, 2003 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          
|Southwest Clearing Corp.                   |  | Southwest Clearing     
|May Financial Corporation                  |  | May Financial          
|Mydiscountbroker.com, Inc.                 |  | Mydiscountbroker       
|Asset Management Group                     |  |                          
|SWS Capital Corporation                    |  | SWS Capital            
|Southwest Investment Advisors, Inc.        |  | Southwest Advisors     
|Banking Group                              |  |                          
|First Savings Bank, 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       
|Southwest Financial Insurance Agency, Inc. |  | SWS Insurance          
|Southwest Insurance Agency, Inc.           |  |                         
|Southwest Insurance Agency of Alabama      |  |                         



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



On April 22, 2003, SWS
Group, Inc. and Mydiscountbroker signed a definitive agreement to sell the accounts of Mydiscountbroker to Ameritrade, Inc. and Ameritrade Canada, Inc., subsidiaries of Ameritrade Holding Corporation (Ameritrade). The purchase price was
based on the actual accounts transferred at closing, which was completed on June 13, 2003. Mydiscountbroker had approximately 16,500 accounts. The sales price was $4,200,000, for an after-tax gain to SWS of $2,730,000, which was recognized in June
of 2003.



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Asset Management Group.Asset management services are offered through SWS Capital, which administers the Local
Government Investment Cooperative (LOGIC) fund for cities, counties, schools and other local governments across Texas. LOGIC is an investment program tailored to the needs of local governments within the state of Texas.



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. During fiscal 2003, SWS completed the transition of these accounts with no additional compensation.



Effective April 28, 2003, Southwest Financial Insurance Agency, Inc. and Southwest Insurance
Agency, Inc., together with its subsidiary, Southwest Insurance Agency of Alabama, became consolidated subsidiaries of SWS due to the purchase by SWS of the outstanding stock of Southwest Financial Insurance Agency, Inc. and Southwest Insurance
Agency, Inc. Southwest Financial Insurance Agency, Inc. and Southwest Insurance Agency, Inc., together with its subsidiary, hold insurance agency licenses in 42 states for the purpose of facilitating the sale of insurance and annuities for Southwest
Securities, Inc. and SWS Financial Services.



STOCK OPTION PLANS



At September 26, 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 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 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
Board of Directors from 1997 through 2001. In fiscal 2002, all stock options and exercise prices were adjusted to reflect the spin-off of SWS primary asset management subsidiary. 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 asset management subsidiary spin-off.



5



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##### Table of Contents

The Company accounts for the plans under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. (in thousands, except share and per share amounts):



|                              |  | Three Months Ended |      
|----------------------------- |  | ------------------ | -----
|                              |  | September 26,2003  |      
|Net income (loss):            |  |                    |      
|As Reported                   |  | $                  | 1,283
|Pro forma                     |  |                    | 837  
|Earnings per share  basic:   |  |                    |      
|As Reported                   |  | $                  | 0.08 
|Pro forma                     |  |                    | 0.05 
|Earnings per share  diluted: |  |                    |      
|As Reported                   |  | $                  | 0.07 
|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 months ended September 26, 2003 and September 27, 2002:



|                        |  | Three Months Ended |  
|----------------------- |  | ------------------ | -
|                        |  | September 26,2003  |  
|Expected volatility     |  | 52                 | %
|Risk-free interest rate |  | 3.37               | %
|Expected dividend yield |  | 2.57               | %
|Expected life           |  | 5 years            |  



CASH & CASH EQUIVALENTS



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



EQUITY METHOD INVESTMENTS



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 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):



|                     |  | September 30,2003 |        |   | June 27, 2003 |  
|-------------------- |  | ----------------- | ------ | - | ------------- | -
|Total assets         |  | $                 | 7,513  |   |               | $
|Total liabilities    |  |                   | 10,778 |   |               |  
|Shareholders equity |  |                   | (3,265 | ) |               |  



|               |  | Three Months Ended |       
|-------------- |  | ------------------ | ------
|               |  | September 30,2003  |       
|Total revenues |  | $                  | 1,024 
|Net loss       |  |                    | (4,017



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##### Table of Contents

As required by APB Opinion No. 18, SWS recorded its share of undistributed loss from CSS operations, as well as
amortization expense on the portion of the investment designated as goodwill. Additionally, 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 and the related goodwill in June 2002.



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. In June of 2003, SWS and CSS amended the loan agreement to provide that SWS would increase
the two remaining quarterly installments to $937,500. All other terms of the note were unchanged.



SWS 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 three months ended September 26, 2003 was $1,007,400. SWS
percentage of losses was greater than the $937,500 loaned during the quarter ended September 26, 2003 by $69,900. From inception of the loan to date, SWS percentage of losses of $3,083,400 was greater than the $2,562,500 loaned by $520,900. As
a result, there is no recorded equity investment or loan receivable from CSS at September 26, 2003.



SWS has four other investment vehicles, which are accounted for under the equity method. One is a limited partnership venture capital fund. Upon formation of this fund, SWS committed $5 million to the fund. As of
September 26, 2003, SWS had contributed $2.5 million from inception to date. During the quarter ended September 26, 2003, SWS recorded losses of $ 255,000 related to this investment.



SWS also has a 33.33% investment in a business, which provides option execution services. SWS entered into this investment January 2, 2003.
As of September 26, 2003, SWS has made the initial investment of $10,000, recorded its share of losses for the quarter of $ 69,000, and made loans to the entity totaling $475,000. SWS loaned $250,000 with an interest rate of 10% due on June 27,
2003. As of September 26, 2003, $40,000 of the outstanding balance had been repaid. The second loan of $225,000 represents subordinated debt of the investment, bears interest at a rate of 3%, and matures March 1, 2006. SWS also provides option
clearing services to the entity at cost.



The Financial Accounting Standards
Board issued Financial Interpretation (FIN) No. 46 on January 17, 2003. Upon review of its investments, SWS determined that it has a variable interest entity (VIE), as defined by FIN No. 46, it can potentially consolidate.
This investment is the equity method investment entered into on January 2, 2003 described above. According to FIN No. 46, the investment would not be consolidated in SWS consolidated financial statements until the first interim period
beginning after June



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15, 2003. On October 8, 2003, the Financial Accounting Standards Board deferred the latest date for consolidation to the first reporting period
ending after December 15, 2003. SWS is still assessing the effect of the implementation of FIN No. 46 on the consolidated financial statements if SWS consolidated the entity.



SWS two remaining equity investments had total losses for the three months ended September 26, 2003 of $100,600.



ASSETS SEGREGATED FOR REGULATORY PURPOSES



At September 26, 2003, SWS had U.S. Treasury securities with a market value of approximately
$151,923,000, reverse repurchase agreements of approximately $101,521,000 and related cash and accrued interest of approximately $5,000 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 $103,210,000. SWS also had approximately $4,001,000 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 September 26, 2003. The reverse repurchase agreements in the PAIB accounts were collateralized by U.S.
Government securities with a market value of approximately $4,050,000. SWS also had approximately $247,800,000 of cash and accrued interest of $59,000 held in a reserve account at September 26, 2003.



At June 27, 2003, SWS had U.S. Treasury securities with a market value of approximately
$248,143,000, reverse repurchase agreements of approximately $191,990,000, and related cash and accrued interest of approximately $51,000 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 $194,647,000. SWS also had approximately $1,000,000 in reverse repurchase agreements in special reserve bank
accounts for the PAIB at June 27, 2003. The reverse repurchase agreements in the PAIB accounts were collateralized by U.S. Government securities with a market value of approximately $1,003,000.



MARKETABLE EQUITY SECURITIES



SWS 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 September 26, 2003 and June 27, 2003, 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 $4,251,000 at September 26, 2003 and $2,436,000 at June 27, 2003. The market value of the USHS shares was $4,389,000 at September 26, 2003 and $3,163,000 at June 27, 2003.



The specific identification method is used to determine the cost of marketable
securities sold. At September 26, 2003 and June 27, 2003, 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 SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.



There were no sales of
Knight or USHS stock in the three-month periods ending September 26, 2003 and September 27, 2002.



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##### Table of Contents

RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS



At September 26, 2003 and June 27, 2003, SWS had receivable from and payable to brokers,
dealers and clearing organizations related to the following (in thousands):



|                             |  | September |           | June
|---------------------------- |  | --------- | --------- | ----
|Receivable                   |  |           |           |     
|Securities failed to deliver |  | $         | 41,703    |     
|Securities borrowed          |  |           | 2,794,872 |     
|Correspondent broker/dealers |  |           | 19,535    |     
|Clearing organizations       |  |           | 6,223     |     
|Other                        |  |           | 5,950     |     
|                             |  |           |           |     
|                             |  | $         | 2,868,283 |     
|                             |  |           |           |     
|Payable                      |  |           |           |     
|Securities failed to receive |  | $         | 43,707    |     
|Securities loaned            |  |           | 2,724,993 |     
|Correspondent broker/dealers |  |           | 17,554    |     
|Other                        |  |           | 9,083     |     
|                             |  |           |           |     
|                             |  | $         | 2,795,337 |     
|                             |  |           |           |     



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 $2,794,873,000 under securities
lending agreements, of which the Company has repledged $2,681,596,000 at September 26, 2003. At June 27, 2003, the Company had collateral of $2,401,665,000 under securities lending agreements, of which the Company had repledged $2,286,526,000.



LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES



Loans receivable, excluding loans held for sale, at September 26, 2003 and June 27, 2003 are
summarized as follows (in thousands):



|                                                 |  | September |         |   | June |  
|------------------------------------------------ |  | --------- | ------- | - | ---- | -
|First mortgage loans (principally conventional): |  |           |         |   |      |  
|Real estate                                      |  | $         | 195,587 |   |      | $
|Construction                                     |  |           | 89,916  |   |      |  
|                                                 |  |           |         |   |      |  
|                                                 |  |           | 285,503 |   |      |  
|                                                 |  |           |         |   |      |  
|Consumer and other loans:                        |  |           |         |   |      |  
|Commercial                                       |  |           | 33,539  |   |      |  
|Other                                            |  |           | 57,008  |   |      |  
|                                                 |  |           |         |   |      |  
|                                                 |  |           | 90,547  |   |      |  
|                                                 |  |           |         |   |      |  
|Factored receivables                             |  |           | 7,440   |   |      |  
|                                                 |  |           |         |   |      |  
|                                                 |  |           | 383,490 |   |      |  
|Unearned income                                  |  |           | (16,419 | ) |      |  
|Allowance for probable loan losses               |  |           | (4,721  | ) |      |  
|                                                 |  |           |         |   |      |  
|                                                 |  | $         | 362,350 |   |      | $
|                                                 |  |           |         |   |      |  



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##### Table of Contents

Impairment of loans with a recorded investment of approximately $11,801,000 and $11,692,000 at September 26, 2003 and
June 27, 2003, respectively, has been recognized in conformity with SFAS No. 114, Accounting by Creditors for Impairment of a Loanan Amendment of SFAS No. 5 and SFAS No. 15, as amended by SFAS No. 118, Accounting 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-month periods ended September 26, 2003 and September 27, 2002 is as follows (in thousands):



|                                    |  | Three Months Ended |      
|----------------------------------- |  | ------------------ | -----
|                                    |  | September 26,2003  |      
|Balance at beginning of period      |  | $                  | 4,421
|Provision for loan losses           |  |                    | 1,041
|Loans charged to the allowance, net |  |                    | (741 
|                                    |  |                    |      
|Balance at end of period            |  | $                  | 4,721
|                                    |  |                    |      



SECURITIES OWNED AND SECURITIES
SOLD, NOT YET PURCHASED



At September 26, 2003 and June 27, 2003, SWS held
securities owned and securities sold, not yet purchased as follows (in thousands):



|                                                  |  | September |         | June
|------------------------------------------------- |  | --------- | ------- | ----
|Securities owned                                  |  |           |         |     
|Corporate equity securities                       |  | $         | 8,599   |     
|Municipal obligations                             |  |           | 19,869  |     
|U.S. Government and Government agency obligations |  |           | 37,854  |     
|Corporate obligations                             |  |           | 56,261  |     
|Other                                             |  |           | 13,833  |     
|                                                  |  |           |         |     
|                                                  |  | $         | 136,416 |     
|                                                  |  |           |         |     
|Securities sold, not yet purchased                |  |           |         |     
|Corporate equity securities                       |  | $         | 2,252   |     
|Municipal obligations                             |  |           | 89      |     
|U.S. Government and Government agency obligations |  |           | 22,627  |     
|Corporate obligations                             |  |           | 45,275  |     
|Other                                             |  |           | 341     |     
|                                                  |  |           |         |     
|                                                  |  | $         | 70,584  |     
|                                                  |  |           |         |     



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 $2,047,000 and $1,945,000 at September 26, 2003
and June 27, 2003, respectively. Additionally, at September 26, 2003 and June 27, 2003, SWS had pledged firm securities valued at $441,000 and $242,000, respectively, in conjunction with securities lending activities.



GOODWILL



In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill.



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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, by determining the fair value of the reporting units with goodwill, during the second
quarter of fiscal 2003. SWS performed its annual assessment of the fair value of goodwill and based on the results of the valuation, SWS goodwill balance was not impaired.



SWS has two reporting units with goodwillSouthwest Securities and the Bank. Changes in the carrying value of goodwill during the three
month periods ended September 26, 2003, by segment and in the aggregate, are summarized in the following table (in thousands):



|                                                                  |  | BrokerageGroup |       | BankingGroup |   | ConsolidatedSWS Group,Inc.
|----------------------------------------------------------------- |  | -------------- | ----- | ------------ | - | --------------------------
|Balance, June 27, 2003                                            |  | $              | 6,302 |              | $ | 1,256                     
|Arising from earn-out provision of completed business combination |  |                | 142   |              |   |                          
|                                                                  |  |                |       |              |   |                           
|Balance, September 26, 2003                                       |  | $              | 6,444 |              | $ | 1,256                     
|                                                                  |  |                |       |              |   |                           



In accordance with SFAS No. 142, SWS
ceased amortizing its goodwill at the date of adoption.



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 $ 52,000 of software development up-grade costs associated with the CSS technology platform for the three months ended September
26, 2003. There were no capitalized software development costs for the three months ended September 27, 2002. These capitalized costs are primarily labor related and will be depreciated over a three-year period.



SHORT-TERM BORROWINGS



SWS has credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used
primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers margin accounts. These lines may also be used to release pledged collateral against day loans. These credit
arrangements are provided on an as offered basis and are not committed lines of credit. These arrangements can be terminated at any time by the lender. Any outstanding balance under these credit arrangements is due on demand and bears
interest at rates indexed to the federal funds rate. At September 26, 2003, the amount outstanding under these secured arrangements was $34,200,000, which was collateralized by securities held for firm accounts valued at $44,048,000, and
$14,200,000, which was collateralized by securities held for non customer accounts valued at $27,499,000. There were no borrowings under these arrangements at June 27, 2003.



In addition to the broker loan lines, SWS has a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates
indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount outstanding under the unsecured letters of credit at the time of borrowing. At September 26, 2003 and June 27, 2003, the
total amount available for borrowings was $16,750,000 and $17,750,000, respectively. There were no amounts outstanding on this line at September 26, 2003 and June 27, 2003.



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##### Table of Contents

SWS has an irrevocable letter of credit agreement aggregating $62,000,000 and $57,000,000 at September 26, 2003 and June
27, 2003, 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 $78,712,000 and $76,298,000 at September 26, 2003 and June 27, 2003, respectively. SWS also has unsecured letters of credit, aggregating $2,250,000
at both September 26, 2003 and June 27, 2003, pledged to support its open positions with securities clearing organizations. At September 26, 2003, SWS has an additional unsecured letter of credit issued for a sub-lease to the sub-leasee of space
previously occupied by Mydiscountbroker in the amount of $1,000,000. The unsecured letters of credit bear interest at the prime rate plus 3%, if drawn, and are renewable 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 September 26, 2003, approximately $467,862,000 of client securities under customer margin loans is available to be repledged, of which SWS has pledged $43,303,000 under securities loan
agreements. At June 27, 2003, $389,240,000 of client securities under customer margin loans is available to be pledged, of which the Company has repledged $16,753,000 under securities loan agreements.



At September 26, 2003 and June 27, 2003, SWS had no repurchase agreements outstanding.



DEPOSITS



Deposits at September 26, 2003 and June 27, 2003 are summarized as follows (dollars in thousands):



|                                              |  | September |         |         | June  |  
|--------------------------------------------- |  | --------- | ------- | ------- | ----- | -
|                                              |  | Amount    |         | Percent |       |  
|Noninterest bearing demand accounts           |  | $         | 24,656  |         | 3.9   | %
|Interest bearing demand accounts              |  |           | 363,976 |         | 57.5  |  
|Savings accounts                              |  |           | 1,359   |         | 0.2   |  
|Limited access money market accounts          |  |           | 17,235  |         | 2.7   |  
|Certificates of deposit, less than $100,000   |  |           | 101,531 |         | 16.1  |  
|Certificates of deposit, $100,000 and greater |  |           | 124,000 |         | 19.6  |  
|                                              |  |           |         |         |       |  
|                                              |  | $         | 632,757 |         | 100.0 | %
|                                              |  |           |         |         |       |  



The weighted average interest rate on
deposits was approximately 1.74% at September 26, 2003 and 1.98% at June 27, 2003.



At September 26, 2003, scheduled maturities of certificates of deposit were as follows (in thousands):



|                                              |  | Fiscal 2004 |         | Fiscal 2005 |   | Fiscal 2006 |  | Thereafter |       | Total
|--------------------------------------------- |  | ----------- | ------- | ----------- | - | ----------- |  | ---------- | ----- | -----
|Certificates of deposit, less than $100,000   |  | $           | 69,063  |             | $ | 21,353      |  | $          | 7,119 |      
|Certificates of deposit, $100,000 and greater |  |             | 110,911 |             |   | 9,761       |  |            | 2,325 |      
|                                              |  |             |         |             |   |             |  |            |       |      
|                                              |  | $           | 179,974 |             | $ | 31,114      |  | $          | 9,444 |      
|                                              |  |             |         |             |   |             |  |            |       |      



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



At September 26, 2003 and June 27, 2003, advances from the FHLB were due as follows (in
thousands):



|                        |  | September |        | June
|----------------------- |  | --------- | ------ | ----
|Maturity:               |  |           |        |     
|Due within one year     |  | $         |       |     
|Due within two years    |  |           | 2,378  |     
|Due within five years   |  |           | 1,682  |     
|Due within seven years  |  |           | 1,094  |     
|Due within ten years    |  |           | 5,826  |     
|Due within twenty years |  |           | 7,030  |     
|                        |  |           |        |     
|                        |  | $         | 18,010 |     
|                        |  |           |        |     



Pursuant to collateral agreements, the
advances from the FHLB, with interest rates ranging from 3.3% to 7.7%, are collateralized by approximately $117,000,000 of collateral value (as defined) in qualifying loans at September 26, 2003 (calculated at June 30, 2003). At June 27, 2003
(calculated at March 31, 2003), advances with interest rates from 1.2% to 7.7% were collateralized by approximately $87,000,000 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 September 26, 2003 and June 27, 2003.



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 month periods ended September 26, 2003 and September 27, 2002 (in thousands):



|                                       |  | Fiscal 2004 |       | Fiscal 2003 |  
|-------------------------------------- |  | ----------- | ----- | ----------- | -
|Balance at beginning of period         |  | $           | 7,284 |             | $
|Change in value of embedded derivative |  |             | 1,802 |             |  
|                                       |  |             |       |             |  
|Balance at end of first quarter        |  | $           | 9,086 |             | $
|                                       |  |             |       |             |  



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-month periods ended September 26, 2003 and September 27, 2002, the changes in the time value of the
embedded equity option in the DARTS were immaterial to the consolidated financial statements.



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, as defined in Rule 15c3-1 under the 1934 Act, equal to the greater of $1,500,000 or 2% of aggregate debit
balances, as defined in Rule 15c3-3



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##### Table of Contents

under the 1934 Act. At September 26, 2003, Southwest Securities had net capital of $98,778,000, or approximately 20.3% of aggregate debit balances, which is
$89,043,000 in excess of its minimum net capital requirement of $9,735,000 at that date. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less
than 5% of aggregate debit items. At September 26, 2003, Southwest Securities had net capital of $74,441,000 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 September 26, 2003, the net
capital and excess net capital for Southwest Clearing was $1,384,000 and $1,134,000, respectively, and May Financial had net capital and excess net capital of $3,377,000 and $3,127,000, 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 September 26, 2003, the net capital and excess net capital of SWS Financial was $356,000 and $106,000, respectively, and Mydiscountbroker had net capital and excess
net capital of $2,242,000 and $1,992,000, 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 September 26, 2003 and June 27, 2003, that the
Bank met all capital adequacy requirements to which it is subject.



As of
September 26, 2003 and June 27, 2003, 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 AdequacyPurposes |   |        | To Be Well Capitalized Under Prompt Corrective Action Provisions |       
|----------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | ---------------------------------------------------------------- | ------
|                                          |  | Amount |        | Ratio |                              |   | Amount |                                                                  | Ratio 
|September 26, 2003:                       |  |        |        |       |                              |   |        |                                                                  |       
|Total capital (to risk weighted assets)   |  | $      | 57,615 |       | 12.3                         | % |        | $                                                                | 37,611
|Tier I capital (to risk weighted assets)  |  |        | 54,464 |       | 11.6                         |   |        |                                                                  | 18,806
|Tier I capital (to adjusted total assets) |  |        | 54,464 |       | 7.6                          |   |        |                                                                  | 28,747
|                                          |  |        |        |       |                              |  
|June 27, 2003:                            |  |        |        |       |                              |   |        |                                                                  |       
|Total capital (to risk weighted assets)   |  | $      | 55,034 |       | 11.2                         | % |        | $                                                                | 39,312
|Tier I capital (to risk weighted assets)  |  |        | 52,011 |       | 10.6                         |   |        |                                                                  | 19,656
|Tier I capital (to adjusted total assets) |  |        | 52,011 |       | 8.1                          |   |        |                                                                  | 25,763



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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 months ended September 26,
2003 and September 27, 2002 (in thousands, except share and per share amounts):



|                                              |  | Three Months Ended |           
|--------------------------------------------- |  | ------------------ | ----------
|                                              |  | September 26,2003  |           
|Net income                                    |  | $                  | 1,283     
|                                              |  |                    |           
|Weighted average shares outstanding  basic   |  |                    | 17,001,684
|Effect of dilutive securities:                |  |                    |           
|Assumed exercise of stock options             |  |                    | 204,837   
|                                              |  |                    |           
|Weighted average shares outstanding  diluted |  |                    | 17,206,521
|                                              |  |                    |           
|Earnings per share  basic                    |  | $                  | 0.08      
|                                              |  |                    |           
|Earnings per share  diluted                  |  | $                  | 0.07      
|                                              |  |                    |           



At September 26, 2003, there were
approximately 1.7 million options outstanding under the two stock option plans, see -General and Basis of Presentation-Stock Option Plans. As of September 26, 2003, approximately 94,114 outstanding options were antidilutive and therefore
were not included in the calculation of weighted average shares outstanding-diluted. As a result of the net losses reported in the first quarter 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 the quarter ended September
27, 2002, SWS repurchased 270,700 shares of its common stock for $3,227,000, or $11.92 per share, under a plan to repurchase up to one million shares of the Parents common stock, authorized by its Board of Directors on November 1, 2000. In
February 2003, the Board of Directors of SWS approved the repurchase of up to 500,000 additional SWS shares of common stock. As a result of the action, on that date, SWS was authorized to repurchase 836,200 shares under the program. No shares have
been repurchased since February 2003. The one million share repurchase plan expires in December 2003. At that time, SWS will have 500,000 shares authorized for repurchase that expire in June of 2004.



Additionally, SWS periodically purchases stock in the open market under SWS Deferred
Compensation Plan. This stock is classified as treasury stock in the consolidated financial statements, but participates in future dividends declared by SWS. Approximately 3,059 shares were purchased in the first quarter of fiscal 2004 at a cost of
$63,000 or $20.59 per share and 10,015 shares were purchased in the first quarter of fiscal 2003 at a cost of $104,000 or $10.38 per share.



SEGMENT REPORTING



SWS operates three principal segments within the financial services industry: the Brokerage Group, the Asset Management Group and the Banking Group. There have been no changes in the basis of segmentation or in the
basis of measurement of segment profit or loss since last reported.



The
category other consolidated entities includes the Parent, SWS Technologies and SWS Insurance. The Parent is a holding company that owns various investments, including the investments in Knight and USHS common stocks. SWS Technologies is
dormant. SWS Insurance facilitates the sale of insurance and annuities for Southwest Securities and SWS Financial. There are no material reconciling adjustments included in this category.



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|(in thousands)                                                                       |  | Brokerage Group |           |   | AssetManagementGroup |   | BankingGroup |  |   | OtherConsolidatedEntities |   |  | ConsolidatedSWS Group,Inc. |       
|------------------------------------------------------------------------------------ |  | --------------- | --------- | - | -------------------- | - | ------------ |  | - | ------------------------- | - |  | -------------------------- | ------
|Three months ended September 26, 2003                                                |  |                 |           |   |                      |   |              |  |   |                           |   |  |                            |       
|Net revenues from external sources                                                   |  | $               | 51,450    |   |                      | $ | 255          |  | $ | 12,398                    |   |  | $                          | (333  
|Net intersegment revenue (expense)                                                   |  |                 | (760      | ) |                      |   |             |  |   | 799                       |   |  |                            | (39   
|Net interest revenue (expense)                                                       |  |                 | 6,742     |   |                      |   |             |  |   | 9,735                     |   |  |                            | (243  
|Depreciation and amortization                                                        |  |                 | 1,270     |   |                      |   | 2            |  |   | 150                       |   |  |                            | 38    
|Income (loss) before income taxes and minority interest in consolidated subsidiaries |  |                 | (654      | ) |                      |   | 74           |  |   | 4,731                     |   |  |                            | (2,041
|Net income (loss)                                                                    |  |                 | (547      | ) |                      |   | 48           |  |   | 3,134                     |   |  |                            | (1,352
|Segment assets                                                                       |  |                 | 3,917,927 |   |                      |   | 1,689        |  |   | 719,858                   |   |  |                            | 32,338
|Expenditures for long-lived assets                                                   |  |                 | 1,422     |   |                      |   |             |  |   | 265                       |   |  |                            | (256  
|                                                                                     |  |                 |           |   |                     
|Three months ended September 27, 2002                                                |  |                 |           |   |                      |   |              |  |   |                           |   |  |                            |       
|Net revenues from external sources                                                   |  | $               | 54,592    |   |                      | $ | 411          |  | $ | 10,720                    |   |  | $                          | 66    
|Net intersegment revenue (expense)                                                   |  |                 | (694      | ) |                      |   |             |  |   | (75                       | ) |  |                            | 769   
|Net interest revenue (expense)                                                       |  |                 | 7,371     |   |                      |   |             |  |   | 6,820                     |   |  |                            | (155  
|Depreciation and amortization                                                        |  |                 | 966       |   |                      |   | 1            |  |   | 151                       |   |  |                            | 55    
|Income (loss) before income taxes and minority interest in consolidated subsidiaries |  |                 | (165      | ) |                      |   | 166          |  |   | 146                       |   |  |                            | (379  
|Net income (loss)                                                                    |  |                 | 194       |   |                      |   | 108          |  |   | (96                       | ) |  |                            | (516  
|Segment assets                                                                       |  |                 | 2,890,705 |   |                      |   | 1,400        |  |   | 571,958                   |   |  |                            | 25,633
|Expenditures for long-lived assets                                                   |  |                 | 2,352     |   |                      |   | 6            |  |   | 65                        |   |  |                            | 75    



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



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 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 fifteen. First Savings has verification on thirteen of the fifteen assignments from the County Clerks office of the county where the mortgaged property is located; with twelve of the liens indicating First
Savings has filed first and one lien indicating First Savings filed second. However, First Savings is not receiving payments on these loans. First Savings filed a claim with its insurance carrier who subsequently rejected the claim. A court
appointed receiver for the New York mortgage bank is investigating the fraud at the mortgage bank including the potential recovery of fraudulently received funds. First Savings is currently evaluating its options to recover some of the loss from the
underlying property or from other parties. At this time, the likelihood of recovery from any of these sources cannot be estimated.



SWS has committed $5 million to invest in a limited partnership venture capital fund. As of September 26, 2003, SWS had contributed $2.5 million of its commitment. Under
the terms of the agreement, no more than 30% of the commitment will be drawn in any 12-month period. No contributions were made to the partnership during the three-month period ended September 26, 2003.



As a result of an NYSE examination for the period from January 2000 to January 2001, the
NYSEs staff indicated that Southwest Securities may have violated certain of the NYSEs recordkeeping, continuing



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education, and floor brokerage rules. We believe our activities in those areas complied in all material respects with the applicable rules and regulations.
Nevertheless, in order to resolve this matter expeditiously, Southwest Securities entered into a stipulation of facts and consent to penalty (the Stipulation) with respect to this matter without admitting or denying any of the
NYSEs Enforcement Divisions allegations. Under the terms of the Stipulation, Southwest Securities made a payment of $150,000 to the NYSE in October 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.



SWS implemented Financial Interpretation No. 45  Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5-Contingencies, SFAS No. 57-Related Party, and SFAS No. 107-Disclosure of Fair Value of Financial Instruments and rescission of Financial Accounting Standards
Board 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 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 September 26, 2003, the Bank had loaned $29,750,000 to FSB Financial.
As a result of this loan, if FSB Financial defaults on the loan to the Bank, SWS would be liable for $4,750,000 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.



In
connection with the 2002 spin-off of SWS primary asset management subsidiary, the Westwood Group, 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 in May 2002
for $2 million. SWS 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.



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 $181,000. 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.



ACCOUNTING PRONOUNCEMENTS



Financial Interpretation No. 46, Consolidation of Variable Interest Entities. The Financial Accounting Standards Board issued FIN No. 46 on
January 17, 2003. Upon review of its investments, SWS determined that it had a VIE, as defined by FIN No. 46, it can potentially consolidate. This investment was created January 2, 2003 and according to FIN No. 46 would not be consolidated in
SWS consolidated financial statements until the first interim period beginning after June 15, 2003. SWS has a 33.33% investment in this VIE, which provides option execution services. As of September 26, 2003, SWS had made an
initial investment of $10,000, recorded its share of losses for the quarter of $69,000, and made loans to the entity totaling $475,000. SWS loaned $250,000 with an interest rate of 10% due on June 27,



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2003. As of September 26, 2003, $40,000 of the outstanding balance had been repaid. The second loan of $225,000 represents subordinated debt of the
investment, bears interest at a rate of 3%, and matures on March 1, 2006. SWS also provides option clearing services to the entity at cost. On October 8, 2003, the Financial Accounting Standards Board deferred the latest date for consolidation to
the first reporting period ending after December 15, 2003. SWS is still assessing the effect of the implementation of FIN No. 46 on the consolidated financial statements if SWS consolidated the entity.



Financial Accounting Standard No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. In June 2003, the Financial Accounting Standards Board issued SFAS No. 150. This statement establishes standards for how SWS should classify and measure certain financial
instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability. The provisions of this statement are effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This pronouncement applies to SWS minority interest in the Banks subsidiaries. On
November 5, 2003, the Financial Accounting Standards Board deferred, indefinitely, the implementation of SFAS No. 150 as it pertains to minority interest. The effect on the consolidated financial statements if SWS would have implemented SFAS No. 150
as of September 26, 2003 would be immaterial. SWS fair value of the minority interest in the Banks subsidiaries is approximately equivalent to book value. Thus, the amount that would be paid if the Banks subsidiaries terminated and
settled their operations at September 26, 2003 would be $1.9 million.



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



OVERVIEW



We are primarily engaged in securities execution and clearing, securities brokerage, investment banking, securities lending and borrowing, and trading as a principal in
equity and fixed income securities. We also engage in full-service banking and asset management. All of these activities are highly competitive.



While brokerage and banking revenues are dependent upon trading volumes and interest rates, which may fluctuate significantly, a large portion of our expenses remain
fixed. Consequently, net operating results can vary significantly from period to period. Our business is also subject to substantial governmental regulation and changes in legal, regulatory, accounting, tax and compliance requirements that may have
a substantial impact on our business and results of operations.



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



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



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



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



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



| |  | the credit-worthiness of our counter-parties in securities lending transactions;
| | - | --------------------------------------------------------------------------------



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



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



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



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



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



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



| |  | the credit-worthiness of our banking and margin customers;
| | - | ----------------------------------------------------------



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



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



Our future operating results are also dependent upon our operating expenses, which are subject to fluctuation due to:



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



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



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



Our business is subject to substantial governmental regulation and changes in legal,
regulatory, accounting, tax and compliance requirements, which may have a substantial impact on our business and results of operations.



Brokerage Group



The U.S. equities market has shown some improvement from the conditions experienced in early fiscal 2003. While volumes overall remained relatively light with average daily volume on the NYSE of 1.4 billion shares,
the Dow Jones Industrial Average increased to 9,275.06 at September 30, 2003 versus 7,701.45 at September 27, 2002. The volumes and thus the revenues generated by our clearing business are dependent on active markets. Sustained growth in volumes is
necessary for growth in our clearing business. During the first quarter we noted volume increases in trades processed in both our high-volume trading correspondents and our general securities correspondents. Clearing revenue increased for the second
consecutive quarter. Continued improvement in volumes and share prices will facilitate growth in revenues in the clearing business. However, growth could be encumbered in this business line by pricing pressure.



Average margin balances reported by NYSE member firms averaged $151 billion in the first
quarter of fiscal 2004 versus $133 billion in the first quarter of fiscal 2003. We rely on margin lending to our customers to generate revenue. Unlike the NYSE margin balances, we have yet to see a recovery in our margin balances. As the markets
show sustained improvement, we expect these balances to grow. Stock loan balances are also influenced by these same market conditions. Stock lending balances were up in the first quarter of fiscal 2004 over last year and the previous quarter. We
expect these balances to continue at the same levels as long as the markets continue to improve.



As expected, volatility in interest rates during the first quarter of fiscal 2004 resulted in depressed earnings from our fixed income business. In July and August of 2003, interest rates on U.S. Treasury Bills rose
1.2% to 1.4% depending on maturity. While this volatility has abated, the interest rate environment is less favorable than in the same quarter last year. As equity markets improve, fixed income markets are likely to stay at or below current levels.
The fixed income business, in the first quarter of fiscal 2003, accounted for 34% of our operating revenue, while in the first quarter of fiscal 2004, the fixed income business accounted for 29% of our operating revenue.



Management is currently focused on two aspects of our business: growing the clearing business
and taking advantage of our prominence in the Southwest to become a nationally recognized full-service regional brokerage firm. Continued improvement in the equity markets is critical to growth in both of



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these areas. As management continues to refine our focus, impairments, acquisitions or dispositions could be warranted.



To realize managements goal to become a nationally recognized full-service regional
brokerage firm it is essential to grow the retail brokerage distribution network. This will be accomplished through the hiring of additional registered representatives and the opening of new branch office locations in the Southwest. As a result of
this effort, we recruited five new Private Client Group representatives in the first quarter of fiscal year 2004. These five new representatives have an average annual production of $382,000 per representative. We also opened one new branch office
in Houston, Texas. 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 at least 11 months to achieve, depending on the successful recruiting of registered representatives.



Equity capital markets are an integral part of a full-service regional firm. Growth in the equity capital markets area requires additional investment banking, research
and sales personnel. Revenue from this area is cyclical and varies significantly with the growth in the equity markets. Consequently, current investment in personnel could negatively impact earnings until the equity capital markets improve.



While we completed our conversion to a new electronic brokerage operating
system in August of 2002, ongoing efforts to upgrade and enhance the core system will result in continued investment in the technology area. Management continues to review equipment and communications in an effort to offset some of the costs of
software enhancement. Our system was developed by Comprehensive Software Systems, Ltd. (CSS), an entity that is backed by a consortium of brokerage firms, including Southwest Securities. The development of the system required more time
and capital from these brokerage firms than was originally anticipated. While the system is fully functional at SWS, other consortium members have yet to completely install the system. Decisions by these other firms will impact CSSs ability to
continue to deliver new modules and enhancements and could impact the cost of technology to us.



Regulatory Environment



The brokerage
group is subject to regulation by the SEC, the NYSE, the NASD and various state securities regulators. The events surrounding corporate accounting and other activities and the enactment of the Sarbanes-Oxley Act have caused the various regulatory
bodies to increase their surveillance of public companies in general as well as brokerage firms. New regulations and new interpretation and enforcement of existing regulations are becoming more frequent. The recent Global Settlement of Conflicts of
Interest between Research and Investment Banking among securities regulators and several securities firms regarding analysts reports and conflicts of interests has resulted in changes in the way brokerage firms conduct their business. More recently,
investigations by the SEC and state regulators into mutual fund trading practices and adherence to breakpoint schedules are another indication of the regulators heightened commitment to enforcement actions. We conduct research, investment
banking and mutual fund trading. This regulatory environment could result in increased costs of compliance with rules and regulations, increased exposure to regulatory actions and could potentially lead to the elimination of, or material changes to,
certain lines of business. In October of 2003, Southwest, along with all other users of the National Securities Clearing Corporations mutual fund order system, received a request from the SEC to review its policies and procedures over mutual
fund trading. We expect to complete this review, in accordance with the SECs request by November 28, 2003. Additionally, Southwest Securities has been notified by the NASD of certain required actions and potential regulatory consequences
related to compliance with mutual fund breakpoints. This communication was received by approximately 450 brokerage firms indicating the extent of the regulators review of the mutual fund area. At this time, we do not expect a material impact
on our financial statements from this review.



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Banking Group



A substantial portion of the Banks revenue is generated from the single-family construction loan and single-family mortgage loan markets. While the Banks
purchased mortgage loan program is nationwide, the majority of the Banks other lending is concentrated in the North Texas 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 operated at record levels during 2003 due to the high level of mortgage refinancing transactions driven by lower mortgage interest rates. Mortgage interest rates began to rise in July 2003 and volumes in this business
have begun to show a decline. This environment could produce volume declines in this line of business of 30-50%. Additionally, during fiscal 2003, management reduced credit lines and eliminated certain customers in this line of business to reflect
more stringent internal control guidelines.



During the later part of fiscal
2003, the Bank hired two individuals in key management positions. A new President with extensive residential, consumer and commercial lending experience was hired to focus on growing the community banking and single-family interim construction
lending businesses. Also, a new head of mortgage warehouse lending was hired to bring additional controls to the present business and grow the Banks mortgage warehouse business.



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 27, 2003. See our Annual Report on Form 10-K for the fiscal year then ended.



RESULTS OF OPERATIONS



Net income for the three-month period ended September 26, 2003 was $1,283,000 representing an increase in income over the comparable three-month period ended September
27, 2002 of $1,593,000. The three-month period ended September 26, 2003 as well as the comparable period of fiscal 2003 contained 63 trading days.



Events and Transactions



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



Mydiscountbroker. On June 13, 2003, we sold the
accounts of Mydiscountbroker to Ameritrade. The sales price of $4,200,000 (generating an after tax gain of $2,730,000), which was recognized in June of 2003, was based on the actual accounts transferred at closing, approximately 16,500 accounts.
Mydiscountbroker had recorded revenues of $854,000 and expenses of $1,343,000 for a net loss before taxes for the three-month period ended September 27, 2002 of $489,000.



Mortgage Loan Charge. 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 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 fifteen. First Savings has verification on thirteen of the fifteen assignments from the County Clerks office of the county where the mortgaged property is located, with twelve of the liens indicating First Savings
has filed first and one lien indicating First Savings filed second. However, we are not receiving payments on these



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loans. First Savings filed a claim with its insurance carrier who subsequently rejected the claim. A court appointed receiver for the New York mortgage bank
is investigating the fraud at the mortgage bank including the potential recovery of fraudulently received funds. We are currently evaluating options to recover some of the loss from the underlying property or from other parties. At this time, the
likelihood of recovery from any of these sources cannot be estimated.



Investment in Comprehensive Software Systems, Ltd. The continued enhancement of our brokerage system is important to the growth of our clearing and retail brokerage business. To ensure the continued enhancement of the systems
developed by CSS, we entered into a loan agreement on December 6, 2002 with CSS that calls for the total advance to CSS of $3,250,000 in quarterly installments of $812,500 beginning January 6, 2003. In June of 2003, we amended the loan agreement to
provide that our two remaining quarterly installments would be increased to $937,500. All other terms of the agreement were unchanged. Because of this commitment, we began recognizing our share of the undistributed losses of CSS in January of 2003.
For the three months ended September 26, 2003, our percentage interest in CSSs losses was $1,007,400. Our percentage of losses was greater than the $937,500 loaned during the quarter ended September 26, 2003 by $69,900. From inception of the
loan to date, SWS percentage of losses of $3,083,400 was greater than the $2,562,500 loaned by $520,900. As a result, there is no recorded equity investment or loan receivable from CSS at September 26, 2003.



Impairment of Long-Lived Assets. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in fiscal 2003, we recorded leasehold and fixed asset impairment charges of $1.4 million. Of
the charges recorded in fiscal 2003, $891,000 relates to the space formerly occupied by Mydiscountbroker, $305,000 relates to space formerly occupied by a trading operation and $125,000 relates to space formerly occupied by a private client group
office. As of September 2003, we have entered into sublease agreements for all but 4,000 square feet of these leased locations.



SFAS No. 133 and Sales of Knight Stock. The adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, in the first quarter of fiscal 2001 created a non-cash earnings impact on our financial statements. SFAS No. 133 is applicable to our 5% Exchangeable Subordinated Notes (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 our investment in Knight Trading Group, Inc.
(Knight) common stock. At our option, the principal of the Notes can be paid in shares of Knight at maturity or in cash. The embedded derivative has been designated as a fair value hedge of our 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 first quarters of fiscal 2004 and 2003, the impact on the consolidated statements of
income (loss) and comprehensive income (loss), representing the change in the time value of money of the embedded derivative was a gain of $13,600 and a loss of $5,000, 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, are calculated on a quarterly basis and recognized in the consolidated statements of income
(loss) and comprehensive income (loss) until such time as the fair value hedge ceases to exist.



At September 26, 2003 and September 27, 2002, we held 373,550 shares of Knight common stock, respectively, and had 373,550 DARTS outstanding as of both dates.



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Analysis of Operations.The following is a summary of increases (decreases) in categories of net revenues
and operating expenses for the three -month periods ended September 26, 2003 and September 27, 2002 (dollars in thousands):



|                                                     |  | Amount |        |   | % |      
|---------------------------------------------------- |  | ------ | ------ | - | - | -----
|Net revenues:                                        |  |        |        |   |   |      
|Net revenues from clearing operations                |  | $      | (34    | ) |   | (1   
|Commissions                                          |  |        | 3,708  |   |   | 20   
|Net interest                                         |  |        | 2,197  |   |   | 16   
|Investment banking, advisory and administrative fees |  |        | (925   | ) |   | (13  
|Net gains on principal transactions                  |  |        | (3,309 | ) |   | (49  
|Other                                                |  |        | (1,045 | ) |   | (28  
|                                                     |  |        |        |   |   |      
|                                                     |  |        | 592    |   |   | 1    
|                                                     |  |        |        |   |   |      
|                                                     |  |       
|Operating expenses:                                  |  |        |        |   |   |      
|Commissions and other employee compensation          |  |        | 1,629  |   |   | 5    
|Occupancy, equipment and computer service costs      |  |        | (1,465 | ) |   | (17  
|Communications                                       |  |        | (888   | ) |   | (22  
|Floor brokerage and clearing organization charges    |  |        | (14    | ) |   | (1   
|Advertising and promotional                          |  |        | 24     |   |   | 3    
|Other                                                |  |        | (1,036 | ) |   | (12  
|                                                     |  |        |        |   |   |      
|                                                     |  |        | (1,750 | ) |   | (3   
|                                                     |  |        |        |   |   |      
|Pretax income                                        |  | $      | 2,342  |   |   | 1,009
|                                                     |  |        |        |   |   |      



Net revenues increased for the quarter
by $592,000. Of the total change, we experienced a $3.7 million increase in commission revenue offset by a $3.3 million decrease in net gains on principal transactions. The $3.7 million increase is primarily due to improved commission revenue in the
Private Client Group. The Private Client Group added five new representatives during the quarter with an average annual production of $382,000 per representative. From September 27, 2002 to September 26, 2003, Southwest Securities added a net of
sixteen new representatives. This increase in representatives contributed to the increase in commission revenue for the Private Client Group of $2.1 million. The $3.3 million decrease in net gains on principal transactions can be principally
attributed to reduced fixed income trading profits in the quarter. In the months of July and August of fiscal 2004, the general bond market noted an increase in interest rates, which made it difficult to generate significant trading profits in the
quarter.



Operating expenses declined $1.8 million for the quarter ended
September 26, 2003. However, taking into account the $3.4 million fraud charge recorded in the three-month period ended September 27, 2002, operating expenses would have increased $1.6 million. The largest single increase was in the variable
compensation component of commissions and employee compensation. Commissions paid increased $1.6 million, which represents approximately 44% of the increase in commission revenue.



Net Revenues from Clearing Operations.Net revenues from clearing decreased $34,000 when compared to the three months
ended September 27, 2002. Net clearing revenues decreased despite the increase in the total transactions processed in the first quarter from 7.1 million in fiscal 2003 to 9.1 million in fiscal 2004. The increase in transactions processed was most
pronounced in our high volume trading correspondents. The increase in transactions was offset by the reduction in revenue per ticket of 26% due to intense price competition. Revenue per transaction was $0.55 in the first quarter of fiscal 2004
verses $0.74 in the first quarter of fiscal 2003.



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Commissions.Commission revenue increased 20% for the three-month period. The largest increases were
noted in the private client group and portfolio trading. These increases were offset by a slight decrease in institutional equity sales. Commission revenue by type of representative is as follows (dollars in thousands):



|                                       |  | September 26, 2003 |        | September 27, 2002
|-------------------------------------- |  | ------------------ | ------ | ------------------
|                                       |  | Three Months Ended |        | No. of Reps       
|Southwest Securities brokers:          |  |                    |        |                   
|Private client group                   |  | $                  | 6,557  |                   
|Fixed income sales & trading           |  |                    | 6,926  |                   
|Institutional equity sales             |  |                    | 2,133  |                   
|Independent registered representatives |  |                    | 4,654  |                   
|Portfolio Trading                      |  |                    | 1,476  |                   
|Other                                  |  |                    | 112    |                   
|                                       |  |                    |        |                   
|                                       |  | $                  | 21,858 |                   
|                                       |  |                    |        |                   



Net Interest Income. Net
interest income from the Brokerage Group is dependent upon the level of customer and stock loan balances as well as the spread between the rates we earn on those assets compared with the cost of funds. Net interest is the primary source of income
from the Bank and represents the amount by which interest and fees generated by earning assets exceed the cost of funds, primarily interest paid to the Banks depositors on interest-bearing accounts.



The components of interest earnings are as follows for the three-month periods ended
September 26, 2003 and September 27, 2002 (in thousands):



|                                          |  | Three Months Ended
|----------------------------------------- |  | ------------------
|                                          |  | September 26,2003 
|Interest revenue:                         |  |                   
|Customer margin accounts                  |  | $                 
|Assets segregated for regulatory purposes |  |                   
|Stock borrowed                            |  |                   
|Bank loans                                |  |                   
|Other                                     |  |                   
|                                          |  |                   
|                                          |  | $                 
|                                          |  |                   
|                                          |  |                   
|Interest expense:                         |  |                   
|Customer funds on deposit                 |  | $                 
|Stock loaned                              |  |                   
|Bank deposits                             |  |                   
|Federal Home Loan Bank advances           |  |                   
|Other                                     |  |                   
|                                          |  |                   
|                                          |  |                   
|                                          |  |                   
|Net interest                              |  | $                 
|                                          |  |                   



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Brokerage Group.For the three months ended September 26, 2003, net interest income for the Brokerage Group
accounted for 12%, of our net revenue versus 13% for the three months ended September 27, 2002. Average balances of interest-earning assets and interest-bearing liabilities are as follows (in thousands):



|                                          |  | Three Months Ended
|----------------------------------------- |  | ------------------
|                                          |  | September 26,2003 
|Average interest-earning assets:          |  |                   
|Customer margin balances                  |  | $                 
|Assets segregated for regulatory purposes |  |                   
|Stock borrowed                            |  |                   
|                                          |  |                   
|Average interest-bearing liabilities:     |  |                   
|Customer funds on deposit                 |  |                   
|Stock loaned                              |  |                   



Net interest revenue from customer
margin balances and assets segregated for regulatory purposes decreased 21% due to both lower interest rates and reduced balances in the first quarter of fiscal 2004 over the first quarter of fiscal 2003. Net interest revenue generated from
securities lending activities has increased 26% from fiscal 2003 to fiscal 2004 due to increased balances. Interest spreads decreased one basis point from fiscal 2003 to fiscal 2004. The types of securities borrowed or loaned and the interest rate
environment influence the spread earned in this business.



Banking Group.Net interest revenue generated by the Bank accounted for approximately 17% and 12% of net revenue in the three-month periods ended September 26, 2003 and September 27, 2002. At the Bank, 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 Banks net interest income by each major category of interest-earning assets and interest-bearing liabilities for the three-month periods ended September 26, 2003 and September 27, 2002 (dollars in thousands):



|                                      |  | Three Months Ended |        
|------------------------------------- |  | ------------------ | -------
|                                      |  | Fiscal 2004        |        
|                                      |  | AverageBalance     |        
|Assets:                               |  |                    |        
|Interest-earning assets:              |  |                    |        
|Real estate  mortgage                |  | $                  | 218,116
|Real estate  construction            |  |                    | 93,982 
|Commercial                            |  |                    | 162,015
|Individual                            |  |                    | 45,523 
|Land                                  |  |                    | 40,068 
|Investments                           |  |                    | 92,286 
|                                      |  |                    |        
|                                      |  |                    | 651,990
|Noninterest-earning assets:           |  |                    |        
|Cash and due from banks               |  |                    | 46,174 
|Other assets                          |  |                    | 11,944 
|                                      |  |                    |        
|                                      |  | $                  | 710,108
|                                      |  |                    |        
|Liabilities and Stockholders Equity: |  |                    |        
|Interest-bearing liabilities:         |  |                    |        
|Certificates of deposit               |  | $                  | 205,559
|Money market accounts                 |  |                    | 17,686 
|Interest-bearing demand accounts      |  |                    | 361,548
|Savings accounts                      |  |                    | 1,292  
|Federal Home Loan Bank advances       |  |                    | 28,193 
|Notes payable                         |  |                    | 4,783  
|                                      |  |                    |        
|                                      |  |                    | 619,061
|                                      |  |                    |        
|Noninterest-bearing liabilities:      |  |                    |        
|Non interest-bearing demand accounts  |  |                    | 25,768 
|Other liabilities                     |  |                    | 11,017 
|                                      |  |                    |        
|                                      |  |                    | 655,846
|Stockholders equity                  |  |                    | 54,262 
|                                      |  |                    |        
|                                      |  | $                  | 710,108
|                                      |  |                    |        
|                                      |  |                    |        
|Net interest income                   |  |                    |        
|                                      |  |                    |        
|Net yield on interest-earning assets  |  |                    |        
|                                      |  |                    |        



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Interest rate trends, changes in the economy and the scheduled maturities and interest rate sensitivity of the loan
portfolios and deposits affect the spreads earned by the Bank. Additionally, in January of 2003, the Bank began offering an FDIC insured deposit product to our brokerage customers. As of September 26, 2003, $361 million of brokerage customers
funds were on deposit at the Bank. Rates paid on these deposits are generally less than the rates on Federal Home Loan Bank (FHLB) advances and certificates of deposit, allowing the Bank to earn an increased interest spread.



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



|                                 |  | Three months ended Fiscal 2004 vs. 2003 |       
|-------------------------------- |  | --------------------------------------- | ------
|                                 |  | Total Change                            |       
|                                 |  |                                         | Volume
|Interest income:                 |  |                                         |       
|Real estate  mortgage           |  | $                                       | 417   
|Real estate  construction       |  |                                         | (324  
|Commercial                       |  |                                         | 245   
|Individual                       |  |                                         | 1,628 
|Land                             |  |                                         | (106  
|Investments                      |  |                                         | 151   
|                                 |  |                                         |       
|                                 |  | $                                       | 2,011 
|                                 |  |                                         |       
|                                 |  |                                         |       
|Interest expense:                |  |                                         |       
|Certificates of deposit          |  | $                                       | (488  
|Money market accounts            |  |                                         | (13   
|Interest-bearing demand accounts |  |                                         | 306   
|Savings accounts                 |  |                                         |      
|Federal Home Loan Bank advances  |  |                                         | (724  
|Notes payable                    |  |                                         | (25   
|                                 |  |                                         |       
|                                 |  |                                         | (944  
|                                 |  |                                         |       
|Net interest income              |  | $                                       | 2,955 
|                                 |  |                                         |       



Investment Banking, Advisory and
Administrative Fees.Investment banking, advisory and administrative fees include revenue generated by the Asset Management Group, as well as revenue



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derived from underwriting or distribution of corporate and municipal securities, unit trusts and money market and other mutual funds. The primary reason for
the decrease in fiscal 2004 fees over the prior year is decreased revenue in both municipal and corporate finance underwriting and advisory fees of $897,000. There was also a decrease in money market fees of $330,000, which was offset by an increase
in managed account, and advisory fees of $400,000.



Average assets under
management by the Asset Management Group were $975,000,000 at September 26, 2003 and $1,118,000,000 at September 27, 2002.



Net Gains on Principal Transactions. The decrease in net gains on principal transactions of $3.3 million from the three-month periods ending September 26,
2003 and September 27, 2002 was due to the decline in fixed income trading profits in the first quarter of fiscal 2004. The months of July and August of fiscal 2004 showed an increase in interest rates. Rate increases on U.S. Treasury Bills ranged
from 1.2% to 1.4% in these two months leading to a decrease in revenue. Rates began to stabilize in mid August of fiscal 2004 giving the fixed income group an opportunity to offset the decrease that occurred in the earlier part of the quarter.



Other Revenue. Other revenue decreased approximately $1 million
from the three-month periods ending September 26, 2003 and September 27, 2002. The decrease is primarily due to the elimination of $382,000 in other revenue from Mydiscountbroker and SWS Technologies, which were sold in fiscal 2003. The remaining
decline is due to losses on corporate investments.



Commissions and Other
Employee Compensation.The level of operating revenues, earnings and the number of employees generally affects commissions and other employee compensation. Overall, commissions and other employee compensation increased $1.6 million
for the quarter over the comparable period in fiscal 2003. The increase was due to commissions paid to revenue-producing employees generating higher levels of commissions revenue (see discussion above.) The increase in commissions expense is
approximately 44% of the increase in commission revenue.



Occupancy,
Equipment and Computer Services.The decrease in the three-month period ended September 26, 2003 from the comparable prior year period is primarily due to a decrease in equipment rental expense. In the first quarter of 2003, SWS completed
the conversion of its operating system, CSS. Consequently, costs incurred in the first quarter of 2003 to complete this system did not recur in the first quarter of fiscal 2004. Also, SWS began purchasing new computer equipment as leases expired. In
the first quarter of fiscal 2003, SWS incurred approximately $396,000 in occupancy and equipment costs for Mydiscountbroker and SWS Technologies that did not occur in the first quarter of fiscal 2004.



Communications.Communications expense decreased due primarily to a decrease in
quote and telephone expense in the three-month period ended September 26, 2003 versus the three-month period ended September 27, 2002.



Other Expense.Excluding the $3.4 million charge for fraudulent loans at the Bank in the first quarter of fiscal 2003, other expense increased $2.4
million for the first three months of fiscal 2004 when compared to the same period in fiscal 2003. The increases for the quarter were primarily due to an increase in bad debts and the loan loss provision for the Bank of $1.8 million as well as
increased legal costs. The Banks loan loss provision increased $600,000 from the same period a year ago. The increased equity losses on investments primarily related to the losses on the CSS investment of $938,000. We also experienced an
increase in legal expenses of $1.5 million. This increase was comprised of $1 million in actual settlements and estimates on future settlements as well as $500,000 in legal fees.



Income Tax Expense (Benefit).Income tax expense (effective rate 25% for the quarter ended September 26, 2003) differed
from the amount that would otherwise have been calculated by applying the federal



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corporate tax rate (35%) to income (loss) before income taxes. The effective rate was unusually low because of the ratio of tax-exempt income and other
permanently excluded items.



FINANCIAL CONDITION



Loans and Allowance for Probable Loan Losses. The Bank grants 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.



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



Loans receivable at September 26, 2003 and June 27, 2003 are summarized as follows (in thousands):



|                           |  | September 26,2003 |         | June 27,2003
|-------------------------- |  | ----------------- | ------- | ------------
|Real estate  mortgage     |  | $                 | 132,085 |             
|Real estate  construction |  |                   | 105,308 |             
|Commercial                 |  |                   | 146,210 |             
|Individuals                |  |                   | 44,963  |             
|Land                       |  |                   | 39,163  |             
|                           |  |                   |         |             
|                           |  | $                 | 467,729 |             
|                           |  |                   |         |             



The following table shows the expected
life of certain loans at September 26, 2003, and segregates those loans with fixed interest rates from those with floating or adjustable rates (in thousands):



|                                      |  | 1 year or less |         | 1-5 years |   | Over 5years |  | Total
|------------------------------------- |  | -------------- | ------- | --------- | - | ----------- |  | -----
|Real estate  construction            |  | $              | 91,696  |           | $ | 6,286       |  | $    
|Commercial                            |  |                | 27,041  |           |   | 52,227      |  |      
|                                      |  |                |         |           |   |             |  |      
|Total                                 |  | $              | 118,737 |           | $ | 58,513      |  | $    
|                                      |  |                |         |           |   |             |  |      
|Amount of loans based upon:           |  |                |         |           |   |             |  |      
|Floating or adjustable interest rates |  | $              | 112,100 |           | $ | 51,231      |  | $    
|Fixed interest rates                  |  |                | 6,637   |           |   | 7,282       |  |      
|                                      |  |                |         |           |   |             |  |      
|Total                                 |  | $              | 118,737 |           | $ | 58,513      |  | $    
|                                      |  |                |         |           |   |             |  |      



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



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income on non-accrual loans is credited to income on a cash basis. Non-performing assets as of September 26, 2003 and June 27, 2003 are as follows (dollars
in thousands):



|                                                    |  | September 26,2003 |        |   | June 27, 2003 |  
|--------------------------------------------------- |  | ----------------- | ------ | - | ------------- | -
|Loans accounted for on a non-accrual basis          |  | $                 | 11,801 |   |               | $
|                                                    |  |                   |        |   |               |  
|Non-performing loans as a percentage of total loans |  |                   | 2.5    | % |               |  
|                                                    |  |                   |        |   |               |  
|Loans past due 90 days or more, not included above  |  | $                 | 3,697  |   |               | $
|                                                    |  |                   |        |   |               |  
|Troubled debt restructurings                        |  | $                 | 4,412  |   |               | $
|                                                    |  |                   |        |   |               |  



An analysis of the allowance for
probable loan losses for the three -month periods ended September 26, 2003 and September 27, 2002 is as follows (dollars in thousands):



|                                                                                          |  | Three Months Ended |      
|----------------------------------------------------------------------------------------- |  | ------------------ | -----
|                                                                                          |  | September 26,2003  |      
|Balance at beginning of period                                                            |  | $                  | 4,421
|Charge-offs  individual                                                                  |  |                    | (763 
|Charge-offs  commercial, financial and agricultural                                      |  |                    | (9   
|Recoveries  individual                                                                   |  |                    | 31   
|                                                                                          |  |                    |      
|Net charge-offs                                                                           |  |                    | (741 
|Additions charged to operations                                                           |  |                    | 1,041
|                                                                                          |  |                    |      
|Balance at end of period                                                                  |  | $                  | 4,721
|                                                                                          |  |                    |      
|Ratio of net charge-offs during the period to average loans outstanding during the period |  |                    | 0.14 
|                                                                                          |  |                    |      



The allowance for probable loan losses
is applicable to the following types of loans as of September 26, 2003 and June 27, 2003 (dollars in thousands):



|                              |  | September 26, 2003 |       |                               | June 27, 2003 |  
|----------------------------- |  | ------------------ | ----- | ----------------------------- | ------------- | -
|                              |  | Amount             |       | Percent of loansto totalloans |               |  
|Commercial                    |  | $                  | 1,835 |                               | 31.3          | %
|Real estate  construction    |  |                    | 987   |                               | 22.5          |  
|Real estate  mortgage & land |  |                    | 1,150 |                               | 36.5          |  
|Individuals                   |  |                    | 749   |                               | 9.7           |  
|                              |  |                    |       |                               |               |  
|                              |  | $                  | 4,721 |                               | 100.0         | %
|                              |  |                    |       |                               |               |  



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Deposits.Average deposits and the average interest rate paid on the deposits for the three -month periods
ended September 26, 2003 and September 27, 2002 can be found in the discussion of the Banking Groups net interest income under the caption -Results of Operations-Net Interest Income-Banking Group.



Certificates of deposit of $100,000 or greater were $124,000,000 and $52,556,000 at September
26, 2003 and June 27, 2003, 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 insured interest bearing checking account to our brokerage customers. 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 ($361 million at September 26, 2003) in funds on deposit from customers of Southwest Securities. This funding source has reduced the Banks reliance on short-term borrowings from the FHLB.



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 2-7 days, during the three month periods ended September 26, 2003 and
September 27, 2002 (dollars in thousands):



|                                      |  | Three Months Ended |       
|------------------------------------- |  | ------------------ | ------
|                                      |  | September 26, 2003 |       
|                                      |  | Amount             |       
|At end of period                      |  | $                  |      
|Average during period                 |  |                    | 10,437
|Maximum month-end balance during year |  |                    | 36,875



LIQUIDITY AND CAPITAL RESOURCES



Brokerage Group.Our assets are substantially liquid
in nature and consist mainly of cash or assets readily convertible into cash. Our equity capital, short-term bank borrowings, interest bearing and non-interest bearing client credit balances, correspondent deposits and other payables finance these
assets. We maintain an allowance for doubtful accounts which represents amounts, in the judgment of management, that are necessary to adequately absorb losses from known and inherent risks in receivables from clients, clients of correspondents and
correspondents.



Short-Term Borrowings. We have credit
arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers
margin accounts. These credit arrangements are provided on an as offered basis and are not committed lines of credit. Outstanding balances under these credit arrangements are due on demand, bear interest at rates indexed to the federal
funds rate and are collateralized by securities of Southwest Securities and its clients. At September 26, 2003, the amount outstanding under these secured arrangements was $34,200,000, which was collateralized by securities held for firm accounts
valued at $44,048,000, and $14,200,000, which was collateralized by securities held for non customer accounts valued at $27,499,000.



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We also have an irrevocable letter of credit agreement (aggregating $62,000,000 at September 26, 2003) pledged to support
our open options positions with an options clearing organization. The letter of credit bears interest at the brokers call rate, if drawn, and is renewable semi-annually. This letter of credit is fully collateralized by marketable securities
held in client and non-client margin accounts with a value of $78,712,000 at September 26, 2003. We also have unsecured letters of credit, aggregating $2,250,000 at September 26, 2003, pledged to support our open positions with securities clearing
organizations. At September 26, 2003, we have an additional unsecured letter of credit issued for a sub-lease to the sub-leasee of space previously occupied by Mydiscountbroker in the amount of $1,000,000. The unsecured letters of credit bear
interest at the prime rate plus 3%, if drawn, and are renewable semi-annually.



In addition to the broker loan lines, we also have a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of
credit is reduced by the amount outstanding under the unsecured letters of credit at the time of borrowing. At September 26, 2003, the total amount available for borrowings was $16,750,000. There were no amounts outstanding at September 26, 2003.



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



Exchangeable
Subordinated Notes. On June 16, 1999, we issued $50 million of 5% Exchangeable Subordinated Notes (the Notes) due June 30, 2004. In July 1999, we issued an additional $7.5 million of the Notes as the underwriters exercised their
over-allotment option. 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, were issued in denominations of $56.6875, the closing bid price of Knight on June 10, 1999. At maturity, noteholders are entitled to one share of
Knight common stock for each DARTS if the average price for the 20 days immediately preceding the Notes maturity is equal to or less than the DARTS issue price. Noteholders 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 Notes issue price and 20% greater than the issue price, the exchange rate
will be determined by a formula. At September 26, 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 $9.1 million on the consolidated statements of
financial condition.



The DARTS mature on June 30, 2004, fiscal 2005. At that
time, we may choose to deliver our remaining shares of Knight stock in satisfaction of our obligation. Extinguishment of this obligation will result in a non-cash gain equal to the difference in the fair value of the Knight stock at the hedging date
and the fair value of the Knight stock at the maturity date of the DARTS. As of September 26, 2003, this gain would be approximately $23,000,000.



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



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.



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Liquidity is monitored daily to ensure the ability to support asset growth, meet deposit withdrawals, maintain reserve
requirements and otherwise sustain operations. The Banks liquidity is maintained in the form of readily marketable loans, balances with the FHLB, 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. Current net available borrowing capacity at FHLB is $99,291,000. Management believes that the Banks present position is adequate to meet its current and
future liquidity needs.



First Savings is subject to 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.



We filed an application with the OTS to create a new bank holding company. This new
subsidiary could be used to issue trust-preferred securities to facilitate additional capital at the Bank.



Cash Flow.Net cash provided by operating activities was $38,932,000 for the three-months ended September 26, 2003 compared to net cash used in operating activities of $36,282,000 for the
three-month periods ended September 27, 2002. The largest difference from period to period is due primarily to a net decrease in loans held for sale of $95,886,000 for fiscal 2004 compared to a net increase in loans held for sale in fiscal 2003 of
$82,297,000. This decrease is a result of decreased volume in the Banks purchased mortgage program. As mortgage interest rates have risen, demand for mortgage refinancing has decreased, resulting in reduced volume and increased cash flow. This
is offset by an increase in client accounts in fiscal 2004 of $31,479,000 compared to a decrease in client accounts in fiscal 2003 of $75,488,000. Net cash provided by investing activities for the three-month period ended September 26, 2003 was
$146,000 compared to net cash used in investing activities was of $8,201,000 for the three-month period ended September 27, 2002. The change from the prior comparable period was due to a decrease in loan originations and purchases. In fiscal 2003,
loans increased $5,326,000 compared to a decrease in fiscal 2004 of $2,617,000. Net cash flows provided by financing activities totaled $119,906,000 and $48,877,000 for the three month periods ended September 26, 2003 and September 27, 2002,
respectively. The increase from the prior comparable period reflects short-term borrowings in the brokerage group to finance customer and inventory positions.



Treasury Stock.Periodically, SWS repurchases its common stock under a plan to repurchase up to one million shares of its common stock, authorized by its
Board of Directors on November 1, 2000. In February 2003, the Board of Directors of SWS approved the repurchase of up to 500,000 additional SWS shares of common stock. As a result of the action, on that date, we were authorized to repurchase 836,200
shares under the program. No shares have been repurchased since February 2003. The one million share repurchase plan expires in December 2003. At that time, SWS will have 500,000 shares authorized for repurchase that expire in June of 2004.



Additionally, we periodically purchase stock in the open market under our
Deferred Compensation Plan. This stock is classified as treasury stock in the consolidated financial statements, but participates in future dividends declared by us. Approximately 3,059 shares were purchased in the first quarter of fiscal 2004 at a
cost of $63,000 or $20.59 per share.



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. Our fixed income activities also expose us to the risk of loss



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



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



|                                                  |  | Years to Maturity |       
|------------------------------------------------- |  | ----------------- | ------
|                                                  |  | 1 or less         |       
|Trading securities, at fair value                 |  |                   |       
|Municipal obligations                             |  | $                 | 101   
|U.S. Government and Government agency obligations |  |                   | 1,211 
|Corporate obligations                             |  |                   | 596   
|                                                  |  |                   |       
|Total debt securities                             |  |                   | 1,908 
|Corporate equity                                  |  |                   |      
|Other                                             |  |                   | 13,492
|                                                  |  |                   |       
|                                                  |  | $                 | 15,400
|                                                  |  |                   |       
|                                                  |  |                   |       
|Weighted average yield                            |  |                   |       
|Municipal obligations                             |  |                   | 3.76  
|U.S. Government and Government agency obligations |  |                   | 16.60 
|Corporate obligations                             |  |                   | 1.81  
|                                                  |  |                   |       
|Available-for-sale securities, at fair value      |  |                   |       
|Marketable equity securities                      |  | $                 |      
|                                                  |  |                   |       



Exchangeable Subordinated
Debt. In addition to the financial instruments included in the above table, we had 373,550 DARTS outstanding with a face value of $21.2 million. These Notes mature June 30, 2004 and bear a fixed coupon of 5%. Market risks associated with the
DARTS include equity price risk, in that the amount that we 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 counter-parties, customers or debt security issuers. We are exposed to credit risk as a trading counter-party to dealers and customers, as a holder of securities and as a member of exchanges and
clearing organizations. Credit exposure is also associated with customer margin accounts, which are monitored daily. We monitor exposure to industry sectors and individual securities and perform sensitivity analysis on a regular basis in connection
with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.



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Managing Risk Exposure. We manage 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. First Savings seeks to reduce the risk of significant adverse effects of market rate fluctuations by minimizing the difference between rate-sensitive assets and liabilities,
referred to as gap, by maintaining an interest rate sensitivity position within a particular timeframe. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. We
monitor our exposure to counter-party risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. We have established various risk management committees, who have the
responsibility to review and manage risk related to interest rates, trading positions, margin and other credit risk and risks from capital market transactions.



EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS



The Financial Accounting Standards Board has recently issued the following SFAS, which are applicable to us:



Financial Interpretation No. 46, Consolidation of Variable Interest Entities. The Financial Accounting Standards
Board issued Financial Interpretation (FIN) No. 46 on January 17, 2003. Upon review of our investments, we determined that we have a variable interest entity (VIE), as defined by FIN No. 46, we can potentially consolidate.
This investment was created January 2, 2003 and according to FIN No. 46 would not be consolidated in our consolidated financial statements until the first interim period beginning after June 15, 2003. We have a 33.33% investment in this
VIE, which provides option execution services. As of September 26, 2003, we had made an initial investment of $10,000, recorded our share of losses for the quarter of $69,000, and made loans to the entity totaling $475,000. We loaned $250,000 with
an interest rate of 10% due on June 27, 2003. As of September 26, 2003, $40,000 of the outstanding balance had been repaid. The second loan of $225,000 represents subordinated debt of the investment, bears interest at a rate of 3%, and matures on
March 1, 2006. We also provide option clearing services to the entity at cost. On October 8, 2003, the Financial Accounting Standards Board deferred the latest date for consolidation to the first reporting period ending after December 15,
2003. We are still assessing the effect of the implementation of FIN No. 46 on the consolidated financial statements if we consolidated the entity.



Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. In June
2003, the Financial Accounting Standards Board issued SFAS No. 150. This statement establishes standards for how we should classify and measure certain financial instruments with characteristics of both liabilities and equity. The statement requires
that an issuer classify a financial instrument that is within its scope as a liability. The provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. This pronouncement applies to our minority interest in the Banks subsidiaries. On November 5, 2003, the Financial Accounting Standards Board deferred, indefinitely, the implementation
of SFAS No. 150 as it pertains to minority interest. The effect on the consolidated financial statements if we would have implemented SFAS No. 150 as of September 26, 2003 would be immaterial. Our fair value of the minority interest in the
Banks subsidiaries is approximately equivalent to book value. Thus, the amount that would be paid if the Banks subsidiaries terminated and settled their operations at September 26, 2003 would be $1.9 million.



|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.



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



The management of SWS, including the principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) and the Securities Exchange Act of 1934) as of September 26, 2003. Based on such evaluation, the principal executive officer and principal financial officer have concluded that as of September 26, 2003, such disclosure
controls and procedures are effective for the purpose of ensuring that material information required to be in this Report is made known to them by others on a timely basis. There have not been any changes in SWS internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of 1934) during the quarter ending September 26, 2003 that have materially affected or are reasonably likely to materially affect our internal control over financial
reporting.



PART II. OTHER INFORMATION



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



In the general course of 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.



|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.



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SWS filed one Report on Form 8-K during the three-month period ended September 26, 2003:



|Date Filed    |  | Description                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|July 31, 2003 |  | Reported under Item 12. Results of Operations and Financial Condition. SWS financial results for the quarter and year ended June 27, 2003.
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.



| |  | 
| |  | 
| |  | 
| |  | 



|                       |  | 
|---------------------- |  | 
|November 10, 2003 Date |  | 
|                       |  | 
|                       |  | 



|                       |  | 
|---------------------- |  | 
|November 10, 2003 Date |  | 
|                       |  | 
|                       |  | 



|                       |  | 
|---------------------- |  | 
|November 10, 2003 Date |  | 
|                       |  | 
|                       |  | 



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SWS GROUP, INC. AND SUBSIDIARIES



INDEX TO EXHIBITS



|ExhibitNumber |  | Description                                                                                                                                                                                                      
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1           |  | Agreement and Plan of Reorganization dated as of August 10, 1999 between the Registrant and
ASBI Holdings, Inc. incorporated by reference to the Registrants Annual Report on Form 10-K filed September
23, 1999
|              | 
|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+         |  | Agreement between Registrant and David Glatstein, effective as of December 28, 2001 incorporated by reference to the Registrants Annual Report on Form 10-K filed September
26, 2002                            
|              | 
|31.1*         |  | Chief Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                            
|              | 
|31.2*         |  | Chief Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                            
|              | 
|32.1*         |  | Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                        
|              | 
|32.2*         |  | Chief Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                        



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



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



38