SOUTHWEST SECURITIES GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended June 25, 1999

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

SOUTHWEST SECURITIES GROUP, INC.
(Exact name of Registrant as specified in its charter)

Delaware 75-2040825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1201 Elm Street, Suite 3500, Dallas, Texas 75270
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.10 per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
----

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _________

As of September 14, 1999, there were 11,814,793 shares of the Registrant's
common stock, $.10 par value, outstanding. The aggregate market value of Common
Stock held by non-affiliates was approximately $258,562,000 using a market
price of $27.50 on that date.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the solicitation
of proxies to be voted at the Registrant's Annual Meeting of Stockholders to be
held November 3, 1999, which will be filed with the Commission pursuant to
Regulations 240.14a (6)(c) within 120 days after the Registrant's fiscal year
end, are incorporated by reference into Part I and Part III of the Report on
Form 10-K.

PART I

Item 1. Business

(a) General Development of Business

We are a full-service securities firm using technology to deliver a broad range
of investment and related financial services to our clients, which include
individual and institutional investors, broker/dealers, corporations,
governmental entities and financial intermediaries.

We provide clearing services to over 200 correspondent broker/dealers and 700
independent contract brokers, as well as full-service and online discount
brokerage services to individual investors. Clearing involves maintaining our
correspondent clients' accounts, processing securities transactions, extending
margin loans and performing a variety of administrative services as agent for
our correspondent broker/dealers. Our clearing business is complemented by our
securities trading, securities lending, investment banking and asset management
businesses.

Our principal subsidiary, Southwest Securities, Inc. ("Southwest") is a
registered securities broker/dealer and a member of the NYSE and other major
exchanges. Southwest provides correspondent services to securities
broker/dealers and other financial institutions in 30 states, Canada and Europe.
Southwest serves individual investors through its Private Client Group offices
in Texas, New Mexico and California and institutional investors nationwide from
its Dallas, New York and Chicago offices. Clients of these offices gain access
to Southwest's investment research that focuses on corporations primarily in the
southwestern United States.

We operate three other broker/dealer subsidiaries engaged in certain aspects of
the securities brokerage business. All three are NASD registered
broker/dealers. SWS Financial Services, Inc. ("SWSFS") contracts with
independent registered representatives for the administration of their
securities business. We offer discount brokerage services through
Mydiscountbroker.com, Inc. ("MDB") which began operations in 1997. SWSFS and MDB
are correspondents of Southwest. Southwest Clearing Corporation ("Clearing") was
incorporated in the State of Delaware on September 30, 1998 and has not yet
begun operations. NorAm, formerly Equity Securities Trading Company, was sold
in August 1999.

We offer investment management, advisory and trust services through three
subsidiaries. Westwood Management Corporation ("Westwood"), a registered
investment advisor, manages the Gabelli-Westwood Family of Mutual Funds as well
as equity and fixed income investments for a diverse clientele including
corporate plan sponsors, charitable institutions, educational endowments and
public funds. Westwood Trust ("Trust") provides trust, custodial and other
management services to high net worth individuals and corporations throughout
Texas and the Southwest. SW Capital Corporation ("Capital"), administers the
Local Government Investment Cooperative ("LOGIC") fund for cities, counties,
schools and other local governments across Texas.

SWS Technologies Corporation ("Technologies") incorporated in 1997, provides
Internet services, network design and engineering and disaster recovery services
to the Company, its clients and other customers in the southwestern United
States.

On August 10, 1999, we signed a definitive merger agreement to acquire ASBI
Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB, (the
"Bank"). ASBI is classified as a unitary savings and loan holding company, the
business of which principally consists of the ownership and management of its
subsidiaries, the principal operating subsidiary of which is the Bank. The Bank,
headquartered in Arlington, Texas, is a federally chartered savings association
organized and existing under the laws of the United States.

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Pursuant to the terms of the merger agreement, we will acquire ASBI and its
subsidiaries, including the Bank, through the merger of one of our wholly owned
subsidiaries with and into ASBI. The agreement provides that we will issue 2.6
million shares of its common stock in a private placement to the holders of all
of the outstanding stock of ASBI. As a result of the merger, the shareholders of
ASBI will become our stockholders.

Don A. Buchholz serves as our chairman and as chairman of ASBI, and is currently
the beneficial owner of approximately 7.0% of our outstanding voting securities.
Mr. Buchholz also owns approximately 19.3% of the outstanding securities of
ASBI. As a result of the conversion of such securities into shares of our common
stock pursuant to the merger, it is anticipated that Mr. Buchholz's beneficial
ownership interest will increase to 9.2% of our outstanding stock. Pursuant to
the terms of a voting agreement among the shareholders of ASBI, Mr. Buchholz as
the power to exercise voting control for approximately 58.6% of ASBI's
outstanding voting securities. Such voting agreement, however, will not be used
in conjunction with the vote of ASBI shareholders to approve the merger.

The acquisition is expected to be accounted for by the pooling-of-interests
method and is subject to prior regulatory and shareholder approval. Detailed
information regarding the acquisition of ASBI, including a description of the
terms and conditions of the definitive merger agreement, issuance of shares of
our common stock to ASBI shareholders and related matters, is set forth in our
Definitive Proxy Statement for our Annual Meeting of Stockholders to be held on
November 3, 1999.

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(b) Financial Information about Operations

Our operations consist of various financial services provided to our clients.
The following table shows our revenue by source for the last three fiscal years
(dollars in thousands):

1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------

Net revenues from clearing
operations $ 40,118 12% $ 26,607 9% $ 22,693 10%
------------- ----------- -----------

Commissions:
Listed equities 13,481 4% 14,125 5% 9,729 4%
Over-the-counter equities 15,392 4% 12,418 4% 9,635 4%
Corporate bonds 7,630 2% 5,027 2% 1,906 1%
Government bonds and mortgage-
backed securities 3,162 1% 2,785 1% 1,970 1%
Municipal bonds 5,568 2% 4,658 2% 4,026 2%
Options 2,885 1% 1,820 1% 1,228 1%
Mutual funds 14,310 4% 13,737 5% 9,013 4%
Other 2,620 1% 4,831 2% 1,375 1%
----------- ----------- -----------
65,048 59,401 38,882
----------- ----------- -----------

Interest 147,006 44% 143,121 50% 119,176 55%
----------- ---------- -----------

Investment banking fees:
Corporate 2,108 1% 5,786 2% 2,913 1%
Municipal 10,650 3% 9,933 3% 6,218 3%
----------- ---------- -----------
12,758 15,719 9,131
----------- ---------- -----------

Advisory and administrative fees:
Institutional and individual
accounts 9,851 3% 8,135 3% 4,667 2%
Money market funds 6,090 2% 3,559 1% 1,790 1%
Other 401 -- 437 -- 443 --
----------- ---------- -----------
16,342 12,131 6,900
----------- ---------- -----------

Net gains on principal transactions:
Equity securities 36,163 10% 7,295 3% 4,377 2%
Municipal securities 3,399 1% 4,095 1% 6,092 3%
Other 2,127 1% 1,186 -- 1,387 1%
----------- ---------- -----------
41,689 12,576 11,856
----------- ---------- -----------

Other 14,309 4% 16,203 6% 9,766 4%
----------- ---------- -----------
Total revenue $337,270 100% $285,758 100% $218,404 100%
=========== ========== ===========

(c) Narrative Description of Business

As of June 25, 1999, we employed 928 individuals. Southwest employed 833 of
these individuals, 120 of whom were full-time retail representatives. In
addition, 710 full-time retail representatives were affiliated as

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independent contractors. Through our broker/dealer subsidiaries, we provide
securities services to approximately 250,000 client accounts. No single client
accounts for a material percentage of our total business.

BROKERAGE SERVICES

Southwest Securities, Inc. Southwest's activities in the securities business
include execution and clearing of securities transactions, individual and
institutional securities brokerage, securities lending, management of and
participation in underwriting of equity and fixed income securities, market
making in corporate securities and research and investment advisory services.
For the year ended June 25, 1999, revenues of Southwest accounted for 87% of
consolidated revenues.

Southwest is a member firm of the NYSE, the American Stock Exchange, Inc. and
the Chicago Stock Exchange, Inc. It is also a member of the NASD, the
Securities Investor Protection Corporation ("SIPC"), and other regulatory and
trade organizations. SIPC provides protection for clients up to $500,000 each
with a limitation of $100,000 for claims for cash balances. Southwest purchases
insurance which, when combined with the SIPC insurance, provides total coverage
in certain circumstances of up to $25 million per client for securities held in
clients' accounts with no aggregate limit.

Execution and Clearing. Southwest provides clearing and execution primarily on a
fully-disclosed basis for other broker/dealers including general securities
broker/dealers, bank affiliated firms and those firms specializing in high
volume trading. In a fully disclosed clearing transaction, the identity of the
correspondent's client is known to Southwest, and Southwest physically maintains
the client's account and performs a variety of services as agent for the
correspondent. Southwest provides clearing and execution services for over 200
correspondents throughout the United States and Europe. Correspondent firms are
charged fees based on their use of services according to a standard clearing
schedule. Discounts are given from the standard schedule based on total volume
and type of services provided to the correspondent. Besides service charges
realized from securities clearing activities, Southwest also earns substantial
amounts of interest income. Southwest extends credit directly to its customers,
the customers of correspondent firms and the correspondent firms themselves in
order to facilitate the conduct of customer and correspondent securities
transactions. This credit is termed margin lending. The correspondents indemnify
Southwest against margin losses on their customers' accounts. Southwest also
extends margin credit directly to correspondents to the extent that such firms
pledge proprietary assets as collateral. Since Southwest must rely on the
guaranties and general credit of the correspondents, Southwest may be exposed to
significant risk of loss if correspondents are unable to meet their financial
commitments should there be a substantial adverse change in the value of
margined securities.

While Southwest's correspondent relationships are with a wide range of general
securities broker/dealers and bank-affiliated broker/dealers, Southwest provides
clearing services for a number of high-volume trading firms. These firms
specialize in providing services to those customers who trade actively on a
daily basis. As of June 25, 1999, Southwest provides clearing services for 16
of these firms. The nature of services provided to the customers of these firms
are substantially different from the standard correspondent relationship and,
accordingly, fees for services to these correspondents are discounted from the
fees normally charged in the standard clearing schedule.

The following table reflects the number of client transactions processed for
each of the last three years and the number of correspondents at the end of each
year:

Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------- --------------- --------------

Tickets for third party correspondents 21,819,847 6,439,240 3,049,700
Tickets for internal correspondents 258,948 159,156 115,963
Tickets for Southwest account executives 304,540 172,203 155,896
--------------- --------------- --------------
Total tickets 22,383,335 6,770,599 3,321,559
=============== =============== ==============

Number of correspondents 216 231 227
=============== =============== ==============

In addition to clearing trades, Southwest provides other products and services
to its correspondents such as recordkeeping, trade reporting, accounting,
general back-office support, securities lending, reorganization and custody of
securities. Southwest also attempts to enrich its correspondent relationships

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by advising the correspondent on communications and networking functions as well
as making available to them a variety of non-brokerage products and services on
favorable terms.

The terms of Southwest's agreements with its correspondents define the
allocation of financial, operational and regulatory responsibility arising from
the clearing relationship. To the extent that the correspondent has available
resources, Southwest is protected against claims by customers of the
correspondent arising from actions by the correspondent; however, if the
correspondent is unable to meet its obligations, dissatisfied customers may
attempt to seek recovery from Southwest.

Individual and Institutional Securities Brokerage. As a securities broker,
Southwest acts as agent in the purchase and sale of securities, options,
commodities and futures contracts traded on various securities and commodities
exchanges or in the over-the-counter ("OTC") market. In most cases, Southwest
charges commissions to its retail clients, on both exchange and OTC
transactions, in accordance with its established commission schedule. In certain
instances, varying discounts from the schedule are given, generally based upon
the client's level of business, the trade size and other relevant factors.
Southwest discounts its commissions substantially on institutional transactions
based on trade size and the amount of business conducted annually with each
institution. For certain fee-based accounts, a fee is charged in lieu of
standard commissions. In addition, Southwest sells a number of professionally
managed mutual funds and maintains dealer-sales agreements with most major
distributors of mutual fund shares sold through broker/dealers. Some account
executives employed by Southwest maintain a license to sell certain insurance
products. Southwest is registered with the Commodity Futures Trading Commission
as a non-guaranteed introducing broker and is a member of the National Futures
Association. Southwest is a fully disclosed client of one of the largest futures
commodity merchants in the United States.

As of June 25, 1999, Southwest had 11 retail brokerage offices, three located in
Dallas and one each in Georgetown, Longview, Lufkin, Nacogdoches, and San
Antonio, Texas; Albuquerque and Santa Fe, New Mexico; and Beverly Hills,
California. In addition, Southwest has bond brokerage offices in Dallas,
Chicago and New York; and an institutional sales office in Dallas.

Customer Financing. Client transactions in securities are effected on either a
cash or margin basis. In margin transactions, the client pays a portion of the
purchase price, and Southwest makes a loan to the client for the balance,
collateralized by the securities purchased or by other securities owned by the
client. Southwest provides financing for margin transactions for its own
clients as well as correspondents' clients. Southwest may extend credit on a
margin basis directly to correspondents to the extent the correspondent holds
securities positions for their own account. Interest is charged, at a floating
rate, to clients on the amount borrowed to finance margin transactions. The rate
charged is dependent on the average net debit balance in the client's accounts,
the activity level in the accounts and the applicable cost of funds. The amount
of the loan is subject to the margin regulations ("Regulation T") of the Board
of Governors of the Federal Reserve System, NYSE margin requirements, and
Southwest's internal policies, which in many instances are more stringent than
Regulation T or NYSE requirements. In most transactions, Regulation T limits
the amount loaned to a customer for the purchase of a particular security to 50%
of the purchase price. Furthermore, in the event of a decline in the value of
the collateral, the NYSE regulates the percentage of client cash or securities
that must be on deposit at all times as collateral for the loans. In permitting
clients to purchase on margin, Southwest is subject to the risk of a market
decline, which could reduce the value of its collateral below the client's
indebtedness. Agreements with margin account clients permit Southwest to
liquidate clients' securities with or without prior notice in the event of an
insufficient amount of margin collateral. Despite those agreements, Southwest
may be unable to liquidate clients' securities for various reasons including the
fact that the pledged securities may not be actively traded, there is an undue
concentration of certain securities pledged, or a stop order is issued with
regard to pledged securities.

The primary source of funds to finance clients' margin account balances is
credit balances in clients' accounts. Southwest generally pays interest to
clients on these credit balances at a rate determined periodically. Available
credit balances are used to lend funds to Southwest customers purchasing
securities on margin. SEC regulations restrict the use of clients' funds to the
financing of clients' activities including margin account balances. Excess
customer credit balances are invested in short-term securities segregated for
the exclusive benefit of customers as required by SEC regulations. Southwest
generates net interest income from the positive interest rate spread between the
rate earned from margin lending and alternative short-term investments and the
rate paid on customer credit balances.

5

Securities Lending Activities. Southwest performs securities lending services
for its own clients, clients of correspondents and correspondents themselves as
well as for other broker/dealers and lending institutions. Southwest's
securities borrowing and lending activities involve borrowing securities to
cover short sales and to complete transactions in which clients have failed to
deliver securities by the required settlement date, and lending securities to
other broker/dealers for similar purposes. When borrowing securities, Southwest
is required to deposit cash or other collateral, or to post a letter of credit
with the lender and Southwest generally receives a rebate (based on the amount
of cash deposited) or a fee calculated to yield a negotiated rate of return.
When lending securities, Southwest receives cash or similar collateral and
generally pays a rebate (based on the amount of cash deposited) to the other
party to the transaction. Generally, Southwest earns net interest income based
on the spread between the interest rate on cash or similar collateral deposited
and the interest rate paid on cash or similar collateral received. Stock
borrowing and securities lending transactions are generally executed pursuant to
written agreements with counterparties which require that (1) securities
borrowed and loaned be marked-to-market on a daily basis, (2) excess collateral
be refunded, and (3) deficit collateral be furnished. Margin adjustments are
usually made on a daily basis through the facilities of various clearing houses.
Southwest is a principal in these securities borrowing and lending transactions
and becomes liable for losses in the event of a failure of any other party to
honor its contractual obligation. Southwest's management sets limits on
transaction volumes with each counter-party and reviews these limits on a weekly
basis to monitor the risk level with each counter-party.

The securities lending business is conducted primarily out of the Company's New
York office using a highly specialized sales force. Competition for these
professionals is intense and there can be no assurance that Southwest will be
able to retain these securities lending professionals.

Investment Banking and Underwriting Activities. Southwest earns investment
banking revenues by assisting corporate clients in planning to meet their
financial needs and advising them on the most advantageous means of raising
capital. Such plans are sometimes implemented by managing or co-managing public
offerings of securities or by arranging private placements of securities with
institutional or individual investors. These types of activities are conducted
in the corporate finance department that is staffed with 12 professionals and 8
analysts. In addition to public offerings and private placements, Southwest
provides other consulting services, including providing valuations of securities
and companies, arranging and evaluating mergers and acquisitions and advising
clients with respect to financing plans and related matters.

The syndicate department coordinates the distribution of managed and co-managed
corporate equity underwritings, accepts invitations to participate in
competitive or negotiated underwritings managed by other investment banking
firms, and allocates and merchandises Southwest's selling allotments to its
branch office system, to institutional clients and to other broker/dealers.

Southwest is also among the leaders in its geographic region in the origination,
syndication and distribution of securities of municipalities and political
subdivisions. The public finance department, which is staffed by 21
professionals, provides professional financial advisory services to public
entities across Texas and the Southwest and maintains branch offices in San
Antonio, Austin and Houston, Texas, and Albuquerque, New Mexico.

The following table sets forth, for the last three fiscal years, the number and
dollar amounts, using the full credit to the co-manager method, of municipal
bond offerings senior-managed or co-managed by Southwest.

Aggregate
Fiscal Number of Amount of
Years Issues Offerings
----------- ------------- ------------------

1999 175 $4,846,558,000
1998 203 $5,143,646,000
1997 165 $2,444,317,000

Participation in underwritings, both corporate and municipal, can expose
Southwest to material risk, since the possibility exists that securities it has
committed to purchase cannot be sold at the initial offering price. Federal and
state securities laws and regulations also affect the activities of underwriters
and impose substantial potential liabilities for violations in connection with
sales of securities by underwriters to the public.

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Market Making Activities. Southwest is a market maker in OTC and exchange-
listed equity securities as well as a dealer in tax-exempt and governmental
fixed income securities. Trading securities in the OTC market involves the
purchase of securities from and the sale of securities to clients of Southwest
or to other dealers who may be purchasing or selling securities for their own
account or acting as agent for their clients. Profits and losses are derived
from the spreads between bid and asked prices, as well as market trends for the
individual securities during the holding period. At June 25, 1999, Southwest
made markets in 544 OTC common stocks and 61 exchange-listed stocks. Southwest
frequently acts as agent in the execution of OTC orders for its clients and, as
such, transacts these trades with other dealers. When Southwest receives a
client order in a security in which it makes a market, it may act as principal
as long as it matches or improves upon the best price in the dealer market, plus
or minus a mark-up or mark-down not exceeding the equivalent agency commission
charge. Recently adopted regulations require that client limit orders be
satisfied prior to the brokerage firm buying securities into or selling the
securities from their own inventory at the same price.

While most of Southwest's principal transactions are executed to facilitate
individual and institutional customer trades, Southwest also maintains certain
inventory positions for its own accounts. These inventories require the
commitment of capital and expose the Company to the risk of a loss if market
prices of the securities held in inventory decrease. General market conditions,
interest rates and the financial prospects for issuers of such securities may
affect the market prices of securities held in inventory. Internal guidelines
intended to limit the size and risk of inventories maintained have been
established and are reviewed periodically.

Research Activities. Southwest has a research department that provides
analysis, investment recommendations and market information with an emphasis on
companies located in the Southwest region. At June 25, 1999, Southwest had 17
senior securities analysts publishing research on 135 companies. The department
focuses on particular industry groups, including consumer products, health care,
real estate and technology.

Information Technology. Information technology is an integral part of
Southwest's clearing and brokerage activities. Southwest operates sophisticated
hardware and software to execute and process securities transactions and is
engaged in continuing software development and regular up-grades on its computer
hardware. Southwest's data center features a twelve processor Tandem K20,000
Himalaya system and a sophisticated telecommunications network supporting over
3,300 terminals. While Southwest's software is licensed from Securities
Industry Software Corporation, it employs in-house programmers to develop
proprietary enhancements and to maintain its system. Southwest provides
brokerage accounting, order entry and market data in a local area network/wide
area network environment as well as through other traditional communication
environments.

Southwest is transitioning from its Himalaya mainframe processors to a family of
Compaq(R) servers as a part of its migration to the Comprehensive Software
Systems, Ltd. ("CSS") software. This software is being developed by CSS, a
joint venture with Southwest and several other broker/dealers. This software is
capable of accommodating a variety of hardware platforms and operating systems
with a large degree of customization at each location. The CSS system will
automate both front- and back-office brokerage processes from contact and order
management to clearance and settlement. Southwest is currently operating
several CSS modules and intends to have substantially all modules in place by
December 31, 1999.

The CSS database at Southwest uses Microsoft SQL Server 7.0 and runs on three
Compaq Proliant(TM) 7000 servers using new Intel Xeon processors. Each of the
Quad/400-megahertz servers provides 50 to 150 gigabytes of disk space and a
gigabyte of random access memory (RAM). The CSS applications also use over 50
Compaq 1850R servers with Dual/400-megahertz processors and 512 megabytes of
RAM.

Southwest is also investing in Internet and other communications technology.
Southwest is currently providing Internet access to account information for
certain correspondents and expects to expand this service. Southwest also
provides Internet service for correspondents and other end users, as well as
employees. Internet and other communication mechanisms may expose the Company
to increased risk of unauthorized access to data systems.

SWS Financial Services, Inc. SWSFS is an NASD member broker/dealer that
contracts with individual registered representatives who are NASD licensed
salespersons for the conduct of their securities business. SWSFS is a
correspondent of Southwest. While these registered representatives must conduct
all of their

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securities business through SWSFS, their contracts permit them to conduct
insurance, real estate brokerage or other business for others or for their own
accounts. The registered representatives are responsible for all of their direct
expenses and are paid higher commission rates than Southwest's account
executives to compensate them for their added expenses.

Mydiscountbroker.com, Inc. MDB, which began operations in 1997, is a NASD
member broker/dealer specializing in deep discount brokerage services with an
emphasis in trading over the Internet. Although MDB's brokers do not provide
investment advice or recommendations, they do offer clients the information
needed, including quotes, market news, and trends, to make informed investment
decisions. MDB's brokers work on a salary, rather than commission.

ASSET MANAGEMENT AND TRUST SERVICES

Westwood Management Corporation Westwood is a registered investment advisor
founded in 1983 by Susan M. Byrne, who continues to serve as its President and
Chief Executive Officer. The firm, which has headquarters in Dallas, manages
equity, fixed income, cash and balanced accounts for a diverse clientele,
including corporate plan sponsors, charitable institutions, educational
endowments and public funds. In addition, Westwood manages the Gabelli-Westwood
Family of Mutual Funds which is available to both taxable and non-taxable
investors.

Westwood Trust Trust was established in 1974 and provides trust, custodial and
other management services to estates, charitable and other trusts and retirement
plans established by high net worth individuals and corporations throughout
Texas and the Southwest. Trust is chartered and regulated by the Texas
Department of Banking.

SW Capital Corporation Capital was established in 1994 and administers the
LOGIC program. The LOGIC program is targeted to the needs of cities, counties,
schools and other local governments across Texas and conforms with the
Interlocal Cooperation Act and the Public Funds Investment Act of the Texas
Government Code. This program allows participants to pool their available
funds, resulting in increased economies of scale, which allow higher returns
while maintaining a high degree of safety and liquidity.

COMPETITION

We encounter intense competition in our business, and we compete directly with
numerous firms, many of which have substantially greater capital and other
resources. We also encounter competition from banks, insurance companies and
financial institutions in many elements of our business. For example, with the
prior approval of the Federal Reserve Board, securities subsidiaries of bank
holding companies may now underwrite and deal in corporate debt and equity
securities, provided that they comply with certain "firewalls" and that the
revenues from such activities do not exceed 25 percent of the security
subsidiary's total revenues. Legislative proposals also under consideration
would eliminate this limit on such activities and would permit commercial banks,
bank holding companies and their subsidiaries and affiliates to offer additional
services which have traditionally been provided only by securities and money
management firms.

In the past few years, a number of banks acquired securities firms and, in so
doing, gained unprecedented entry into the securities industry. While the
effect of such acquisitions cannot yet be determined, they have brought entirely
new sources of capital into the securities industry, resulting in more
formidable competition.

Additionally, competition among securities firms and other competitors for
successful sales representatives, securities traders, securities analysts, stock
loan professionals and investment bankers is intense and continuous.

We compete with other securities firms and with banks, insurance companies and
other financial institutions principally on the basis of service, product
selection, price, location and reputation in local markets. We operate at a
price disadvantage to discount brokerage firms that do not offer equivalent
services. Southwest competes for the correspondent clearing business on the
basis of service, price, technology, product selection and reputation. We
compete in asset management services with other portfolio managers principally
based on portfolio performance, price and service.

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REGULATION

The securities industry in the United States is subject to extensive regulation
under federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Much of the regulation of
broker/dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the NYSE. These self-regulatory organizations adopt
rules (which are subject to approval by the SEC) for governing the industry and
conduct periodic examinations of member broker/dealers. Securities firms are
also subject to regulation by state securities commissions in the states in
which they are registered. Southwest, SWSFS and MDB are registered in all 50
states. Southwest is also registered in Puerto Rico.

The regulations to which broker/dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. Additional legislation, changes
in rules promulgated by the SEC and by self-regulatory organizations or changes
in the interpretation or enforcement of existing laws and rules often directly
affect the method of operation and profitability of broker/dealers. The SEC and
the self-regulatory organizations may conduct administrative proceedings that
can result in censure, fine, suspension or expulsion of a broker/dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker/dealers is the protection of clients and the securities markets rather
than protection of creditors and shareholders of broker/dealers. See Note 10 of
the Notes to Consolidated Financial Statements for further description of
certain SEC regulations.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders:

Name Age Position
---- --- --------

David Glatstein 50 Director, Chief Executive Officer and President
Edward R. Anderson 50 Executive Vice President
William D. Felder 41 Executive Vice President
Kenneth R. Hanks 45 Executive Vice President and Chief Operating Officer
Stacy M. Hodges 36 Executive Vice President, Chief Financial Officer and Treasurer
Daniel R. Leland 38 Executive Vice President
Richard H. Litton 52 Executive Vice President
W. Norman Thompson 43 Executive Vice President and Chief Information Officer
Paul D. Vinton 50 Executive Vice President

David Glatstein was elected Chief Executive Officer in May 1996 and has served
as President and a director of both the Company and Southwest since May 1995.
Mr. Glatstein was Chief Executive Officer of Barre & Company, Inc. from its
founding in 1980 until its acquisition by Southwest in 1995; First Vice
President of the Securities Division of Lehman Brothers Kuhn Loeb, Inc. from
1978 to 1980 and a securities broker with White, Weld & Company, Inc. from 1973
to 1978. Mr. Glatstein is a past Chairman of the District 6 Business Conduct
Committee of the NASD.

Edward R. Anderson has served as Executive Vice President of the Company in
charge of the Operations Division since January 1999. Mr. Anderson joined the
Company in February 1998 as Executive Vice President for Acquisitions and New
Business Development. Prior to joining the Company, he spent 26 years in various
positions at Principal Financial Services in Dallas including Director of
Capital Markets, Chief Administrative Officer, Executive Vice President and
Chief Financial Officer. Mr. Anderson is a certified public accountant and is a
past Chairman of the District 6 Business Conduct Committee of the NASD.

William D. Felder has served as Executive Vice President of the Company since
December 1995 and as Senior Vice President of the Company since 1993. Mr.
Felder has been associated with Southwest in various other capacities since
1980, including director since August 1993 and Senior Vice President in charge
of Clearing Services from 1988 to 1998. Mr. Felder is a past Chairman of the
District 6 Business Conduct Committee of the NASD.

9

Kenneth R. Hanks has served as Executive Vice President since June 1996 and
Chief Operating Officer since August 1998. Mr. Hanks was the Company's Chief
Financial Officer from June 1996 to August 1998 and has been a director of
Southwest since June 1997. Mr. Hanks served in various executive capacities of
Rauscher Pierce Refsnes, Inc. from 1981 to 1996, including Executive Vice
President and Chief Financial Officer. He serves as an arbitrator with the NASD
and formerly served as a member of the NASD's District 6 Business Conduct
Committee.

Stacy M. Hodges has served as Treasurer and Chief Financial Officer since August
1998 and Executive Vice President since February 1999. Ms. Hodges was
Controller of the Company from September 1994 to August 1998. Ms. Hodges has
been a director of Southwest since June 1997. Prior to joining Southwest, Ms.
Hodges was a Senior Audit Manager in the Financial Services division of KPMG
LLP. Ms. Hodges is a member of the Texas Society of CPAs.

Daniel R. Leland has served as Executive Vice President of the Company since
February 1999. He has served as Executive Vice President and director of
Southwest since July 1995. He has been in charge of the Fixed Income Division
since November 1997. Mr. Leland began his career at Barre & Company in June
1983 where he was employed in various capacities in fixed income sales and
trading before becoming President of Barre & Company in 1993. Mr. Leland is an
arbitrator for the NASD and is a past Vice Chairman of the District 6 Business
Conduct Committee.

Richard H. Litton has served as Executive Vice President of the Company and
Executive Vice President in charge of the Public Finance Division and a director
of Southwest since July 1995. Mr. Litton headed the Municipal Securities Group
in Dallas for BA Securities, Inc. from 1993 to 1995. Mr. Litton was President
with First Southwest Company, a regional investment bank from 1987 to 1993; Vice
President and Regional Manager of Merrill Lynch Capital Markets Municipal Group
from 1977 to 1987 and a securities broker with White, Weld & Company, Inc. from
1976 to 1977. Mr. Litton served on the Advisory Committee on the Recovery of
Real Estate Finance for the Texas House of Representatives' Financial
Institutions Committee. Mr. Litton is past member and director of the Municipal
Advisory Council of Texas and past member of the Marketing Committee of the
Public Securities Association.

W. Norman Thompson has served as Executive Vice President and Chief Information
Officer of the Company since January 1995. Mr. Thompson has been a director of
Southwest since June 1997. Mr. Thompson was associated with Kenneth Leventhal &
Co. (now a part of Ernst & Young LLP) in various capacities ranging from Audit
Manager to Senior Consulting Manager from 1987 to 1994. Previously, Mr.
Thompson was an Audit Manager with KPMG LLP from 1981 to 1987. In the
capacities he held with both Kenneth Leventhal & Co. and KPMG LLP, he was
heavily involved in Information Technology auditing and consulting.

Paul D. Vinton has served as Executive Vice President of the Company since
November 1998 and as Senior Vice President of Southwest since June 1995 and as a
director of Southwest since May 1997. Mr. Vinton was associated with Stephens
Inc. in various capacities from 1993 through 1995. Mr. Vinton has been employed
within the securities industry since 1972 with various firms dealing primarily
in operational, clearance and settlement activities. Mr. Vinton has served on
various industry group boards including most recently the Depository Trust
Company Settlement Advisory Board.

Item 2. Properties

Our executive offices are located in approximately 160,500 square-feet of leased
space in an office building in Dallas, Texas. The lease expires in 2008. We
conduct our clearing operations primarily in our principal office in Dallas,
Texas and our office in New York. We have 11 retail brokerage offices, three
located in Dallas, Texas and one each in Georgetown, Longview, Lufkin,
Nacogdoches and San Antonio, Texas; Albuquerque and Santa Fe, New Mexico; and
Beverly Hills, California. We have public finance branch offices in San
Antonio, Austin and Houston, Texas and Albuquerque, New Mexico. We have fixed
income branch offices in Chicago, Illinois and New York. Our present facilities
and equipment are adequate for current and planned operations.

10

Item 3. Legal Proceedings

On April 17, 1998, a judgment was entered against us in connection with a breach
of contract lawsuit stemming from the 1995 acquisition of Barre & Company, Inc.
The judge awarded the counterparty approximately $40,000 in damages and
approximately $1,700,000 in attorney's fees. We believe that we have
substantial grounds for appeal and we have begun the appellate process. We also
believe that our reserves are adequate to cover the full amount of the judgment.

On May 22, 1998, a class action claim was filed in the United States District
Court for the Northern District of Texas against us and ViaGraphix Corporation
alleging that material misrepresentations were made in the registration
statement and prospectus that was filed with the SEC and distributed to
investors in connection with the initial public offering of stock of ViaGraphix,
which was managed and underwritten by us. We believe that we have meritorious
defenses to the allegations of the lawsuit, and do not believe that the outcome
of this claim will have a material adverse effect on our business, financial
condition or operating results.

In the general course of our brokerage business and the business of clearing for
other brokerage firms, we have been named as defendants in various pending
lawsuits and arbitration proceedings. These claims allege violation of Federal
and state securities laws. We believe that resolution of these claims will not
result in any material adverse effect on our business, financial condition or
operating results.

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

None.

11

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters

The registrant's common stock began trading on the New York Stock Exchange, Inc.
on October 6, 1997 under the symbol "SWS". Previously, the registrant's stock
was traded on the NASDAQ National Market System. At September 14, 1999, there
were 137 holders of record of our common stock and in excess of 9,500 total
holders of our common stock. The following table sets forth for the periods
indicated the high and low market prices for the common stock and the cash
dividend declared per common share:

1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------

Cash dividend declared per common share /(2)/ $ .063 $ .063 $ .063 $ .063
Stock Price Range /(2)/
High $22.90 $22.73 $36.99 $76.36
Low $14.72 $14.44 $19.15 $25.69

1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------

Cash dividend declared per common share /(2)/ $ .052 $ .052 $ .052 $ .052
Stock Price Range /(2)/
High $21.26 $23.65 $23.81 $25.87
Low $15.25 $18.29 $19.05 $19.86

Item 6. Selected Financial Data

SELECTED FINANCIAL DATA
(In thousands, except ratios and per share amounts)

Year Ended
------------------------------------------------------------
June 25, June 26, June 27, June 28, June 30,
1999 1998 1997 1996 1995
------------------------------------------------------------

Operating Results:
Revenue $ 337,270 $ 285,758 $ 218,404 $ 181,808 $ 120,181
Net income $ 26,219 $ 20,630 $ 16,983 $ 14,040 $ 5,668
Earnings per share - basic /(2) (3)/ $ 2.23 $ 1.76 $ 1.51 $ 1.26 $ .55
Earnings per share - diluted /(2) (3)/ $ 2.21 $ 1.75 $ 1.51 $ 1.26 $ .55
Weighted average shares outstanding -
basic /(2) (3)/ 11,766 11,743 11,270 11,162 10,393
Weighted average shares outstanding -
diluted /(2) (3)/ 11,839 11,764 11,283 11,168 10,393
Cash dividend declared per common share /(2)/
$ .25 $ .21 $ .15 $ .13 $ .12

Financial Condition:
Total assets $4,293,274 $3,220,106 $3,276,392 $2,196,397 $1,535,979
Long-term debt $ 50,000 $ -- $ -- $ -- $ --
Stockholders' equity $ 262,284 $ 125,467 $ 106,928 $ 84,449 $ 71,541
Shares outstanding /(2)/ 11,806 11,746 11,726 11,160 11,133
Tangible book value per common
share /(1) (2)/ $ 21.60 $ 10.04 $ 8.44 $ 7.30 $ 6.16
Ratio of earnings to fixed charges /(4)/ 1.4 1.3 1.3 1.3 1.2

/(1)/ Adjusted to consider goodwill of $7,244 at June 25, 1999, $7,558 at June
26, 1998, $8,002 at June 27, 1997, $2,976 at June 28, 1996 and $2,940 at
June 30, 1995.
/(2)/ Adjusted to reflect a ten percent stock dividend which was effective
October 1, 1997, a five percent dividend which was effective August 3,
1998 and a ten percent stock dividend which was declared on May 6, 1999,
payable August 2, 1999 to shareholders of record on July 15, 1999.
/(3)/ Fiscal years 1998, 1997, 1996 and 1995 were adjusted to reflect the
implementation of Statement of Financial Accounting Standards No. 128,
"Earnings per Share."

12

/(4)/ For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before the provision for income taxes and
fixed charges consist of interest expense and one-third of rental expense
which is deemed representative of an interest factor.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

From time to time, Southwest Securities Group, Inc. (the "Parent") and
subsidiaries (collectively, the "Company") may publish "forward-looking
statements" within the meaning of section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
(the "Acts") or make oral statements that constitute forward-looking statements.
These forward-looking statements may relate to such matters as anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company cautions readers that a variety of factors could cause
the Company's actual results to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
These risks and uncertainties, many of which are beyond the Company's control,
include, but are not limited to (1) transaction volume in the securities
markets; (2) volatility of the securities markets; (3) fluctuations in interest
rates; (4) changes in regulatory requirements which could affect the cost of
doing business; (5) general economic conditions, both domestic and foreign; (6)
changes in the rate of inflation and related impact on securities markets; (7)
competition from existing financial institutions and other new participants in
the securities markets; (8) legal developments affecting the litigation
experience of the securities industry; (9) successful implementation of
technology solutions; and (10) changes in federal and state tax laws which could
affect the popularity of products sold by the Company. The Company does not
undertake any obligation to publicly update or revise any forward-looking
statements.

The Company's discussion of the issues surrounding the Year 2000 contain
forward-looking statements as defined in the Acts. These forward-looking
statements could relate to, but are not limited to (1) the financial impact of
the Year 2000 project; (2) the Company's estimated timetables for completion of
each phase of the project; (3) the Company's estimates of the availability of
vendor software upgrades and consulting services; (4) the readiness of third-
party service providers; and (5) contingency plans. The Company cautions that
many factors, including those outside of the control of the Company, could cause
actual results to be materially different than those anticipated and expressed
in the forward-looking statements.

GENERAL

The Company is primarily engaged in securities execution and clearance,
securities brokerage, investment banking, securities lending and borrowing and
trading as a principal in equity and fixed income securities. All of these
activities are highly competitive and are sensitive to many factors outside the
control of the Company, including volatility of securities prices and interest
rates; trading volume of securities; economic conditions in the regions where
the Company does business; income tax legislation; and demand for investment
banking and securities brokerage services. While revenues are dependent upon
the level of trading and underwriting volume, which may fluctuate significantly,
a large portion of the Company's expenses remain fixed. Consequently, net
earnings can vary significantly from period to period.

Effective May 1, 1997, NorAm Investment Services, Inc. ("NorAm"), formerly
Equity Securities Trading Company, Inc. ("Equity"), became a wholly owned
subsidiary of the Company through the issuance of 445,845 shares of common
stock. The acquisition was accounted for under the purchase method of accounting
and, accordingly, assets and liabilities were recorded at their fair market
values on the date of the acquisition. Goodwill relating to this acquisition of
approximately $5,113,000 is recorded in other assets in the consolidated
statements of financial condition. The Company sold NorAm in August 1999.

RESULTS OF OPERATIONS

During fiscal 1999, net income totaled $26,219,000, an increase of $5,589,000,
or 27%, from fiscal 1998, which is a Company record. In 1998, net income
totaled $20,630,000, an increase of $3,647,000, or 21%, from fiscal 1997. For
the past three years, the equity markets have experienced an unprecedented rise,
spurring record levels of transaction volume and capital market activity. These
conditions have led to

13

record results in many sectors of the financial services industry, including
most of the Company's primary lines of business. These industry factors, coupled
with the Company's effort to grow into new areas of the industry, have allowed
the Company to reach earnings records.

The following is a summary of year-to-year increases (decreases) in categories
of net revenues and operating expenses (dollars in thousands):

1999 vs. 1998 1998 vs. 1997
Amount Percent Amount Percent
-------------------------------------------------
Net revenues

Net revenues from clearing
operations $13,511 51% $ 3,914 17%
Commissions 5,647 10% 20,519 53%
Net interest 4,638 11% 6,479 18%
Investment banking, advisory and
administrative fees 1,250 4% 11,819 74%
Net gains on principal transactions 29,113 231% 720 6%
Other (1,894) (12%) 6,437 66%
-------- -----------
52,265 28% 49,888 37%
-------- -----------

Operating expenses
Commissions and other employee
compensation 32,874 36% 26,755 41%
Occupancy, equipment and computer
service costs 3,680 21% 5,447 45%
Communications 1,229 10% 1,483 13%
Floor brokerage and clearing
organization charges 1,005 20% 943 23%
Other 4,855 19% 9,105 54%
-------- -----------
43,643 28% 43,733 40%
-------- -----------
Income before income taxes $ 8,622 27% $ 6,155 24%
======== ===========

Net Revenues from Clearing Operations. Net revenues from clearing increased
$13,511,000, or 51%, from 1998 to 1999, as a result of an increase in
transaction volumes. Total transactions processed in fiscal 1999 increased 229%
to approximately 22.4 million from approximately 6.8 million in fiscal 1998.
Turbulent market conditions during the first six months of fiscal 1999 and high
trading volumes in the Internet and technology sectors lead to heavy trading
volume in securities markets. The rate of increase in transactions processed
has outpaced the increase in revenues from clearing, because, in recent years,
the Company has increased the number of high-volume trading Correspondents in
its customer base, and a substantial portion of the increase in transactions
processed were related to these Correspondents. These customers use a
relatively low level of clearing services and, accordingly, are charged
substantially discounted clearing fees from the Company's standard clearing
schedule. As transaction volumes increase, revenue per clearing transaction
tends to decrease as Correspondents take advantage of volume discounts.

Net revenues from clearing increased $3,914,000, or 17%, from 1997 to 1998,
primarily as a result of an increased number of Correspondents and an increase
in total transaction volumes. The number of Correspondents increased to 231 at
June 26, 1998 from 227 at June 27, 1997, an increase of 1.7%. Total
transactions processed in fiscal 1998 increased 106% to approximately 6.8
million from approximately 3.3 million in fiscal 1997.

Commissions. Commissions from the Company's client transactions increased
$5,647,000 to $65,048,000, an increase of 10% when compared with revenues in
fiscal 1998 of $59,401,000. This increase is primarily attributable to an
increase in fixed income sales, as well as an increase in the number of brokers
in the Company's independent contractor network. Fixed income sales increased
46% over the prior fiscal year. The number of independent contractor sales
representatives increased to 710 at June 25, 1999 from 697 at June 26, 1998.
Also contributing to the increase were increased commissions from
Mydiscountbroker.com, Inc. ("MDB"), the Company's on-line investing subsidiary
which began offering on-line trading in the third

14

quarter of fiscal 1998. Commissions at MDB increased approximately 193% over the
prior year. The number of MDB on-line accounts increased approximately 393% from
June 26, 1998 to June 25, 1999.

Commissions from the Company's client transactions in fiscal 1998 increased
$20,519,000 to $59,401,000, an increase of 53% when compared with revenues in
fiscal 1997 of $38,882,000. This increase was evenly divided between the
Southwest Securities, Inc. ("Southwest") Private Client Group network and the
SWS Financial Services, Inc. ("SWSFS"), formerly Brokers Transaction Services,
independent contractor network. Commissions from account executives increased
due to increased sales to individual and institutional investors of (1)
offerings managed or co-managed by the Company, (2) over-the-counter corporate
bonds and (3) mutual funds. The increase in SWSFS commissions was primarily
related to an increased number of independent contractor sales representatives.
The number of independent contractors was 697 and 536 at June 26, 1998 and June
27, 1997, respectively.

Net Interest Income. The Company's net interest income is dependent upon the
level of customer and stock loan balances as well as the spread between the rate
it earns on those assets compared with the cost of funds. The components of
interest earnings are as follows (in thousands):

June 25, June 26, June 27,
1999 1998 1997
---------------------------------------------------

Interest revenue:
Customer margin accounts $ 47,865 $ 39,662 $ 28,906
Assets segregated for regulatory purposes 11,511 9,806 15,190
Stock borrowed 80,688 83,332 65,906
Other 6,942 10,321 9,174
--------------- -------------- ------------
147,006 143,121 119,176
--------------- -------------- ------------

Interest expense:
Customer funds on deposit 31,870 27,723 28,365
Stock loaned 65,868 67,956 50,204
Other 2,213 5,025 4,669
--------------- -------------- ------------
99,951 100,704 83,238
--------------- -------------- ------------
Net interest $ 47,055 $ 42,417 $ 35,938
=============== ============== ============

For the year ended June 25, 1999, net interest income accounted for 20% of the
Company's net revenue versus 23% in the prior fiscal year. Interest revenue from
customer margin balances and interest expense from customer funds on deposit
have fluctuated in relation to average balances over the past two fiscal years.
Net interest revenue generated from securities lending activities has remained
relatively stable in the current fiscal year versus the prior fiscal year.
Average customer balances and average balances from securities lending
activities are as follows (in thousands):

Fiscal Years Ended
June 25, 1999 June 26, 1998
--------------------------------------

Average customer margin balances $ 604,000 $ 477,000
Average customer funds on deposit 699,000 544,000

Average stock borrowed 2,219,000 2,139,000
Average stock loaned 2,189,000 2,113,000

Rates on customer margin balances and funds on deposit are influenced by changes
in leading market interest rates and competitive factors. Spreads on securities
lending transactions are influenced by the types of securities borrowed or
loaned, market conditions and counter-party risk. Securities lending
activities are conducted out of the Company's New York office using a highly
specialized sales force. Competition for these individuals is intense and there
can be no assurance that the Company will be able to retain these individuals.

15

In fiscal 1998, net interest income accounted for 23% of the Company's net
revenue, while in fiscal 1997, net interest income was 27% of net revenue.
Interest income from customer accounts increased 37% in 1998 as compared to 1997
primarily due to increases in margin account balances as favorable market
conditions coupled with comparatively low interest rates made margin borrowing
popular. Additionally, the Company's acquisition of Equity in May of 1997
resulted in an increase in customer margin accounts of approximately $80
million. Interest expense related to customer funds on deposit in fiscal 1998
decreased 2% from 1997 due to a decrease in the average balances of customer
funds on deposit. During 1998, the Company transferred approximately $190
million of its customer funds on deposit to a money market mutual fund program
for which the Company acts as underwriter through its SWSFS subsidiary. The
transfers occurred as a result of the Company's offering new cash management
products to qualified plan customers. The decrease in average customer credit
balances caused a corresponding decrease in assets segregated for regulatory
purposes. Interest income from these assets declined $5,384,000, or 35%, in
fiscal 1998 versus fiscal 1997 as the average balance of these assets decreased
to $167,583,000 in 1998 versus $294,678,000 in 1997.

Interest income from stock borrowed transactions increased $17,426,000, or 26%,
in fiscal 1998 compared to fiscal 1997, while interest expense from stock loaned
transactions increased $17,752,000, or 35%. These increases were due to
increases in the average balances borrowed and loaned in the Company's conduit
business. Average stock borrowed balances increased 26% to $2,139,310,000 from
$1,696,668,000 in fiscal 1997 while average stock loaned balances increased 28%
to $2,112,604,000 from $1,656,708,000 in fiscal 1997.

Investment Banking, Advisory and Administrative Fees. Investment banking,
advisory and administrative fees include revenues derived from the underwriting
and distribution of corporate and municipal securities, unit trusts and money
market and other mutual funds. Investment banking, advisory and administrative
fees increased in fiscal 1999 when compared to fiscal 1998 due to increases in
fees from investment advisory services, offset by decreases in corporate and
municipal finance fees. Advisory fees earned on investment management increased
as assets under management at June 25, 1999 were approximately $3.5 billion
versus $2.9 billion at June 26, 1998. The number and offering amount of senior
and co-managed municipal finance offerings in which the Company participated
decreased 14% and 6%, respectively, over the prior year.

Investment banking, advisory and administrative fees in 1998 increased
$11,819,000, or 74%, to $27,850,000 when compared to $16,031,000 in fiscal 1997
due to increased volume of transactions in both equity and municipal investment
banking markets. Additionally, advisory fees earned on investment management
increased as average assets under management in 1998 were approximately $2.9
billion versus $2.2 billion in fiscal 1997.

Net Gains on Principal Transactions. Net gains on principal transactions have
experienced significant growth over prior year, increasing 231% to $41,689,000.
This growth is due to the expansion of the Company's equity trading area. The
number of market makers employed in this area has increased to 20 at June 25,
1999 from 15 at June 26, 1998, while coverage from market making activities has
increased to 544 over-the-counter securities and 61 exchange-listed securities
in which the Company makes a market. Revenue in this area can fluctuate
significantly from quarter to quarter based on market conditions.

Other Income. Other income decreased over the prior year due to non-recurring
revenue in fiscal 1998. The Parent owned a minority interest in Roundtable
Partners, LLC ("Roundtable"), the predecessor of Knight/Trimark Group, Inc.
("Knight"), which filed an S-1 registration statement with the U.S. Securities
and Exchange Commission on May 1, 1998 for an initial public offering of stock.
In accordance with the terms of the limited partnership agreement, prior to the
offering, previously undistributed earnings of Roundtable, approximately $3.7
million, were distributed to the Parent in fiscal 1998.

Other income increased $6,437,000, or 66%, to $16,203,000 for the year ended
June 26, 1998 primarily as a result of the transaction described above. The
remaining increase in other income was due to increased revenue from transaction
and account fees.

Commissions and Other Employee Compensation. Commissions and other employee
compensation are generally affected by the level of operating revenues, earnings
and the number of employees. During the fiscal year ended June 25, 1999,
commissions and other employee compensation expense increased over the same
periods in the prior year. This was principally due to (1) increased
commissions and benefits paid to revenue-producing employees generating higher
levels of operating revenues; (2) as previously discussed,

16

increased headcount among the independent contractor network; and (3) the
addition of 149 full-time employees. The number of full-time employees increased
to 928 at June 25, 1999 compared to 779 at June 26, 1998. Approximately 57% of
the increased employee count relates to those employed in the information
technology area.

During fiscal 1998, commissions and other employee compensation expense
increased $26,755,000, or 41%, compared to the prior year. This was principally
due to (1) increased commissions and benefits paid to revenue-producing
employees generating higher levels of operating revenues; (2) increased
headcount among the Company's independent contractor network; (3) the addition
of 90 full-time employees, including 37 in the technology area; and (4)
increased incentive compensation accruals. The number of employees increased to
779 at June 26, 1998 compared to 689 at June 27, 1997.

Occupancy, Equipment and Computer Service Costs. Occupancy, equipment and
computer service costs increased primarily due to upgrades in computer
processing equipment as the Company continues to focus its resources on the
implementation of its new brokerage software, Comprehensive Software Systems,
Ltd. ("CSS") (see YEAR 2000 discussion below) as well as the redesign of the
Company's customer statements.

Occupancy, equipment and computer service costs increased $5,447,000, or 45%,
during fiscal 1998 primarily due to upgrades in computer processing equipment,
an increase in office space and the completion of the remodeling of the
Company's headquarters.

Communications. Communications expense increased 10% and 13%, respectively, in
fiscal years 1999 and 1998, due to expanded computer networking and the
expansion of the equity trading area.

Other Expenses. In fiscal 1999, other expenses increased 19% primarily due to
increases in contract labor, professional services and promotional expenses.
Contract labor and professional service expenses relate to, among other things,
the Company's involvement in developing Year 2000 compliant software (see YEAR
2000 discussion below).

In fiscal 1998, other expenses increased $9,105,000, or 54%, to $26,043,000,
primarily due to increases in expenses associated with underwriting fixed income
securities, consulting and legal services and increases in the Company's
litigation and other reserves.

FINANCIAL CONDITION

The Parent's investment in Knight is classified as marketable equity securities
available for sale, and the unrealized holding gain, net of tax, is recorded as
other comprehensive income as a part of stockholders' equity on the consolidated
statements of financial condition in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." At June 25, 1999, the Parent owned approximately 3.3 million
shares of Knight, as adjusted for the two-for-one stock split effective May 17,
1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company's assets are substantially liquid in nature and consist mainly of
cash or assets readily convertible into cash. These assets are financed by the
Company's equity capital, short-term bank borrowings, interest bearing and non-
interest bearing client credit balances, correspondent deposits and other
payables. The Company maintains an allowance for doubtful accounts which
represents amounts, in the judgment of management, that are necessary to
adequately absorb losses from known and inherent risks in receivables from
clients, clients of correspondents and correspondents.

The Company has credit arrangements with commercial banks, which include broker
loan lines up to $192,500,000. 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 the Company and its clients. At June 25, 1999,
the amount outstanding under these secured arrangements was $2,700,000 which was
collateralized by securities held for firm accounts valued at $29,724,000. In
the opinion of management, these credit arrangements are adequate to meet the
short-term operating capital needs of the Company.

17

In addition to the broker loan lines, the Company also 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. There were no amounts outstanding at June 25,
1999 under this unsecured line of credit.

On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated
Notes (the "Notes") due June 30, 2004. At maturity, the principal of the notes
will be paid in shares of the Class A common stock of Knight or, at the option
of the Company, their cash equivalent. The Notes, which are in the form of
DARTS(SM) (or, "Derivative Adjustable Ratio Securities(SM)"), 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.

Net cash used in operating activities during the fiscal year ended June 25, 1999
was $47,941,000. The use of cash was due to the increase in securities owned
and assets segregated for regulatory purposes and was adequately financed by
increased customer funds on deposit and the proceeds from the issuance of the
Notes.

The Company's broker/dealer subsidiaries are subject to the requirements of the
Securities and Exchange Commission relating to liquidity, capital standards and
the use of client funds and securities. The Company has historically operated
in excess of the minimum net capital requirements.

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.
The Company's 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. The Company does not maintain material positions in interest-rate-
sensitive financial instruments. The Company's fixed income activities also
expose it to the risk of loss related to changes in credit spreads. Credit
spread risk arises from the potential that changes in an issuers credit rating
or credit perception could affect the value of financial instruments.

Equity Price Risk. The Company is exposed to equity price risk as a result of
making markets 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.

Credit Risk. Credit risk arises from the potential nonperformance by
counterparties, customers or debt security issuers. The Company is exposed to
credit risk as a trading counterparty to dealers and customers, as a holder of
securities and as a member of exchanges and clearing organizations.

Managing Risk Exposure. The Company manages risk exposure through the
involvement of various levels of management. Position limits in trading and
inventory accounts are well established and monitored on an ongoing basis.
Current and proposed underwriting, banking and other commitments are subject to
due diligence reviews by senior management, as well as professionals in the
appropriate business and support units involved. Credit risk related to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral. The Company monitors its exposure to counterparty risk
through the use of credit exposure information, the monitoring of collateral
values and the establishment of credit limits.

Market Risk Analysis. The Company has performed an analysis of the Company's
financial instruments and has assessed the related risk and materiality in
accordance with the rules. Based on this analysis, in the opinion of
management, the market risk associated with the Company's financial instruments
at June 25, 1999 will not have a material adverse effect on the consolidated
financial position or operating results of the Company.

18

YEAR 2000

The widespread use of computer programs that rely on two-digit date programs to
perform computations and decision-making functions may cause information
technology ("IT") systems to malfunction in the Year 2000 and may lead to
significant business delays in the U.S. and internationally. The Year 2000
problem has the potential to impact the securities industry since information is
moved to and from the exchanges and trading partners on a real-time basis from
computer system to computer system with little human interaction. In addition
to potential problems from computer systems, potential problems could arise from
equipment with embedded chips, such as fax machines, elevators and other non-IT
systems.

The Company has defined a Year 2000-compliant system as one capable of correct
identification, manipulation and calculation when processing data in connection
with the year change from December 31, 1999 to January 1, 2000. A Year 2000-
compliant system is also capable of correct identification, manipulation and
calculation using leap years both alone and in conjunction with other dates.
The Company's systems are compliant under the above definition. The Company
addressed issues with regard to Year 2000 compliance as described below.

In the first stage, the Company prepared an inventory of all IT and non-IT
systems, as well as equipment that could have embedded chips, whether or not
critical to the operation of the business. The Company also compiled a listing
of material relationships with third parties. These relationships include
various exchanges, clearing houses, banks, telecommunications companies and
public utilities. This stage of the Year 2000 process is 100% complete. The
Company continually reviews areas of the business to address any new items added
since the initial inventories.

In stage two, results from the inventory discussed above were assessed to
determine the Year 2000 impact and what actions needed to be taken to obtain
Year 2000 compliance. For the Company's internal systems, actions needed ranged
from obtaining vendor certification of Year 2000 compliance, remediation of
internal systems or replacement of systems and equipment that could not be
remediated. This stage is 100% complete. The Company has determined a course
of action for remediation or replacement of all critical internal systems. The
Company continues surveying and obtaining information about Year 2000 readiness
of its material third-party relationships. Contingency plans have been
developed for those third parties who cannot satisfactorily demonstrate Year
2000 compliance. The plans are continually refined, updated and tested as
changes in third-party readiness occurs.

The third stage includes the repair, replacement or retirement of systems. This
stage of the Year 2000 process is complete. The Company has upgraded packaged
software throughout the organization. Desktop system upgrades and upgrades of
the communications infrastructure are finished. The main telephone switch and
critical branch office switches have been upgraded where necessary, and upgraded
network operating systems have been loaded into place. The rollout of the Year
2000 compliant version of the BRASS(R) Equity Trading System has also been
completed.

The primary financial system used for financial reporting purposes for the
Company was replaced during fiscal 1998 to prepare for Year 2000 as well as to
derive other benefits from the financial reporting system. Updates to this
system were installed in the second quarter of fiscal 1999 and testing was
completed in the third quarter of fiscal 1999. The financial system itself is
certified by the vendor as Year 2000 compliant.

The Company's primary operational system is the Securities Industry Software
("SIS") application, which provides both front- and back-office services to
Correspondents, customers and our internal users. For several years, the
Company has self-supported the SIS application. The Company has been pursuing a
replacement strategy for SIS and is implementing a new client-server based
information system ("CSS"). CSS is being developed by Comprehensive Software
Systems, Ltd., an entity in which several securities firms own interests,
including the Company, which owns an 8.18% interest.

While replacement of the SIS system with CSS was our primary solution for Year
2000 issues associated with the SIS system, in September 1998 the Company
engaged an independent consulting firm to begin remediation of the SIS system.
As of June 30, 1999, 100% of the code was remediated by the consulting firm,
tested by the Company and installed in the production environment.

The Company has been working on the CSS project since 1992, as implementation of
this system was in process before the Company began assessment of critical Year
2000 issues. In fiscal 1997, the Company accelerated the pace of the CSS project
so that it would be available as the Year 2000 solution for the SIS system.
Through fiscal 1997 and 1998, costs associated with the joint venture, including
personnel,

19

hardware, software and related costs, were approximately $4 million. During
fiscal 1997 and 1998, the Company incurred an additional $1 million in costs
related to the Year 2000 project primarily related to compensation and benefits,
software upgrades and hardware replacement for financial and other systems. In
fiscal 1999, the Company has incurred an additional $8.4 million in expenses
related to the CSS project and other Year 2000 initiatives. Implementation of
the CSS system should result in the reduction of certain existing hardware and
software lease, maintenance and licensing costs.

In the first half of fiscal 2000, the Company expects to incur an additional
$600,000 related to Year 2000 project costs. These costs will be funded out of
working capital and substantially all will be expensed. The budgeted
expenditures include compensation and benefits for IT and other operational
staff.

The Company is also heavily dependent upon the power and telecommunications
infrastructure within the United States and would be subject to business
interruptions as a result of the failure of those systems. Additionally, the
Company would experience disruption in certain of its businesses if the various
exchanges, clearing houses or banks used by the Company reported a system
failure. The Company is communicating with these third parties in order to
obtain assurances regarding Year 2000 readiness. The Company's contingency plans
also address potential failure of these systems.

The last stage of the implementation process includes testing all of the changes
implemented individually and integrating those changes with all of the Company's
systems and those of its customers and trading partners. Testing takes on
various forms depending on the type of change implemented. Each upgrade, to the
extent economically feasible, is run through a test environment before it is
implemented. It is then tested to see how well it integrates into the Company's
overall IT environment. The Company has also engaged in point-to-point testing
with various exchanges, clearing houses and utilities and has established a
future date environment for testing the CSS and SIS applications. The Company
participated in the Securities Industry Association's industry-wide testing
which occurred over a series of weekends in March and April 1999 and simulated
the first trading cycle to settle in the Year 2000. The Company successfully
completed each phase of the testing. Additional tests have continued with
vendors not included in the industry-wide test as well as with Correspondent
customers. There are no material unresolved Year 2000 testing exceptions as of
June 25, 1999.

The Company has prepared contingency plans that deal with a variety of failures
that could potentially be caused by Year 2000 or other problems. These plans
range from global issues like the loss of a major stock exchange or utility, to
infrastructure issues like the loss of the primary data communications carrier
or regional electrical power supplier, to failures within the Company's
facilities like the loss of an owned telephone switch or the failure of an
internally maintained application. The Company will continue to refine and test
these plans up through the Year 2000 as the various exchanges and utilities
update their plans for different kinds of failures. Testing related to
contingency plans will focus on those failures we assume are more likely to
occur because of incomplete work or inadequate information on the part of
mission critical vendors. As a part of the contingency planning process, the
Company is preparing a formal command center at both the primary and backup
facilities.

Although the Company's mission critical systems are Year 2000 compliant, there
are many factors beyond the Company's control that could have an adverse effect.
The Company continues to work diligently to minimize the potential impact of
such external forces on its Year 2000 readiness.

ACQUISITION OF ASBI HOLDINGS, INC.

On August 10, 1999, the Company signed a definitive merger agreement to acquire
ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB,
Arlington, Texas. The agreement provides that the Company will issue 2.6 million
shares of its common stock to the holders of all of the outstanding stock of
ASBI. Don A. Buchholz serves as chairman of both the Company and ASBI, and is
the beneficial owner of approximately 7.0% of the Company's outstanding voting
securities. Mr. Buchholz is the beneficial owner of approximately 19.3% of the
outstanding securities of ASBI, and he exercises voting control for
approximately 58.6% of ASBI's outstanding voting securities. The acquisition is
expected to be accounted for by the pooling-of-interests method and is subject
to regulatory and shareholder approval.

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" was issued in June 1997 and establishes standards for
reporting and display of comprehensive income and its

20

components in a set of general-purpose financial statements. The Company adopted
SFAS 130 in the first quarter of fiscal 1999. All prior periods have been
restated to conform with SFAS 130.

The Financial Accounting Standards Board ("FASB") issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in June
1997. This statement establishes standards for the way that a public business
enterprise reports information about operating segments in the annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports to shareholders. The Company adopted SFAS
131 in the fiscal 1999 financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires derivatives to be recognized
in the consolidated statements of financial condition at fair value. Changes in
such fair value are required to be recognized in earnings to the extent the
derivative is not effective as a hedge. This statement will apply to the
Company's 5% Exchangeable Subordinated Notes and the Company's underlying
investment in Knight common stock. The impact on the financial statements will
depend on a variety of factors, including future interpretive guidance from the
FASB. Management is currently reviewing the impact of this new pronouncement,
and the impact on the Company's financial position is unknown at this time. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999 and should
be applied prospectively. However, the FASB has subsequently issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of
the Effective Date of FASB Statement No. 133" which postpones initial
application until fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 in fiscal 2001.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is incorporated in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption Market Risk.

Item 8. Financial Statements and Supplementary Data

(a) Financial statements, schedules and exhibits filed under this item are
listed in the index appearing on page F-1 of this report.

(b) QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share amounts)

1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------

Revenues $73,197 $79,296 $90,042 $94,735
Income before income taxes $ 7,356 $ 9,351 $11,706 $12,107
Net income $ 4,683 $ 6,142 $ 7,533 $ 7,861
Earnings per share - basic /(2)/ $ .40 $ .52 $ .64 $ .67
Earnings per share - diluted /(2)/ $ .40 $ .52 $ .64 $ .66
Cash dividend declared per common share /(2)/ $ .063 $ .063 $ .063 $ .063
Stock Price Range /(2)/
High $ 22.90 $ 22.73 $ 36.99 $ 76.36
Low $ 14.72 $ 14.44 $ 19.15 $ 25.69

1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
Revenues $65,296 $70,465 $68,841 $81,156
Income before income taxes $ 7,785 $ 8,405 $ 7,369 $ 8,339
Net income $ 5,045 $ 5,390 $ 4,863 $ 5,332
Earnings per share - basic /(1) (2) (3)/ $ .43 $ .45 $ .42 $ .45
Earnings per share - diluted /(1) (2) (3)/ $ .43 $ .45 $ .41 $ .45
Cash dividend declared per common share /(1) (2)/ $ .052 $ .052 $ .052 $ .052
Stock Price Range /(1) (2)/
High $ 21.26 $ 23.65 $ 23.81 $ 25.87
Low $ 15.25 $ 18.29 $ 19.05 $ 19.86

21

(1) Adjusted to reflect a ten percent stock dividend which was effective
October 1, 1997 and a five percent stock dividend which was effective
August 3, 1998.
(2) Adjusted to reflect a ten percent stock dividend declared May 6, 1999,
payable on August 2, 1999 to shareholders of record on July 15, 1999.
(3) The first quarter of fiscal 1998 was adjusted to reflect the implementation
of Statement of Financial Accounting Standards No. 128, "Earnings per
Share."

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

For information with respect to executive officers of the registrant, see
"Executive Officers of the Registrant" at the end of Part I, Item 1 of this
report.

The information under the heading "Proposal One - Election of Directors" in the
definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders
to be filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120
days after the Company's fiscal year end is incorporated herein by reference.

Item 11. Executive Compensation

The information under the subheading "Executive Compensation" under the heading
"Management" in the definitive Proxy Statement for the Company's 1999 Annual
Meeting of Stockholders to be filed with the Commission pursuant to Regulation
240.14a (6)(c) within 120 days after the Company's fiscal year end is
incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information under the subheading "Stock Ownership of Principal Owners and
Management" under the heading "Management" in the definitive Proxy Statement for
the Company's 1999 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 240.14a (6)(c) within 120 days after the
Company's fiscal year end is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information under the heading "Proposal One - Election of Directors"; under
the subheadings "Background of the Transaction" and "Relationship of the Parties
and Interests of Certain Persons in the Transaction" under the heading "Proposal
Two - Issuance of 2,600,000 Shares of Common Stock in Connection with the
Proposed Acquisition of ASBI Holdings, Inc."; and under the heading "Management"
in the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 240.14a
(6)(c) within 120 days after the Company's fiscal year end is incorporated
herein by reference.

22

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) List of documents filed as a part of the report:

1. Exhibits required by this Item are either listed in the index appearing
on page F-1 of this report or have been previously filed with the SEC.

2. The following consolidated financial statement schedules of the
Registrant and its subsidiaries, and Independent Auditors' Report
thereon, are attached hereto as required by Item 14 (d):

Exhibit Number
--------------

S-1 Schedule I - Condensed Financial Information of Registrant

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.

3. The following exhibits of the Registrant and its subsidiaries are
attached hereto as required by Item 14(d):

Exhibit Number
--------------

2.1 Agreement and Plan of Reorganization dated as of August
10, 1999 between the Registrant and ASBI Holdings, Inc.*
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*
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 September24,
1998
10.6 Stock Purchase Plan (Restated) incorporated by
reference to the Registrant's Quarterly Report on Form
10-Q filed February 16, 1999
12 Computation of Ratio of Earnings to Fixed Charges*
23 Consent of KPMG LLP*
27 Financial Data Schedule*
99 Press Release dated June 6, 1999 filed as an exhibit to
Current Report on Form 8-K filed on June 7, 1999

* Filed herewith

23

(b) Reports on Form 8-K:

The Company filed a Current Report on Form 8-K on June 7, 1999. Item 5 of the
referenced Report refers to the Company's press release dated June 6, 1999
announcing the execution of a Letter of Intent to acquire ASBI Holdings, Inc.
No financial statements were filed with the Report.

24

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Southwest Securities Group, Inc.
------------------------------------------------
(Registrant)

September 23, 1999 /S/ David Glatstein
- ------------------ ------------------------------------------------
(Date) (Signature)
David Glatstein
Director and Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

September 23, 1999 /S/ Don A. Buchholz
- ------------------ ------------------------------------------------
(Date) (Signature)
Don A. Buchholz
Chairman of the Board

September 23, 1999 /S/ David Glatstein
- ------------------ ------------------------------------------------
(Date) (Signature)
David Glatstein
Director and Chief Executive Officer
(Principal Executive Officer)

September 23, 1999 /S/ Stacy M. Hodges
- ------------------ ------------------------------------------------
(Date) (Signature)
Stacy M. Hodges
Treasurer and Chief Financial Officer
(Principal Financial Officer)

September 23, 1999 /S/ Laura Leventhal
- ------------------ ------------------------------------------------
(Date) (Signature)
Laura Leventhal
Controller
(Principal Accounting Officer)

September 23, 1999
- ------------------ ________________________________________________
(Date) (Signature)
Brodie L. Cobb
Director

September 23, 1999
- ------------------ ________________________________________________
(Date) (Signature)
J. Jan Collmer
Director

25

September 23, 1999
- ------------------ ________________________________________________
(Date) (Signature)
R. Jan LeCroy
Director

September 23, 1999 /S/ Frederick R. Meyer
- ------------------ ------------------------------------------------
(Date) (Signature)
Frederick R. Meyer
Director

September 23, 1999 /S/ Jon L. Mosle, Jr.
- ------------------ ------------------------------------------------
(Date) (Signature)
Jon L. Mosle, Jr.
Director

26

SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

FINANCIAL STATEMENTS PAGE(S)

Consolidated Statements of Financial Condition F-2
as of June 25, 1999 and June 26, 1998

Consolidated Statements of Income and Comprehensive Income F-3
for the years ended June 25, 1999, June 26, 1998 and June 27, 1997

Consolidated Statements of Stockholders' Equity F-4
for the years ended June 25, 1999, June 26, 1998 and June 27, 1997

Consolidated Statements of Cash Flows F-5
for the years ended June 25, 1999, June 26, 1998 and June 27, 1997

Notes to Consolidated Financial Statements F-6-18

Independent Auditors' Report F-19

F-1

Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 25, 1999 and June 26, 1998
(In thousands, except par values and share amounts)

1999 1998
----------- -----------
Assets

Cash $ 11,334 $ 13,706
Assets segregated for regulatory purposes 225,736 130,728
Marketable equity securities available for sale 172,928 --
Receivable from brokers, dealers and clearing organizations 3,088,005 2,365,635
Receivable from clients, net 679,652 648,464
Securities owned, at market value 74,486 32,144
Other assets 41,133 29,429
----------- -----------
$4,293,274 $3,220,106
=========== ===========

Liabilities and Stockholders' Equity
Short-term borrowings $ 2,700 $ --
Payable to brokers, dealers and clearing organizations 3,000,096 2,293,731
Payable to clients 812,559 720,813
Securities sold, not yet purchased, at market value 24,350 1,662
Drafts payable 37,013 41,688
Other liabilities 104,222 36,745
Exchangeable subordinated notes 50,000 --
----------- -----------
4,030,940 3,094,639

Minority interest in consolidated subsidiary 50 --

Stockholders' equity:
Preferred stock of $1.00 par value. Authorized 100,000 shares;
none issued -- --
Common stock of $.10 par value. Authorized 20,000,000 shares;
issued and outstanding 11,805,925 shares in 1999;
issued 10,687,583 and outstanding 10,678,406 shares in 1998. 1,180 1,069
Additional paid-in capital 127,092 69,462
Accumulated other comprehensive income - unrealized
holding gain, net of tax of $60,374 112,123 --
Retained earnings 21,896 55,022
Receivable from employees under the Employee Stock
Purchase Plan (7) (12)
Treasury stock (9,177 shares, at cost, in 1998) -- (74)
----------- -----------
Total stockholders' equity 262,284 125,467
----------- -----------
Commitments and contingencies
$4,293,274 $3,220,106
=========== ===========

See accompanying Notes to Consolidated Financial Statements.

F-2

Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands, except share and per share amounts)

1999 1998 1997
----------- ----------- -----------

Net revenues from clearing operations $ 40,118 $ 26,607 $ 22,693
Commissions 65,048 59,401 38,882
Interest 147,006 143,121 119,176
Investment banking, advisory and administrative fees 29,100 27,850 16,031
Net gains on principal transactions 41,689 12,576 11,856
Other 14,309 16,203 9,766
----------- ----------- -----------
337,270 285,758 218,404
----------- ----------- -----------
Commissions and other employee compensation 124,691 91,817 65,062
Interest 99,951 100,704 83,238
Occupancy, equipment and computer service costs 21,343 17,663 12,216
Communications 13,738 12,509 11,026
Floor brokerage and clearing organization charges 6,129 5,124 4,181
Other 30,898 26,043 16,938
----------- ----------- -----------
296,750 253,860 192,661
----------- ----------- -----------
Income before income taxes 40,520 31,898 25,743
Income taxes 14,301 11,268 8,760
----------- ----------- -----------
Net income 26,219 20,630 16,983
Other comprehensive income - unrealized holding gain
arising during period, net of tax of $60,374 112,123 -- --
----------- ----------- -----------
Comprehensive income $ 138,342 $ 20,630 $ 16,983
=========== =========== ===========

Earnings per share - basic $ 2.23 $ 1.76 $ 1.51
=========== =========== ===========
Earnings per share - diluted $ 2.21 $ 1.75 $ 1.51
=========== =========== ===========
Weighted average shares outstanding - basic 11,766,377 11,743,228 11,269,666
=========== =========== ===========
Weighted average shares outstanding - diluted 11,838,723 11,763,605 11,282,885
=========== =========== ===========

See accompanying Notes to Consolidated Financial Statements.

F-3

Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands, except share and per share amounts)

Receivable
from
employees
under
Accumulated Employee
Additional other Stock
Common Stock paid-in comprehensive Retained Purchase Treasury
Shares Amount capital income earnings Plan stock Total
---------------------------------------------------------------------------------------------

Balance at June 28, 1996 8,783,630 $ 879 $ 27,107 $ -- $ 56,815 $(278) $(74) $ 84,449
Net income -- -- -- -- 16,983 -- -- 16,983
Dividends ($.15/share) -- -- -- -- (1,779) -- -- (1,779)
Issuance of common stock for
acquisition 445,845 45 7,089 -- -- -- -- 7,134
Stock dividend declared on
August 28, 1997 922,947 92 21,943 -- (22,035) -- -- --
Proceeds from employees for
Employee Stock Purchase Plan -- -- -- -- -- 141 -- 141
---------------------------------------------------------------------------------------------
Balance at June 27, 1997 10,152,422 1,016 56,139 -- 49,984 (137) (74) 106,928
Net income -- -- -- -- 20,630 -- -- 20,630
Dividends ($.21/share) -- -- -- -- (2,441) -- -- (2,441)
Exercise of stock options 16,000 2 498 -- (275) -- -- 225
Stock dividend on exercised options 1,600 -- 38 -- (38) -- -- --
Adjustment for fractional shares
on stock dividend declared on
August 28, 1997 (36) -- -- -- -- -- -- --
Stock dividend declared on
May 22, 1998 508,420 51 12,787 -- (12,838) -- -- --
Proceeds from employees for
Employee Stock Purchase Plan -- -- -- -- -- 125 -- 125
---------------------------------------------------------------------------------------------
Balance at June 26, 1998 10,678,406 1,069 69,462 -- 55,022 (12) (74) 125,467
Net income -- -- -- -- 26,219 -- -- 26,219
Dividends ($.25/share) -- -- -- -- (2,997) -- -- (2,997)
Exercise of stock options 36,465 3 2,391 -- (1,285) -- -- 1,109
Stock dividend declared on
May 6, 1999 1,073,266 107 54,956 -- (55,063) -- -- --
Unrealized holding gain, net of
tax of $60,374 -- -- -- 112,123 -- -- -- 112,123
Proceeds from employees for
Employee Stock Purchase Plan -- -- -- -- -- 5 -- 5
Reissuance of treasury stock for
Stock Purchase Plan 9,177 -- 101 -- -- -- 74 175
Issuance of common stock and
amortization of deferred
compensation expense for Stock
Purchase Plan 8,611 1 182 -- -- -- -- 183
---------------------------------------------------------------------------------------------
Balance at June 25, 1999 11,805,925 $1,180 $127,092 $112,123 $ 21,896 $ (7) $ -- $262,284
=============================================================================================

See accompanying Notes to Consolidated Financial Statements.

F-4

Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands)

1999 1998 1997
---------- --------- ---------
Cash flows from operating activities:

Net income $ 26,219 $ 20,630 $ 16,983
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,057 3,426 2,750
Provision for doubtful accounts 625 1,241 --
Deferred income taxes (1,086) (371) (1,198)
Deferred compensation expense 62 -- --
Decrease (increase) in assets segregated for regulatory
purposes (95,008) 221,469 (128,167)
Net change in broker, dealer and clearing organization
accounts (16,005) 70,789 1,452
Net change in client accounts 59,933 (321,983) 203,161
Decrease (increase) in securities owned (42,342) (223) 2,672
Decrease (increase) in other assets (8,274) (179) 4,089
Increase (decrease) in drafts payable (4,675) 10,652 5,878
Increase (decrease) in securities sold, not yet purchased 22,688 (3,640) 4,545
Increase in other liabilities 6,865 11,556 3,770
---------- --------- ---------
Net cash provided by (used in) operating activities (47,941) 13,367 115,935
---------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets (3,472) (3,525) (7,597)
Proceeds from sale of fixed assets -- -- 96
---------- --------- ---------
Net cash used in investing activities (3,472) (3,525) (7,501)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of exchangeable subordinated notes 50,000 -- --
Debt issue costs (1,813) -- --
Net change in short-term borrowings 2,700 (4,000) (100,984)
Payments on liabilities subordinated to claims of
general creditors -- (1,400) --
Proceeds from employees for Employee Stock Purchase Plan 5 125 141
Proceeds from employees for Stock Purchase Plan 296 -- --
Net proceeds from exercise of stock options 659 225 --
Net proceeds from issuance of stock of consolidated subsidiary 50 -- --
Payment of cash dividends on common stock (2,856) (1,831) (2,130)
---------- --------- ---------
Net cash provided by (used in) financing activities 49,041 (6,881) (102,973)
---------- --------- ---------
Net increase (decrease) in cash (2,372) 2,961 5,461

Cash at beginning of year 13,706 10,745 5,284
---------- --------- ---------
Cash at end of year $ 11,334 $ 13,706 $ 10,745
========== ========= =========

See accompanying Notes to Consolidated Financial Statements.

F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

(a) General and Basis of Presentation

The consolidated financial statements include the accounts of Southwest
Securities Group, Inc. ("Parent") and its consolidated subsidiaries listed below
(collectively, the "Company"):

Southwest Securities, Inc. "Southwest"
SWS Financial Services, Inc. "SWSFS"
(formerly Brokers Transaction Services, Inc.)
Mydiscountbroker.com, Inc. "MDB"
(formerly Sovereign Securities, Inc.)
NorAm Investment Services, Inc. "NorAm"
Southwest Clearing Corporation "Clearing"
Westwood Management Corporation "Westwood"
Westwood Trust "Trust"
SW Capital Corporation "Capital"
Southwest Investment Advisors, Inc. "Advisors"
SWS Technologies Corporation "Technologies"
(formerly SWST Computer Corp.)

Southwest, SWSFS, MDB and NorAm are National Association of Securities Dealers
("NASD") registered broker/dealers under the Securities Exchange Act of 1934
("1934 Act"). NorAm was acquired May 1, 1997 through the issuance of 445,845
shares of common stock. The acquisition was accounted for under the purchase
method of accounting, and, accordingly, assets and liabilities were recorded at
their fair market values on the date of acquisition. Goodwill relating to this
acquisition of approximately $5,113,000 is recorded in other assets in the
accompanying consolidated statements of financial condition. NorAm was sold in
August 1999 (Note 19). Clearing was incorporated in the State of Delaware on
September 30, 1998 and has not yet begun operations.

Advisors and Westwood are registered investment advisors under the Investment
Advisors Act of 1940. Trust is chartered and regulated by the Texas Department
of Banking. All significant intercompany balances and transactions have been
eliminated.

The annual consolidated financial statements are prepared as of the close of
business on the last Friday of June. Accordingly, the fiscal years for 1999,
1998 and 1997 ended June 25, 1999, June 26, 1998 and June 27, 1997,
respectively.

(b) Securities Transactions

Securities transactions are recorded on a settlement date basis with such
transactions generally settling three business days after trade date. Revenues
and expenses related to such transactions are also recorded on settlement date,
which is not materially different than trade date.

(c) Securities Owned

Marketable securities are carried at quoted market value. The increase or
decrease in net unrealized appreciation or depreciation of securities owned is
credited or charged to operations and is included in net gains on principal
transactions in the consolidated statements of income and comprehensive income.
As of December 31, 1998, the Company began determining the market value of these
securities on a trade date basis rather than a settlement date basis.

(d) Depreciation and Amortization

Depreciation of furniture and equipment is provided over the estimated useful
lives of the assets (5 or 7 years), and depreciation on leasehold improvements
is provided over the lease term (up to 9 years). Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is amortized on
a straight-line basis over periods to be benefited ranging from twenty-five to
forty years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation.

F-6

(e) Drafts Payable

In the normal course of business, the Company uses drafts to make payments
relating to its brokerage transactions. These drafts are presented for payment
through the Company's bank and are sent to the Company daily for review and
acceptance. Upon acceptance, the drafts are paid and charged against cash.

(f) Reverse Repurchase and Repurchase Agreements

Securities purchased under agreements to resell ("Reverse Repurchase
Agreements") and securities sold under agreements to repurchase ("Repurchase
Agreements") are carried at the amounts at which these securities will be
subsequently resold or reacquired as specified in the respective agreements.
Management regularly monitors the market value of the underlying securities
relating to outstanding repurchase and reverse repurchase agreements.

(g) Federal Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax return.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(h) Cash Flow Reporting

For the purposes of the consolidated statements of cash flows, the Company
considers cash to include cash on hand and in depository accounts. Assets
segregated for regulatory purposes are not included as cash equivalents for
purposes of the consolidated statements of cash flows because such assets are
segregated for the benefit of customers only.

Cash paid during the year for interest was $99,935,000, $100,422,000 and
$82,936,000, in 1999, 1998 and 1997, respectively. Cash paid during the year
for income taxes was $18,691,000, $10,332,000 and $9,235,000 in 1999, 1998 and
1997, respectively.

In a non-cash transaction in 1999, the Parent received approximately 1.7 million
common shares (approximately 3.3 million shares after a two-for-one stock split
effective May 17, 1999) of Knight/Trimark Group, Inc. ("Knight") subsequent to
Knight's initial public offering completed July 10, 1998. During 1997, the
Company issued common stock valued at approximately $7,134,000 related to the
acquisition of NorAm.

(i) Earnings Per Share

The Company has adopted and retroactively applied the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" for all
periods presented. SFAS No. 128 requires dual presentation of basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing net income by
weighted average common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if contracts to issue common stock were
exercised.

(j) Minority Interest

Southwest has issued 50 shares of Series A Preferred Stock at $1,000 per share
to certain qualified broker/dealers. Qualified broker/dealers are broker/dealers
registered under the 1934 Act who clear their proprietary transactions through
Southwest and who represent that they are subject to net capital rules of the
SEC and other self-regulatory organizations to which such broker/dealers report.
A total of 5,000 shares of Series A Preferred Stock are reserved for issuance to
such broker/dealers. This investment by third-parties in Southwest is
classified as minority interest in consolidated subsidiary on the Consolidated
Statements of Financial Condition.

(k) Stock-Based Compensation

The Company accounts for employee stock-based compensation using the intrinsic
value method of accounting prescribed by Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company provides pro
forma disclosures of net income and earnings per share for stock option grants
as if the fair value based method had been applied. Prior to fiscal year 1998,
the impact of recording the compensation expense related to the stock options
granted by the Company was not material to the consolidated financial
statements.

F-7

(l) Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

(m) Fair Value of Financial Instruments

Substantially all of the Company's financial assets and liabilities are carried
at market value or at amounts which, because of their short-term nature,
approximate current fair value. The Company's short-term borrowings, if
recalculated based on current interest rates, would not significantly differ
from the amounts recorded at June 25, 1999. The fair value of exchangeable
subordinated notes, issued on June 16, 1999 would not significantly differ from
the amount recorded at June 25, 1999.

(n) Accounting Pronouncements

SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
establishes standards for reporting and display of comprehensive income and its
components in a set of general-purpose financial statements. The Company
adopted SFAS 130 in the first quarter of fiscal 1999. All prior periods have
been restated to conform with SFAS 130.

The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997. This statement establishes standards for the
way that a public business enterprise reports information about operating
segments in the annual financial statements and requires that those enterprises
report selected information about operating segments in interim reports to
shareholders. The Company adopted SFAS 131 in the fiscal 1999 financial
statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires derivatives to be recognized
in the consolidated statements of financial condition at fair value. Changes in
such fair value are required to be recognized in earnings to the extent the
derivative is not effective as a hedge. This statement will apply to the
Company's 5% Exchangeable Subordinated Notes and the Company's underlying
investment in Knight common stock. The impact on the financial statements will
depend on a variety of factors, including future interpretive guidance from the
FASB. Management is currently reviewing the impact of this new pronouncement,
and the impact on the Company's financial position is unknown at this time.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and
should be applied prospectively. However, the FASB has subsequently issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" which postpones
initial application until fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133 in fiscal 2001.

2. ASSETS SEGREGATED FOR REGULATORY PURPOSES

At June 25, 1999, the Company had U.S. Treasury securities with a market value
of $28,465,000 and reverse repurchase agreements of $197,271,000 segregated in
special reserve bank accounts for the exclusive benefit of customers under Rule
15c3-3 of the 1934 Act. Reverse repurchase agreements at June 25, 1999 were
collateralized by U.S. Government securities with market values of approximately
$198,298,000.

At June 26, 1998, the Company had U.S. Treasury securities with a market value
of $59,515,000 and reverse repurchase agreements of $71,213,000 segregated in
these accounts. The reverse repurchase agreements were collateralized by U.S.
Government securities with market values of approximately $71,871,000 at June
26, 1998.

3. MARKETABLE EQUITY SECURITIES

The investment in Knight is classified as marketable equity securities available
for sale, and the unrealized holding gain, net of tax, is recorded as other
comprehensive income as a part of stockholders' equity on the consolidated
statements of financial condition. Subsequent to Knight's two-for-one stock
split effective May 17, 1999, the Company owns approximately 3.3 million shares
of Knight common stock.

F-8

The following table summarizes the cost and market value of the investment in
Knight at June 25, 1999 (in thousands):

Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------

Marketable equity securities $432 172,496 -- $172,928
==========================================

4. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
At June 25, 1999 and June 26, 1998, the Company had receivable from and payable
to brokers, dealers and clearing organizations related to the following (in
thousands):

1999 1998
------------- -------------

Receivable:

Securities failed to deliver $ 27,505 $ 18,880
Securities borrowed 2,987,910 2,229,587
Correspondent broker/dealers 47,805 62,673
Clearing organizations 1,444 1,245
Other 23,341 53,250
------------- -------------
$ 3,088,005 $ 2,365,635
============= =============

Payable:

Securities failed to receive $ 23,634 $ 45,956
Securities loaned 2,945,007 2,227,874
Correspondent broker/dealers 15,273 11,300
Other 16,182 8,601
------------- -------------
$ 3,000,096 $ 2,293,731
============= =============

Securities failed to deliver and receive represent the contract value of
securities that have not been delivered or received subsequent to settlement
date. Securities borrowed and loaned represent deposits made to or received from
other broker/dealers relating to these transactions. These deposits approximate
the market value of the underlying securities.

The Company clears securities transactions for Correspondent broker/dealers.
Settled securities and related transactions for these Correspondents are
included in the receivable from and payable to brokers, dealers and clearing
organizations.

The Company participates in the securities borrowing and lending business by
borrowing and lending securities other than those of its clients. All open
positions are adjusted to market values daily. The amounts receivable and
payable, relating to open positions for the securities borrowed and securities
loaned other than those of the Company's clients, were $2,963,865,000 and
$2,926,386,000, respectively, at June 25, 1999 and $2,192,459,000 and
$2,198,278,000, respectively, at June 26, 1998.

5. RECEIVABLE FROM AND PAYABLE TO CLIENTS

Receivable from and payable to clients include amounts due on cash and margin
transactions. Included in these amounts are receivable from and payable to
noncustomers (as defined by Rule 15c3-3 of the 1934 Act, principally officers,
directors and related accounts), which aggregated approximately $2,935,000 and
$4,794,000, respectively, at June 25, 1999 and $1,916,000 and $2,649,000,
respectively, at June 26, 1998. Securities accounts of noncustomers are subject
to the same terms and regulations as those of customers. Securities owned by
customers and noncustomers that collateralize the receivable are not reflected
in the accompanying consolidated financial statements.

The Company pays interest on certain customer "free credit" balances available
for reinvestment. The aggregate balance of such funds was approximately
$699,793,000 and $542,822,000 at June 25, 1999 and June 26, 1998, respectively.
During fiscal years 1999 and 1998, the interest rates paid on these balances
ranged from 4.0% to 4.75%.

F-9

The Company maintains an allowance for doubtful accounts which represents
amounts, in the judgment of management, that are necessary to adequately absorb
losses from known and inherent risks in receivables from customers. Provisions
made to this allowance are charged to operations. At June 25, 1999 and June 26,
1998, all unsecured customer receivables had been provided for in this
allowance.

6. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

Securities owned and securities sold, not yet purchased at June 25, 1999 and
June 26, 1998, which are carried at market value, include the following (in
thousands):

1999 1998
----------- ----------

Securities owned
Corporate equity securities $ 35,671 $ 5,220
Municipal obligations 19,391 13,633
U.S. Government and Government agency obligations 9,470 8,696
Corporate obligations 4,114 1,479
Commercial paper -- 446
Other 5,840 2,670
----------- ----------
$ 74,486 $ 32,144
=========== ==========

Securities sold, not yet purchased
Corporate equity securities $ 14,972 $ 1,208
Municipal obligations 6,184 124
U.S. Government and Government agency obligations 2,491 175
Corporate obligations 372 98
Commercial paper -- 50
Other 331 7
----------- ----------
$ 24,350 $ 1,662
=========== ==========

Certain of the above securities have been pledged to secure short-term
borrowings and as security deposits at clearing organizations for the Company's
clearing business. These pledged securities amounted to $3,647,000 and
$3,572,000 at June 25, 1999 and June 26, 1998, respectively.

7. SHORT-TERM BORROWINGS

The Company has credit arrangements with commercial banks, which include broker
loan lines up to $192,500,000. 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
balances under these credit arrangements are due on demand and bear interest at
rates indexed to the federal funds rate (4.63% at June 25, 1999). At June 25,
1999, the amount outstanding under these secured arrangements was $2,700,000
which was collateralized by securities held for firm accounts valued at
$29,724,000. There were no amounts outstanding at June 26, 1998 on these credit
arrangements.

The Company also has an irrevocable letter of credit agreement aggregating
$60,000,000 at June 25, 1999 and $32,000,000 at June 26, 1998 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
annually. This letter of credit is fully collateralized by marketable securities
held in clients' and nonclients' margin accounts with a value of $110,719,000
and $55,328,000 at June 25, 1999 and June 26, 1998, respectively.

In addition, the Company 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. There
were no amounts outstanding on this unsecured line of credit at either June 25,
1999 or June 26, 1998.

F-10

At June 25, 1999 and June 26, 1998, the Company had no repurchase agreements
outstanding.

8. INCOME TAXES

Income tax expense for the fiscal years ended June 25, 1999, June 26, 1998 and
June 27, 1997 (effective rate of 35.3% in 1999 and 1998, and 34.0% in 1997)
differs from the amount that would otherwise have been calculated by applying
the Federal corporate tax rate (35% in 1999, 1998 and 1997) to income before
income taxes and is comprised of the following (in thousands):

1999 1998 1997
--------- --------- ---------

Income tax expense at the statutory rate $14,182 $11,164 $9,010
Tax exempt interest (242) (285) (321)
Other, net 361 389 71
--------- --------- ---------
$14,301 $11,268 $8,760
========= ========= =========

Income taxes as set forth in the consolidated statements of income and
comprehensive income consisted of the following components (in thousands):

1999 1998 1997
---------- --------- ---------

Current $15,402 $11,639 $ 9,958
Deferred (1,101) (371) (1,198)
--------- --------- ---------
Total income taxes $14,301 $11,268 $ 8,760
========= ========= =========

The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities as of June 25, 1999 and June 26, 1998 are
presented below (in thousands):

1999 1998
---------- ----------

Deferred tax assets:
Expenses for book, not deductible
until paid $ 3,567 $3,235
Management incentive compensation 1,258 910
Depreciation at rates different for tax
than for financial reporting 61 52
Stock options exercised 546 96
Other 681 446
---------- --------
Total gross deferred tax assets 6,113 4,739

Deferred tax liabilities:
Unrealized holding gain on marketable
equity securities (60,374) --
Unrealized (gains) losses 8 (11)
Other (250) (408)
---------- --------
Total gross deferred tax liabilities (60,616) (419)
---------- --------
Net deferred tax assets (liabilities) $(54,503) $4,320
========== ========

As a result of the Company's history of taxable income and the nature of the
items from which deferred tax assets are derived, management believes that it is
more likely than not that the Company will realize the benefit of the deferred
tax assets.

9. EXCHANGEABLE SUBORDINATED NOTES

On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated
Notes (consisting of 882,028 Derivative Adjustable Ratio Securities(SM), each a
"DARTS(SM)"). The Notes mature on June 30, 2004, and are not redeemable or
exchangeable until that time. Interest will be paid quarterly in arrears on
March 31, June 30, September 30, and December 31, commencing September 30, 1999.
Accrued interest at June 25, 1999 totaled $104,000.

F-11

Legal and accounting fees, printing costs and other expenses associated with the
issuance of the DARTS totaled $1.8 million and are being amortized on the
straight-line method over the term of the bonds. In fiscal 1999, amortization
expense charged to operations was $15,000.

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 the Company, their cash equivalent.
The Notes 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. The amount of Knight common stock
delivered at maturity may be adjusted as a result of certain distribution and
recapitalization events involving Knight.

The DARTS are subordinated and unsecured general debts of the Company and are
subordinated to all existing and future indebtedness of the Company and all
liabilities of the Company's subsidiaries. DARTS will rank equal to future debt
for money borrowed that is not designated as senior to the DARTS and future debt
that is exchangeable for capital stock.

10. NET CAPITAL REQUIREMENTS

The broker/dealer subsidiaries are subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (the "Rule"), which requires the
maintenance of minimum net capital. Southwest 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 under
the 1934 Act. At June 25, 1999, Southwest had net capital of $119,329,000, or
approximately 15% of aggregate debit balances, which is $103,619,000 in excess
of its minimum net capital requirement of $15,710,000 at that date.
Additionally, the net capital rule of the New York Stock Exchange, Inc. (the
"Exchange") 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
June 25, 1999, Southwest had net capital of $80,054,000 in excess of 5% of
aggregate debit items.

SWSFS, MDB and NorAm follow the primary (aggregate indebtedness) method under
Rule 15c3-1, which requires the maintenance of minimum net capital of $250,000.
On June 29, 1999, Clearing was approved to be a NASD broker/dealer and will
begin its filings under Rule 15c3-1 in fiscal 2000. At June 25, 1999, the net
capital and excess net capital of SWSFS, MDB and NorAm was as follows:

Net Capital Excess Net Capital
------------------------------------------

SWSFS $317,000 $ 67,000
MDB 307,000 57,000
NorAm 371,000 121,000

Trust is subject to the capital requirements of the Texas Department of Banking,
and has a minimum capital requirement of $1,000,000. Trust had total
stockholder's equity of approximately $2,671,000, which is $1,671,000 in excess
of its minimum capital requirement at June 25, 1999.

11. EMPLOYEE BENEFITS

At June 25, 1999, the Company had two stock option plans, the Southwest
Securities Group, Inc. Stock Option Plan (the "1996 Plan") and the Southwest
Securities Group, Inc. 1997 Stock Option Plan (the "1997 Plan"). The 1996 Plan
was adopted by the Board of Directors on September 17, 1996 and approved by the
shareholders on November 6, 1996. The 1996 Plan reserves 1,270,500 shares of the
Company's common stock for issuance to eligible employees of the Company or its
subsidiaries, as well as to non-employee members of the Board of Directors. On
August 20, 1997, the Board of Directors approved the 1997 Plan, which reserves
190,575 shares of the Company's common stock for eligible employees or potential
employees of the Company or its subsidiaries. Shares reserved under these option
plans reflect all stock dividends issued by the Company (Note 13). 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 Stock Option
Committee. Options granted to

F-12

non-employee directors under the 1996 Plan are fully vested six months after
grant and have a five-year term. The Company also has options outstanding that
were granted on May 25, 1995 in conjunction with the acquisition of Barre &
Company, Inc. ("Barre"). These options were vested immediately upon grant and
have a five-year term.

A summary of the status of the Company's outstanding stock options as of June
25, 1999, June 26, 1998 and June 27, 1997 is presented below:

1999 1998 1997
---------------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Underlying Exercise Underlying Exercise Underlying Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------

Outstanding, beginning of period 253,012 $21.00 52,000 $ 11.17 32,000 $ 8.07
Granted 244,408 18.84 210,973 23.72 20,000 16.13
Exercised (36,465) 16.42 (16,000) 8.07 -- --
Forfeited (19,819) 19.58 (6,000) 23.63 -- --
Adjustment for five/ten percent
stock dividends 44,581 -- 12,039 -- -- --
--------- -------- -------
Outstanding, end of period 485,717 $19.15 253,012 $ 21.00 52,000 $ 11.17
========= ======== =======
Exercisable, end of period 75,303 46,200 52,000

Weighted-average fair value of options granted $ 18.78 $ 22.83 $ 16.13
during fiscal year

The following table summarizes information for the stock options outstanding at
June 25, 1999:

Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------------------------------------------------------------------------------------

$6.99 to $19.70 272,928 8.5 years $17.61 27,060 $10.31
$19.70 to $23.27 207,446 8.0 years 20.55 48,243 20.52
$23.27 to $50.00 5,343 7.8 years 43.26 -- --
------------- ---------
$6.99 to $50.00 485,717 8.3 years $19.15 75,303 $16.85
============= =========

The Company applies APB 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its stock
options. Had compensation cost been determined consistent with SFAS 123 for the
options granted, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below for the years ended June 25,
1999 and June 26, 1998:

1999 1998
--------- ---------

Net income (in thousands) As reported $26,219 $20,630
========= =========
Pro forma $25,297 $20,357
========= =========

F-13

1999 1998
------------ -----------

Earnings per share As reported - basic $2.23 $1.76
============ ===========
As reported - diluted $2.21 $1.75
============ ===========
Pro forma - basic $2.15 $1.74
============ ===========
Pro forma - diluted $2.14 $1.73
============ ===========

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 1999 and
1998:

1999 1998
----------------- -------------------

Expected volatility 33% 30%
Risk-free interest rate 4.50% 5.09%
Expected dividend yield .40% 1.25%
Expected life 5 to 10 years 5 to 10 years

The Company has a defined contribution profit sharing plan covering
substantially all employees. Profit sharing plan benefits become fully vested
after six years of service by the participant. Costs of the profit sharing plan
are accrued and funded at the Company's discretion. Profit sharing expense for
fiscal years 1999, 1998 and 1997 was approximately $5,264,000, $4,599,000 and
$3,338,000, respectively.

On November 6, 1996, the shareholders of the Company approved the Phantom Stock
Plan ("Phantom Plan") adopted by the Board of Directors on September 17, 1996.
The Phantom Plan allows non-employee directors to receive directors fees in the
form of common stock equivalent units. As of June 25, 1999, 869 dividend
adjusted units have been issued under the Phantom Plan.

On August 20, 1997, the Board of Directors adopted a Stock Purchase Plan ("Stock
Purchase Plan") to enable employees of the Company and its subsidiaries to
purchase up to 1,270,500 shares of common stock of the Company, as adjusted for
stock dividends (Note 13). At June 25, 1999, approximately 19,000 shares were
issued under the Stock Purchase Plan, as adjusted for the most recent ten
percent stock. Subsequent to year end, an additional approximately 7,000 stock
dividend adjusted shares were issued to participants.

12. EARNINGS PER SHARE

A reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computations is as follows (in thousands, except share and
per share amounts):

1999 1998 1997
----------- ----------- -----------

Net income $ 26,219 $ 20,630 $ 16,983
=========== =========== ===========

Weighted average shares outstanding - basic 11,766,377 11,743,228 11,269,666

Effect of dilutive securities:
Assumed exercise of stock options 72,346 20,377 13,219
----------- ----------- -----------
Weighted average shares outstanding - diluted 11,838,723 11,763,605 11,282,885
=========== =========== ===========

Earnings per share - basic $ 2.23 $ 1.76 $ 1.51
=========== =========== ===========
Earnings per share - diluted $ 2.21 $ 1.75 $ 1.51
=========== =========== ===========

F-14

At June 25, 1999, there were approximately 442,000 options outstanding under the
1996 Plan and approximately 27,000 options outstanding under the 1997 Plan. The
Company also has approximately 17,000 options outstanding that were granted in
conjunction with the acquisition of Barre & Company, Inc. ("Barre Options"). As
of June 25, 1999, all but 264 outstanding options were dilutive and were
included in the calculation of weighted average shares outstanding - diluted.

13. STOCK DIVIDENDS

On August 28, 1997, the Board of Directors declared a ten percent stock dividend
which was paid on October 1, 1997 to shareholders of record at the close of
business on September 15, 1997. Additionally, on May 22, 1998, the Board of
Directors declared a five percent stock dividend which was paid on August 3,
1998 to shareholders of record at the close of business on July 15, 1998. On May
6, 1999, the Board declared another ten percent stock dividend which was paid on
August 2, 1999 to shareholders of record on July 15, 1999. Per share amounts,
dividends per share and weighted average shares outstanding have been restated
in the accompanying financial statements to reflect the effect of these stock
dividends. At the discretion of the Stock Option Committee, the stock options
outstanding, as well as the options' exercise prices, were adjusted for the five
percent stock dividend effective August 3, 1998 and the ten percent stock
dividend effective August 2, 1999. The number of stock options outstanding, the
number of stock options exercisable and the weighted-average exercise prices at
June 25, 1999 and June 26, 1998, as well as the weighted-average fair value of
options granted during the fiscal years, have been restated.

14. COMMITMENTS AND CONTINGENCIES

The Company leases its offices under noncancelable operating lease agreements.
During fiscal years 1999, 1998 and 1997, the Company entered into various
noncancelable operating lease agreements relating to data processing equipment
used in the brokerage operations. Rental expense for facilities leases for
fiscal years 1999, 1998 and 1997 aggregated approximately $5,329,000, $4,833,000
and $3,172,000, respectively.

At June 25, 1999, the future rental payments for the noncancelable leases for
each of the following five fiscal years and thereafter follow (in thousands):

Year ending:

2000 $ 7,418
2001 5,801
2002 3,912
2003 2,940
2004 2,909
Thereafter 11,007
-------
Total payments due $33,987
=======

During fiscal 1999, the Company committed approximately $10.6 million through
December 2000 to expand and promote MDB.

On April 17, 1998, a judgment was entered against the Company in connection with
a breach of contract lawsuit stemming from the 1995 acquisition of Barre. The
judge awarded the counterparty approximately $40,000 in damages and
approximately $1,700,000 in attorney's fees. The Company believes it has
substantial grounds for appeal and has begun the appellate process. The Company
also believes its reserves are adequate to cover the full amount of the
judgment.

In the general course of its brokerage business and the business of clearing for
other brokerage firms, the Company 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. Management believes that
resolution of these claims will not result in any material adverse effect on the
Company's consolidated financial position or results of operations.

15. AFFILIATE TRANSACTIONS

The Company, through its principal subsidiary, Southwest, provides accounting
and administrative services for its subsidiaries and clears all customer
transactions for SWSFS, MDB and NorAm. Westwood serves as

F-15

the investment manager for the assets discussed in Note 2. Trust acts as an
agent on behalf of Southwest in the direction of transactions related to these
assets. In addition, Westwood serves as the investment manager of the common
trust funds of Trust.

16. FINANCIAL INSTRUMENTS WITH OFF-STATEMENT OF FINANCIAL CONDITION RISK

In the normal course of business, the broker/dealer subsidiaries engage in
activities involving the execution, settlement and financing of various
securities transactions. These activities may expose the Company to off-
statement of financial condition credit and market risks in the event the
customer or counterparty is unable to fulfill its contractual obligation. Such
risks may be increased by volatile trading markets.

As part of its normal brokerage activities, the Company sells securities not yet
purchased (short sales) for its own account. The establishment of short
positions exposes the Company to off-statement of financial condition market
risk in the event prices increase, as the Company may be obligated to acquire
the securities at prevailing market prices.

The Company seeks to control the risks associated with its customer activities,
including customer accounts of its Correspondents for which it provides clearing
services, by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The required margin levels are
monitored daily and, pursuant to such guidelines, customers are required to
deposit additional collateral or to reduce positions when necessary.

A portion of the Company's customer activity involves short sales and the
writing of option contracts. Such transactions may require the Company to
purchase or sell financial instruments at prevailing market prices in order to
fulfill the customer's obligations.

At times, the Company lends money using reverse repurchase agreements. All
positions are collateralized by U.S. Government or U.S. Government agency
securities. Such transactions may expose the Company to off-statement of
financial condition risk in the event such borrowers do not repay the loans and
the value of collateral held is less than that of the underlying receivable.
These agreements provide the Company with the right to maintain the relationship
between market value of the collateral and the receivable.

The Company arranges secured financing by pledging securities owned and unpaid
customer securities for short-term borrowings to satisfy margin deposits of
clearing organizations. The Company also actively participates in the borrowing
and lending of securities. In the event the counterparty in these and other
securities loaned transactions is unable to return such securities pledged or
borrowed or to repay the deposit placed with them, the Company may be exposed to
the risks of acquiring the securities at prevailing market prices or holding
collateral possessing a market value less than that of the related pledged
securities. The Company seeks to control the risks by monitoring the market
value of securities pledged and requiring adjustments of collateral levels where
necessary.

17. SEGMENT REPORTING

In 1999 and prior years, the Company operated two principal segments within the
financial services industry: the Broker/Dealer Group and the Asset Management
Group. Such segments are managed separately based on types of products and
services offered and their related client bases. The Company evaluates the
performance of its segments based primarily on income before income taxes.

The Broker/Dealer Group is comprised of Southwest, SWSFS, MDB, NorAm and
Clearing. Southwest provides Correspondent clearing and execution services to
securities broker/dealers, including SWSFS, MDB and NorAm, and other financial
institutions. Southwest serves individual and institutional investors through
its 19 branch offices. Through these offices, clients gain access to Southwest's
investment research. Southwest also provides municipal finance and investment
banking and underwriting services.

SWSFS contracts with independent registered representatives for the
administration of their securities business. MDB specializes in deep discount
brokerage services over the Internet. NorAm contracts with Canadian
broker/dealers on an independent contractor basis for administration of their
U.S. securities business.

F-16

The Asset Management Group is composed of Westwood and Trust (together, the
Westwood Group) and Capital. Westwood manages the Gabelli-Westwood Family of
Mutual Funds as well as equity and fixed income investments for a diverse
clientele including corporate plan sponsors, charitable institutions,
educational endowments and public funds. Trust provides trust, custodial and
other management services to high net worth individuals and corporations
throughout Texas and the Southwest. Capital administers the Local Government
Investment Cooperative ("LOGIC") fund for cities, counties, schools and other
local governments across Texas.

All accounting policies are the same as those described in the summary of
significant accounting policies. Intersegment balances that eliminate in
consolidation have been applied to the appropriate segment.

Consolidated
Asset Other Southwest
Broker/Dealer Management Consolidated Securities
(in thousands) Group Group Entities Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------

June 25, 1999

Net revenues from external sources $ 324,119 $12,044 $ 1,107 $ 337,270
Net intersegment revenues -- 940 2,209 --
Net interest revenue 46,846 197 12 47,055
Depreciation and amortization 2,540 201 316 3,057
Income before income taxes 41,315 3,065 (3,860) 40,520

Segment assets $4,099,509 $ 9,907 $183,858 $ 4,293,274
Expenditures for long-lived assets 3,174 274 24 3,472

June 26, 1998

Net revenues from external sources $ 271,241 $ 9,629 $ 4,888 $ 285,758
Net intersegment revenues -- 715 1,741 --
Net interest revenue 42,357 182 (122) 42,417
Depreciation and amortization 2,873 179 374 3,426
Income before income taxes 29,092 1,850 956 31,898

Segment assets $3,207,940 $ 8,276 $ 3,890 $ 3,220,106
Expenditures for long-lived assets 3,237 78 210 3,525

June 27, 1997

Net revenues from external sources $ 210,809 $ 6,521 $ 1,074 $ 218,404
Net intersegment revenues -- 648 1,867 --
Net interest revenue 35,750 278 (90) 35,938
Depreciation and amortization 2,530 190 30 2,750
Income before income taxes 26,688 203 (1,148) 25,743

Segment assets $3,263,080 $ 8,958 $ 4,354 $ 3,276,392
Expenditures for long-lived assets 7,072 155 370 7,597

18. ACQUISITION OF ASBI HOLDINGS, INC.

On August 10, 1999, the Company signed a definitive merger agreement to acquire
ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB,
Arlington, Texas. The agreement provides that the Company will issue 2.6
million shares of its common stock to the holders of all of the outstanding
stock of ASBI. Don A. Buchholz serves as chairman of both the Company and ASBI,
and is the beneficial owner of approximately 7.0% of the Company's outstanding
voting securities. Mr. Buchholz is the beneficial owner of approximately 19.3%
of the outstanding securities of ASBI, and he exercises voting control for
approximately 58.6% of ASBI's outstanding voting securities. The acquisition is
expected to be accounted for by the pooling-of-interests method and is subject
to regulatory and shareholder approval.

F-17

19. SUBSEQUENT EVENTS

In July 1999, the Company issued an additional $7.5 million of 5% Exchangeable
Subordinated Notes (132,304 DARTS) as the underwriters exercised their over-
allotment option. These DARTS have the same terms as the DARTS issued in June
1999 (Note 9). The Company received proceeds of $7.3 million net of
underwriters' fees.

Effective August 6, 1999, the Company sold all of its shares in NorAm for
$478,788.

F-18

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Southwest Securities Group, Inc.:

We have audited the consolidated financial statements of Southwest Securities
Group, Inc. and subsidiaries as listed in the accompanying index on page F-1. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index at Part IV. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwest Securities
Group, Inc. and subsidiaries as of June 25, 1999 and June 26, 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 25, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG LLP

Dallas, Texas
July 27, 1999, except as to the second
paragraph of Note 19 which is as of
August 6, 1999 and Note 18 which is
as of August 10, 1999

F-19

S-1

Schedule I - Condensed Financial Information of Registrant

Southwest Securities Group, Inc.
Condensed Financial Information of Registrant

Condensed Statements of Financial Condition
-------------------------------------------
June 25, 1999 and June 26, 1998
(In thousands)

1999 1998
----------------- -----------------

Assets

Investment in subsidiaries, at equity $ 127,519 $ 98,258
Marketable equity securities 172,928 --
Notes receivable from subsidiary 58,000 19,700
Other assets 18,912 12,958
----------------- ------------------
$ 377,359 $ 130,916
================= ==================

Liabilities and Stockholders' Equity

Other liabilities $ 65,025 $ 5,449
Exchangeable subordinated notes 50,000 --
Minority interest in consolidated subsidiary 50 --
Stockholders' equity 262,284 125,467
----------------- -----------------
$ 377,359 $ 130,916
================= =================

S-1 (continued)

Schedule I - Condensed Financial Information of Registrant - Continued

Southwest Securities Group, Inc.
Condensed Financial Information of Registrant

Condensed Statements of Income, Comprehensive Income
-----------------------------------------------------
and Stockholders' Equity
------------------------
Years Ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands)

1999 1998 1997
--------- --------- ----------

Revenues - Interest and other income $ 2,366 $ 6,361 $ 2,941
--------- --------- ---------

Expenses:
Interest expense 104 90 23
Other expenses 3,780 3,293 1,972
--------- --------- ---------
3,884 3,383 1,995
--------- --------- ---------
Income (loss) before income tax expense
and equity in earnings of subsidiaries (1,518 2,978 946
Income tax (expense) benefit 341 (1,183) (400)
--------- --------- ---------
Income (loss) before equity in earnings of subsidiaries (1,177) 1,795 546
Equity in earnings of subsidiaries 27,396 18,835 16,437
--------- --------- ---------
Net income 26,219 20,630 16,983
Other comprehensive income - unrealized holding gain,
net of tax of $60,374 112,123 -- --
--------- --------- ---------
Comprehensive income 138,342 20,630 16,983

Stockholders' equity at beginning of year 125,467 106,928 84,449
Dividends (2,997) (2,441) (1,779)
Exercise of stock options 1,109 225 --
Net proceeds from employees for Employee Stock Purchase Plan 5 125 141
Reissuance of treasury stock 175 -- --
Issuance of common stock and amortization of deferred
compensation expense for Stock Purchase Plan 183 -- --
Issuance of common stock for acquisition -- -- 7,134
--------- --------- ---------
Stockholders' equity at end of year $262,284 $125,467 $106,928
========= ========= =========

S-1 (continued)

Schedule I - Condensed Financial Information of Registrant - Continued

Southwest Securities Group, Inc.
Condensed Financial Information of Registrant

Condensed Statements of Cash Flows
----------------------------------
Years Ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands)

1999 1998 1997
---------- --------- ---------

Cash flows from operating activities:
Net income $ 26,219 $ 20,630 $ 16,983
Adjustments:
Depreciation and amortization 241 303 --
Undistributed equity in earnings of subsidiaries (29,261) (10,180) (20,695)
Other 730 3,528 186
---------- --------- ---------
Net cash provided by (used in) operating activities (2,071) 14,281 (3,526)
---------- --------- ---------
Cash flows from investing activities:
Proceeds from (payments on) notes and other
accounts with subsidiaries (42,862) (8,800) 1,515
Purchase of investments (2,058) -- --
Return of investment 650 -- --
---------- --------- ---------
Net cash provided by (used in) investing activities (44,270) (8,800) 1,515
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of exchangeable subordinated notes 50,000 -- --
Debt issue costs (1,813) -- --
Net change in short-term borrowings -- (4,000) 4,000
Proceeds from employees for Employee Stock Purchase Plan 5 125 141
Net proceeds from exercise of stock options 659 225 --
Proceeds from employees for Stock Purchase Plan 296 -- --
Proceeds from issuance of stock of consolidated subsidiary 50 -- --
Payment of cash dividends on common stock (2,856) (1,831) (2,130)
---------- --------- ---------
Net cash provided by (used in) financing activities 46,341 (5,481) 2,011
---------- --------- ---------
Net change in cash -- -- --
Cash at beginning of year 1 1 1
---------- --------- ---------
Cash at end of year $ 1 $ 1 $ 1
========== ========= =========

_______________

Non-cash transactions: During 1997, the Company issued common stock valued at
$7,134,000 related to the acquisition of Equity Securities Trading Company
("Equity"). At June 26, 1998, goodwill amounting to $4,729,000 related to the
acquisition was transferred to the Company from NorAm Investment Services, Inc.,
formerly Equity, a fully consolidated subsidiary. In a non-cash transaction, the
Company received approximately 1.7 million common shares (approximately 3.3
million shares after a two-for-one stock split effective May 17, 1999) of
Knight/Trimark Group, Inc. ("Knight") subsequent to Knight's initial public
offering completed July 10, 1998.