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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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) 651-1800

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

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of class)

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. X
---

As of August 31, 1996, there were 8,783,630 shares of the Registrant's common
stock, $.10 par value, outstanding. The aggregate market value of Common Stock
held by non-affiliates was approximately $70,394,000.

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
shareholders to be held November 6, 1996, which will be filed with the
Commission pursuant to Regulations 240.14a (6)(c) prior to October 26, 1996, are
incorporated by reference into Part I and Part III of the Report on Form 10-K.


PART I

Item 1. Business

GENERAL

Southwest Securities Group, Inc. and subsidiaries (Registrant),
collectively the "Company" is a Delaware corporation incorporated in 1972 and
through its principal subsidiary, Southwest Securities, Inc. (Southwest),
provides securities transaction processing and other related services and
operates a full-service brokerage, investment banking and asset management firm.
Its primary business is delivering a broad range of securities transaction
processing services to broker/dealers. Transaction processing services include
cost-effective integrated trade execution, clearing, client account processing
and other customized services ("Transaction Processing"). Southwest also
provides services that are directly related to Transaction Processing, including
margin lending and stock loan services.

Southwest's Transaction Processing services are currently provided on a
fully disclosed basis to 228 Correspondents. These Correspondents are located
in 33 states, 2 foreign countries and one U.S. Territory.

The Company also provides securities brokerage and investment services
primarily to individuals, provides investment banking services to municipal and
corporate clients and trades fixed income and equity securities. In addition,
through Brokers Transaction Services (BTS), a wholly owned subsidiary of the
Company and a National Association of Securities Dealers (NASD) registered
broker/dealer, the Company contracts with independent registered representatives
for the administration of their securities business. The Company offers asset
management and trust services through Westwood Management Corporation
("Westwood") and Trust Company of Texas ("Trust Company"). The Company also
offers an investment program called the Local Government Investment Cooperative,
or LOGIC, for cities, counties, schools and other local governments across
Texas. LOGIC is operated by a subsidiary of the Company, SW Capital
Corporation. In addition to providing revenues to the Company, the Company also
believes that many of these activities complement the Transaction Processing
business by providing additional products and services which are utilized by its
Correspondents.

Over the five fiscal years ended June 28, 1996, the Company's revenues grew
from $67.5 million to $181.8 million and its net income grew from $6.7 million
in fiscal 1992 to $14.0 million in fiscal 1996. The primary factors responsible
for the Company's growth have been an increase in the number of transactions
processed for existing Correspondents, the addition of new Correspondents, and
the expansion of related services and products including margin loans, stock
loans and investment products. The Company's retail brokerage, investment
banking and trading activities have also contributed to its growth.

Headquartered in Dallas, Texas, Southwest operates 13 retail brokerage
offices in Texas, New Mexico and Oklahoma. As of June 28, 1996, the Company had
638 full-time employees, including 118 account executives employed by Southwest.
In addition, BTS had contracts with 462 independent registered representatives
in 33 states.

Southwest is a member firm of the New York Stock Exchange, Inc. (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 $25.0 million per
client for securities held in clients' accounts with no aggregate limit.


BUSINESS STRATEGY

The Company's strategy is to capitalize on the expanding market for the
outsourcing of Transaction Processing by providing high quality service to
broker/dealers, including brokerage affiliates of commercial banks. The Company
has also expanded into other areas of operations which complement Transaction
Processing by providing additional products and services to its Correspondents.
These areas include margin loans, stock loans, investment banking services for
municipal and corporate clients, trading fixed income and equity securities,
asset management and trust services. In addition, Southwest operates its own
retail brokerage operation in order to attract account executives who prefer to
be employees of Southwest rather than independent contractors or Correspondents.

The Company's business strategy addresses certain important changes
affecting the securities industry. In recent years, individual account
executives have been leaving their employers to form their own broker/dealer
firms. Many of these broker/dealers choose to outsource their Transaction
Processing to a third party, such as Southwest.

Rapid technology changes in both software and hardware are causing many
brokerage firms and banks to change the way they view potential investments in
maintaining up-to-date systems capabilities. An outsourcing arrangement with a
transaction processor allows a broker/dealer to eliminate much of the risk and
difficulty of managing technology and receive Transaction Processing and related
services for a known variable cost.

In order to address the foregoing changes and take advantage of the
opportunities afforded thereby, the Company has adopted a business strategy
which includes the following major elements:

Focus on Independent and Bank-Affiliated Broker/Dealers. Southwest markets
its Transaction Processing services to broker/dealers and bank-affiliated
broker/dealers who elect to have a third party process their securities
transactions for a number of reasons including: (i) the complex nature of the
Transaction Processing business; (ii) the desire to have variable rather than
fixed overhead costs associated with a variable flow of transactions; and (iii)
a prohibitively high level of capital needed to support the processing of
securities transactions. Many of Southwest's Correspondents are smaller
broker/dealers. Southwest and BTS also recruit and train registered
representatives and provide marketing services for small and medium-sized banks
entering the securities business.

Offer a Broad Range of Services. While the Company's primary business
focus is to provide Transaction Processing and related services, the Company
also provides complementary products and services, including investment banking
services for municipal and corporate clients, fixed income and equity trading,
asset management and trust services. The Company believes that many of these
activities complement the Transaction Processing business by providing
additional products and services to its Correspondents. The Company continually
seeks to find new ways to support and enhance more effectively the business of
its Correspondents.

Provide Sophisticated Data Processing Technology. Electronic data
processing is an integral part of Southwest's Transaction Processing
capabilities. Southwest operates sophisticated data processing hardware and
software to execute and process securities transactions and is engaged in
continuing software development and regular up-grades on its computer hardware.
The Company's data center features eight fault-tolerant Tandem Cyclone computers
and a sophisticated telecommunications network supporting over 2,000 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. The "on-line, real-time" system makes it possible
for a broker to input a desired transaction and immediately have the transaction
posted to the Correspondent's account and a confirmation of the transaction
printed. This system differs from the "batch" system, which does not provide
for immediate posting, confirmation and printing of a transaction. 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 intends to continue to make significant technology investments
including participation in a joint venture with eight other broker/dealers. The
joint venture, Comprehensive Software Systems, Ltd., is attempting to


develop the next generation of software for the securities industry capable of
running on hardware ranging from personal computers to mainframes. This design
is expected to accommodate a variety of hardware platforms and operating systems
with a large degree of customization at each location. The system is expected to
be completed in 1997.


PROCESSING OPERATIONS

Southwest provides Transaction Processing on a fully disclosed basis. 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.

The execution and clearing process requires the performance of a series of
complex steps, many of which are accomplished with data processing equipment.
The execution process begins when the Correspondent accepts its client's order
for the purchase or sale of securities and electronically transmits the order to
Southwest's data center for processing. Southwest, in turn, routes the order to
the market in which it believes it can effect the best execution. In the
execution of some listed and some over-the-counter transactions, Southwest
receives payment for that order flow. After execution, a written confirmation
containing the details of each transaction is automatically produced and
delivered to the Correspondent's client and posted to their client's account.

Southwest clears the transaction by taking possession of the cash of the
Correspondent's client, if securities are being purchased, or certificates, if
any, if securities are being sold, and by delivering cash or certificates to the
broker for the other party to the transaction. Southwest collects from the
Correspondent's client the money due on the transaction, including the
commission charged by the Correspondent, deducts from the commission the charge
for execution and clearing and any other amounts due Southwest, and remits the
net commission to the Correspondent on a monthly basis. Cash or certificates
received by Southwest for the Correspondent's client are either held in the
account or delivered to the customer. Southwest sends the client a monthly or
quarterly statement of the client's account. The actual clearing functions for
multiple transactions involving many brokerage firms are much more complex than
is described above. Instead of matching each buyer and seller in a transaction
and making delivery to and receiving payment from each of them, the securities
industry has established a netting process whereby securities and money are
delivered or received between brokerage firms through central clearing houses.


The following table sets forth, for each of the last three fiscal years,
certain information relating to the number of client transactions processed and
the number of Correspondents at the end of each year:



Fiscal 1996 Fiscal 1995 Fiscal 1994
----------- ----------- -----------

Tickets for Correspondents (except BTS) 1,831,455 670,495 637,327

Tickets for BTS 80,258 57,228 44,335
Tickets for Southwest account executives 128,487 97,042 111,299
----------- ----------- -----------

Total Tickets 2,040,200 824,765 792,961
=========== =========== ===========

Number of Correspondents* 228 205 192
=========== =========== ===========

- -------------
* Number at fiscal year end. BTS is included as one Correspondent. See
"Brokerage - Brokers Transaction Services, Inc." below.


While Southwest has over 220 correspondents, one correspondent, BA
Investment Services, Inc., ("BAIS") accounted for 1%, 3% and 5% of the Company's
revenues in fiscal years 1996, 1995 and 1994, respectively. BAIS is a wholly
owned subsidiary of BankAmerica Corp. During fiscal year 1996, BAIS terminated
its clearing agreement with Southwest. Management believes that based on the
Transaction Processing and related services provided to BAIS during fiscal 1996,
the agreement modifications will have minimal impact on revenues in subsequent
years.


LENDING ACTIVITIES AND OTHER SOURCES OF INTEREST INCOME

Southwest derives interest revenue in connection with extending credit to
its own clients and clients of its Correspondents to enable those clients to
purchase securities on margin. Southwest also extends credit directly to
Correspondents to the extent the Correspondents hold securities positions for
their own accounts. Other sources of interest income include investing excess
credit balances for its own clients and clients of its Correspondents, interest
generated by trading portfolios of fixed income securities and securities
lending activities.

Client Financing. Transactions in securities are effected on either a cash
or margin basis. In margin transactions, Southwest extends credit for a portion
of the purchase price, which is collateralized by securities and cash in the
client's account, and receives income from interest charged on such extension of
credit. 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. Southwest is subject to the risk of a market decline, which could
reduce the value of its collateral below the client's indebtedness before the
collateral could be sold. 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.

Interest is charged to clients on the amount borrowed to finance margin
transactions. The financing of margin purchases is an important source of
revenue to Southwest since the interest rate paid by the client on funds loaned
by Southwest exceeds Southwest's cost of short-term funds. The interest rate
charged to clients on such loans is based on the brokers' call rate (the rate
paid to banks by brokers on loans collateralized by securities). Interest earned
on client margin transactions represented approximately 26% of total interest
income during the most recent fiscal year. At June 28, 1996, margin receivables
were approximately $464,158,000.


The primary source of funds to finance clients' margin account balances has
been credit balances in clients' accounts. As of June 28, 1996, clients' credit
balances available to Southwest were approximately $494,391,000. Southwest pays
interest to clients on most of the funds at a rate determined periodically. SEC
regulations restrict the use of client's funds to the financing of clients'
activities including margin account balances and, to the extent not so used,
such funds are required to be deposited in a special account for the benefit of
clients. Interest income earned by the Company on these deposits totaled
approximately 12% of interest income in fiscal 1996.

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. Southwest earns interest on
the cash or similar collateral received. Securities borrowing and lending
transactions are generally executed pursuant to written agreements that require
that the securities borrowed and loaned be marked to market on a daily basis and
that excess collateral be refunded or that additional collateral be furnished as
a result of changes in the market value of the securities. 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. See Note 3 to the Company's
Consolidated Financial Statements. Southwest's securities borrowing and lending
activities are primarily conducted from its New York office, where some of
Southwest's operations and clerical activities are also performed. Interest
earned from securities borrowing activities accounted for approximately 54% of
interest income in fiscal 1996.

Other. Other sources of interest revenue for Southwest include interest
charged directly to Correspondents to finance securities held for their accounts
and interest generated by trading portfolios of fixed income securities. These
items, and others, accounted for approximately 8% of interest income in fiscal
1996.


BROKERAGE

The Company conducts its retail brokerage business through two wholly owned
subsidiaries, Southwest and BTS. The following table sets forth the dollar
amount in thousands and the percentage (before deducting commissions payable to
Southwest's account executives and BTS's registered representatives) of
securities commissions by product, as well as other information:



Fiscal Year Ended
(dollars in thousands)
---------------------------------------------
June 28, June 30, June 24,
1996 % 1995 % 1994 %
-------- --- -------- --- -------- ---

Securities Commissions:
Listed equities $ 9,550 26% $ 7,305 27% $ 8,443 26%
Over-the-counter equities 10,146 27% 6,184 23% 8,937 27%
Corporate bonds 1,015 3% 547 2% 790 2%
Government bonds 2,754 7% 2,273 9% 3,328 10%
Municipal bonds 3,903 11% 3,182 12% 3,338 10%
Options 814 2% 614 2% 608 2%
Mutual funds 7,433 20% 5,372 20% 6,130 19%
Commodities 194 1% 171 1% 181 1%
Other 1,087 3% 969 4% 1,158 3%
------- ------- -------
Total $36,896 $26,617 $32,913
======= ======= =======

Account executives at year-end 118 115 108
Brokerage offices at year-end 13 15 14
BTS representatives at year-end 462 361 273


Southwest. As of June 28, 1996, Southwest had 13 retail brokerage offices,
three located in Dallas, Texas and one each in Austin, Georgetown, Kerrville,
Longview, Lufkin, Nacogdoches, and San Antonio, Texas; Albuquerque and Santa Fe,
New Mexico and Tulsa, Oklahoma. Southwest generates commission revenues when it
acts as a broker, on an agency basis, or as a dealer, on a principal basis, to
effect securities transactions for individual and institutional investors.
Southwest processes both listed and over-the-counter agency transactions for
clients. Southwest also processes transactions in puts and calls on options
exchanges as agent for its clients. 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.

Brokers Transaction Services, Inc. BTS is an NASD member broker/dealer
that contracts with individual registered representatives who are NASD licensed
salespersons for the conduct of their securities business. BTS is a
Correspondent of Southwest. While these registered representatives must conduct
all of their securities business through BTS, 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.


INVESTMENT BANKING

Municipal Finance. The Fixed Income Division of Southwest is headquartered
in Dallas. It is comprised of a public finance department and a sales and
underwriting department. The public finance department, which is staffed by 24
professionals, provides professional financial advisory services to public
entities across Texas and the Southwest and maintains branch offices in San
Antonio and Longview, Texas, and Albuquerque, New Mexico. The municipal bond
sales and underwriting division, which is staffed by 28 professionals,
participates in underwriting and selling both negotiated and competitive bid
municipal bond offerings.

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 managed or co-managed by Southwest.



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

1996 168 $3,892,244,000
1995 102 $1,169,881,000
1994 80 $1,752,694,000


Corporate Finance. Southwest's Corporate Finance Department is staffed by
four professionals who provide financial advisory and capital raising services,
primarily to corporate clients. Financial advisory services involve advising
clients in mergers and acquisitions and their related financings and in various
types of corporate valuations. Most financial advisory clients are privately
held companies. Capital raising services involve public and private offerings.

Syndicate. Southwest's Special Products/Syndicate Department, staffed by
three professionals, manages the Company's participation in national syndicates
of underwriters. Southwest acts as an underwriter, dealer, and selling group
member for tax-free municipal unit trusts, taxable government and corporate bond
unit trusts and equity unit trusts. During fiscal 1996, Southwest underwrote and
sold in excess of $9,000,000 of unit trust securities. Southwest participates in
equity syndicate offerings either as a member of the underwriting group or the
selling group. During fiscal 1996, Southwest participated in 64 equity offerings
in which its underwriting commitments were approximately $52,000,000 in the
aggregate. Southwest also acts as a dealer in syndicates of underwriters of
certificates of deposit and distributes money market and other mutual fund
shares.


PRINCIPAL TRANSACTIONS

Trading securities in the over-the-counter markets involves the purchase of
securities from and the sale of securities 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 spread between bid and
asked prices, as well as market increases or decreases for the individual
security during the holding period. Southwest makes markets in corporate
equities and trades in municipal bonds and various government securities. As of
June 28, 1996, Southwest made markets in 170 common stocks traded in the over-
the-counter market. Southwest's over-the-counter common stock inventory
positions at the end of each quarter during fiscal 1996 ranged from
approximately $2,456,000 to $3,236,000 and averaged approximately $2,922,000.
The number of fixed income securities traded varies widely. Southwest's fixed
income securities positions at the end of each quarter during fiscal 1996,
ranged from $22,482,000 to $46,910,000 and averaged $31,532,000.

Southwest also acts as agent in the execution of over-the-counter orders
for its clients and as such transacts trades with other dealers. When Southwest
receives a client order in a security in which it makes a market, it may act as
principal so long as it matches the best price in the dealer market, plus or
minus a mark-up or mark-down equivalent to an agency commission price.


ASSET MANAGEMENT AND TRUST SERVICES

The Company offers asset management and trust services through Westwood,
Trust Company and SW Capital 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 offices in Dallas and New York, 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 Westwood Family of Mutual Funds which is
available to both taxable and non-taxable investors.

Trust Company 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 Company is chartered and regulated by the Texas
Department of Banking.

SW Capital Corporation was established in 1994 and administers the Local
Government Investment Cooperative program, or LOGIC. The LOGIC program is
targeted to the needs of cities, counties, schools and other local governments
across Texas. 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

All aspects of the business of the Company are highly competitive. The
Company competes with numerous other securities firms, commercial banks,
investment banking firms, life insurance companies, asset management firms,
trust companies and others. Many of the Company's competitors have substantially
greater capital and other resources than the Company. Competition among
financial services firms also exists for experienced technical and other
personnel as well as for account executives.

The Transaction Processing business has become considerably more
competitive over the past few years as numerous highly visible, large, well-
financed securities firms either have begun offering Transaction Processing
services or have attempted to increase their share of the market. This
competition is centered around offering enhanced computer software capabilities
to improve services for retail clients. Despite the Company's efforts to
maintain state-of-the-art technology, there is no assurance that its
Correspondents will continue to use its services. In addition, there has been
consolidation within the securities industry by companies having financial
resources far greater than the Company. These developments have increased
competition from firms with greater capital resources and possibly greater
operating efficiencies than those of the Company.

The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage business.
In addition, an increasing number of specialized firms now focus their services
to the individual client. These firms generally effect transactions for their
clients on a discounted commission basis without offering other services such as
portfolio valuation, investment recommendations and research.

Commercial banks and other financial institutions have become a competitive
factor by offering their clients certain corporate and individual financial
services traditionally provided by securities firms. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of the Company's business and could affect the
opportunities for the Company to expand its Transaction Processing business. The
Federal Reserve Board has approved applications of several leading commercial
banks to underwrite certain types of securities which commercial banks have
previously not been permitted to underwrite. While it is not possible to predict
the type and extent of competitive services which commercial banks and other
financial


institutions ultimately may offer or whether administrative or legislative
barriers will be repealed or modified, securities firms such as the Company may
be adversely affected.


EMPLOYEES

As of August 31, 1996, the Company employed 639 full-time employees. The
Company believes its relations with its employees are good.


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 to be
held November 6, 1996.



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


Raymond E. Wooldridge (1) 57 Director and Vice Chairman of the Board of the Company

David Glatstein (1) 47 Director, Chief Executive Officer and President of the Company

Richard H. Litton 49 Senior Executive Vice President of the Company

William. D. Felder 38 Senior Executive Vice President of the Company

W. Norman Thompson 40 Senior Executive Vice President and Chief Information Officer
of the Company

Kenneth R. Hanks 42 Senior Executive Vice President and Chief Financial Officer
of the Company


- --------------------
(1) Executive Committee


RAYMOND E. WOOLDRIDGE has served as a director of the Company since 1986
and was Chief Executive Officer of the Company from July 1994 until May 1996.
Mr. Wooldridge served as President and Chief Operating Officer of the Company
from August 1991 until July 1994 and President and Chief Operating Officer for
Southwest from 1986 until August 1993. Mr. Wooldridge is also Vice Chairman of
the Board of Governors of the NASD, President and a director of the TSBDA and a
director of D.A. Davidson & Co., Inc., an NASD firm headquartered in Great
Falls, Montana. Mr. Wooldridge is past Chairman of the Board and Director of the
National Securities Clearing Corporation, a national clearing agency registered
with the SEC and previously served as a director of the SIA.

DAVID GLATSTEIN was elected Chief Executive Officer in May 1996 and has
served as President and a director of the Company and President and Chief
Operating Officer of Southwest since May 1995. Mr. Glatstein was President of
Barre & Company 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 securities broker with White, Weld & Company,
Inc. from 1973 to 1978. Mr. Glatstein previously served as a member of the
District 6 Business Conduct Committee of the NASD, the SIA and the TSBDA. Mr.
Glatstein is a past Chairman of the District 6 Business Conduct Committee of the
NASD.

RICHARD H. LITTON has served as Senior Executive Vice President of the
Company and Senior Executive Vice President in charge of the Fixed Income
Division 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.

WM. D. FELDER has served as Senior Executive Vice President of the Company
since December 1995, as Senior Vice President of the Company since August 1993,
and as Senior Vice President in charge of Clearing Services of Southwest since
1988. Mr. Felder has been associated with Southwest in various capacities since
1980. Mr. Felder is a member of the Chicago Stock Exchange, Inc. and is a member
of the Pacific Stock Exchange, Inc. Mr. Felder is currently a member of the
Board of Governors of the Chicago Stock Exchange, Inc., and is serving a term on
the District Business Conduct Committee, District 6, of the NASD.

W. NORMAN THOMPSON has served as Senior Executive Vice President and Chief
Information Officer of the Company since January 1995. Mr. Thompson was
associated with Kenneth Leventhal & Co. in various capacities ranging from Audit
Manager to Senior Consulting Manager from 1987 to 1994. Previously, Mr. Thompson
was an Audit Manager with KPMG Peat Marwick from 1981 to 1987. In the capacities
he held with both Kenneth Leventhal & Co. and KPMG Peat Marwick, he was heavily
involved in EDP auditing and consulting.

KENNETH R. HANKS has served as Senior Executive Vice President and Chief
Financial Officer since June 1996. 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.


The Company has an Executive Committee, an Audit Committee and a
Compensation Committee, all of which were established in September 1991 and a
Stock Option Committee established in September 1996. The Executive Committee of
the Board of Directors of the Company has the authority, between meetings of the
Board of Directors, to take all actions with respect to the management of the
Company's business that require action by the Board of Directors, except with
respect to certain specified matters that by law must be approved by the entire
Board. The Audit Committee is responsible for (i) reviewing the results and
scope of, and the fees for, the annual audit, (ii) reviewing with the
independent auditors the corporate accounting practices and policies and
recommending to whom reports should be submitted within the Company, (iii)
reviewing with the independent auditors their final report, (iv) reviewing with
internal and independent auditors overall accounting and financial controls, and
(v) being available to the independent auditors during the year for consultation
purposes. The Compensation Committee determines the salaries of the officers of
the Company, assists the officers in determining the salaries of other
personnel, and performs other similar functions. The Stock Option Committee
administers the grant of awards under the Stock Option Plan.

All Directors are elected for a one-year term of office or until their
respective successors are duly elected and qualified. Officers are elected by
and serve at the discretion of the Board of Directors.

Members of the Board of Directors who are not officers or employees of the
Company receive a fee of $1,500 per quarter plus $500 for each directors'
meeting they attend. Directors are reimbursed for expenses relating to
attendance at meetings.


Item 2. Properties

The Company presently leases all of its office space. The Company conducts its
Clearing Operations primarily in its principal office in Dallas, Texas and its
office in New York. It has 13 retail brokerage offices, three located in Dallas,
Texas and one each in Austin, Georgetown, Kerrville, Longview, Lufkin,
Nacogdoches, and San Antonio, Texas; Albuquerque and Santa Fe, New Mexico and
Tulsa, Oklahoma. The Company's present facilities and equipment are adequate for
current and planned operations.


Item 3. Legal Proceedings

None.


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

The information required by this item regarding Submission of Matters to a
Vote of Security Shareholders is incorporated by reference to pages 2 through 17
of the Company's Proxy Statement dated September 26, 1996 which will be filed
with the Commission pursuant to Regulation 240.14a (6)(c) prior to October 26,
1996.


PART II

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

The registrant's common stock is traded principally on the NASDAQ National
Market System. At August 31, 1996 there were 4325 holders of record of 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.


-------- -------- -------- --------
1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------

Cash dividend declared per common share $ .040 $ .040 $ .040 $ .040
Stock Price Range
High $10.38 $10.63 $11.75 $11.75
Low $ 8.25 $ 8.75 $10.75 $11.00
-------- -------- -------- --------

-------- -------- -------- --------
1995 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------

Cash dividend declared per common share $ .035 $ .035 $ .035 $ .035
Stock Price Range
High $ 8.00 $ 7.25 $ 8.81 $ 8.88
Low $ 6.00 $ 5.88 $ 6.25 $ 8.00



Item 6. Selected Financial Data

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


Year Ended
------------------------------------------------------------
June 28, June 30, June 24, June 25, June 26,
1996 1995 1994 1993 1992
------------------------------------------------------------

Operating Results:
Revenues $ 181,808 $ 120,181 $ 113,755 $ 91,191 $ 67,530
Net income $ 14,040 $ 5,668 $ 8,192 $ 10,692 $ 6,707
Earnings per share $ 1.60 $ .69 $ 0.99 $ 1.51 $ 1.02
Weighted average shares 8,790 8,180 8,303 7,092 6,552
outstanding/(1)/
Cash dividend declared per common $ .16 $ .14 $ .12 $ .08 $ .05
share

Financial Condition:
Total assets $2,196,397 $1,535,979 $1,271,556 $1,093,884 $501,030
Long-term debt $ -- $ -- $ 723 $ 1,550 $ 2,328
Stockholders' equity $ 84,449 $ 71,541 $ 63,866 $ 46,267 $ 34,023
Shares outstanding/(1)/ 8,784 8,763 8,248 7,313 7,080
Book value per common common share $ 9.61 $ 8.16 $ 7.75 $ 6.33 $ 4.81
(1)


/(1)/ Adjusted to reflect the three-for-two stock split granted to shareholders
of record date June 15, 1993, issued July 1, 1993.


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

GENERAL
Southwest Securities Group, Inc. and subsidiaries (the "Company"), through
its principal subsidiary, Southwest Securities, Inc. ("Southwest"), provides
securities transaction processing and other related services and operates a
full-service brokerage, investment banking and asset management firm. Its
primary business is delivering a broad range of securities transaction
processing services to broker/dealers. Transaction processing services include
cost-effective integrated trade execution, clearing, client account processing
and other customized services ("Transaction Processing"). Southwest also
provides services that are directly related to Transaction Processing, including
margin lending and stock loan services. The Company also provides securities
brokerage and investment services primarily to individuals, provides investment
banking services to municipal and corporate clients and trades fixed income and
equity securities. Brokers Transaction Services, Inc. ("BTS"), a wholly owned
subsidiary of the Company, and a National Association of Securities Dealers
registered broker/dealer, contracts with independent registered representatives
for the administration of their securities business. SW Capital Corporation, a
wholly owned subsidiary of the Company, houses the Local Government Investment
Cooperative ("LOGIC") program. The LOGIC program is targeted to the needs of
cities, counties, schools and other local governments across Texas. 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. In addition, the Company offers asset management and
trust services through its wholly owned subsidiaries, Westwood Management
Corporation ("Westwood") and The Trust Company of Texas ("Trust Company").
Southwest Investment Advisors, Inc. ("Advisors"), a wholly owned subsidiary of
the Company is a registered investment advisor. Advisors has been inactive since
April 11, 1994.

Effective May 26, 1995, the Company acquired Barre & Company, Inc.
("Barre"), a Dallas based brokerage firm, through the issuance of 740,702 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. Simultaneous with the acquisition,
the assets and liabilities of Barre were merged with Southwest and Barre was
dissolved. Goodwill relating to this acquisition of approximately $270,000 is
recorded in other assets in the consolidated statements of financial condition.
Subsequent to the acquisition, David Glatstein, Chief Executive Officer of
Barre, became President and a Director of the Company as well as President of
Southwest. Effective May 2, 1996, Mr. Glatstein was elected Chief Executive
Officer of the Company.

During fiscal 1994, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock in the open
market. The Company's Board granted management the authority to repurchase the
Company's common stock from time to time at its discretion as market conditions
permit. A total of 710,527 shares were purchased at a total cost of $4,776,000.
A total of 61,122 of these shares were issued for the Employee Stock Purchase
Plan. The remainder were issued for the acquisition of Barre.

In August 1994, the Company authorized an employee stock purchase plan
available to eligible employees. The shares available for purchase were those
purchased in the Company's recent series of treasury stock acquisitions. A total
of 61,122 shares were sold under the terms of the Plan, resulting in loans to
employees of $421,000. As of June 28, 1996, $278,000 was outstanding under these
notes.

While Southwest has over 220 correspondents, one correspondent, BA
Investment Services, Inc., ("BAIS") accounted for 1%, 3% and 5% of the Company's
revenues in fiscal years 1996, 1995 and 1994, respectively. BAIS is a wholly
owned subsidiary of BankAmerica Corp. During fiscal year 1996, BAIS terminated
its clearing agreement with Southwest. Management believes that based on the
Transaction Processing and related services provided to BAIS during fiscal 1996,
the agreement modifications will have minimal impact on revenues in subsequent
years.

One of the most important facets of the Company's operations is
Transactions Processing and related services. Substantially all of the revenues
from Transaction Processing are shown on the Company's Consolidated Statements
of Income as net revenues from clearing operations. Increased Transaction
Processing and related services have resulted in increases in certain revenues,
including net revenues from clearing operations, interest revenue from margin
loans to clients of Southwest's Correspondents and to Correspondents for their
own security


inventory positions and money market administrative fees. The resultant
increases in retained earnings have increased the capital of the Company which
in turn has permitted the Company to expand all areas of its operations.

Other major sources of revenues are commissions from Southwest's client
transactions and interest revenue from margin loans to its own clients, stock
loan transactions and other interest-bearing assets. 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. The major expenses incurred by the Company relate
to payment of commissions, overall compensation and benefits for both sales and
administrative personnel and the costs of funds to finance the Company's
securities operations, including short-term borrowings, securities lending
transactions and other interest-bearing obligations.


FISCAL 1996 COMPARED TO FISCAL 1995
The Company's total revenues increased $61,627,000 or 51% to $181,808,000
as compared with fiscal 1995 revenues of $120,181,000 due to increases in all
facets of the Company. Favorable market conditions combined with the addition of
Correspondents resulted in increased revenues from Transaction Processing of
$7,079,000, an increase of 65% in fiscal 1996 over fiscal 1995. The number of
Correspondents increased from 205 in 1995 to 228 in 1996. Commissions generated
by Southwest brokers increased $10,297,000 to $36,896,000, an increase of 39%,
when compared with the previous year revenue of $26,617,000, due to increased
activity in the securities markets for substantially all of the fiscal year.
Investment banking, advisory and administrative fees increased to $12,533,000
for the year ended June 28, 1996, an increase of $3,426,000, or 38%, when
compared to the same period last year. Other income increased $4,658,000 to
$9,791,000 in fiscal 1996 primarily due to an increase in rebates received from
third market transactions.

Interest income increased $32,327,000 to $95,956,000, or 51% over fiscal
1995 while interest expense increased 63% or $26,784,000 to $69,092,000 from
$42,308,000 in fiscal 1995. This resulted in an increase in net interest revenue
of $5,543,000 or 26%. The increase in net interest revenue was due to higher
average balances in the securities lending area as well as a continuing
favorable interest rate environment. Southwest actively participates in the
borrowing and lending of securities other than those of its clients. The amounts
receivable and payable relating to open positions for securities borrowed and
loaned as of June 28, 1996 were $1,341,788,000 and $1,286,199,000, respectively.
As of June 30, 1995 these amounts were $863,648,000 and $848,722,000,
respectively.

Total expenses for fiscal 1996 increased $48,625,000 to $160,051,000, or
44% when compared to fiscal 1995 expenses of $111,426,000 primarily as a result
of increased commissions and other employee compensation as well as interest
expense as discussed above. Commissions and other employee compensation
increased $13,017,000 to $53,433,000, an increase of 32%, during fiscal 1996 as
compared to the same period last year due to higher commission revenue generated
by Southwest brokers and an increase in BTS registered representatives, who are
independent contractors and are paid at higher rates than Southwest's
representatives. The number of BTS registered representatives at June 28, 1996
was 462 compared to 361 at June 30, 1995. The number of employees also increased
to 638 at June 28, 1996 compared to 553 at June 30, 1995, contributing to the
increased compensation. Occupancy, equipment and computer service costs
increased $1,014,000, or 12% to $9,591,000 for fiscal 1996 due to upgrades of
computer equipment and an increase in office space. Communications expenses
increased 35% to $9,109,000 in fiscal 1996 as compared to fiscal 1995 due to
expanding computer networking. Floor brokerage expenses increased $489,000, or
14%, to $3,870,000 in fiscal 1996 compared to $3,381,000 in fiscal 1995. Other
expenses increased $4,963,000 to $14,956,000 for the year ended June 28, 1996,
an increase of 50% over the June 30, 1995 expenses of $9,993,000. This increase
was due primarily to expenses associated with investment banking services.

FISCAL 1995 COMPARED TO FISCAL 1994
The Company's total revenues increased $6,426,000 or 6% to $120,181,000 as
compared with fiscal 1994 primarily due to an increase in securities lending and
other interest revenue. Interest income increased $18,883,000 to $63,629,000, or
42% over fiscal 1994 while interest expense increased 48% or $13,784,000 to
$42,308,000 from $28,524,000 in fiscal 1994. This resulted in an increase in net
interest revenue of $5,099,000 or 31%. The increase in net interest revenue was
due to higher average balances in the securities lending area as well as a
continuing favorable interest rate environment. Southwest actively participates
in the borrowing and lending of securities other than those of its clients. The
amounts receivable and payable relating to open positions for securities
borrowed and


loaned as of June 30, 1995 were $863,648,000 and $848,722,000, respectively. As
of June 24, 1994 these amounts were $732,453,000 and $736,693,000.

During fiscal 1995, competitive pricing pressures resulted in decreased
revenues from Transaction Processing of $3,244,000, a decrease of 23% in fiscal
1995 over fiscal 1994, despite an increase in Correspondents to 205 in 1995
versus 192 in 1994. Commissions generated by Southwest brokers decreased
$6,296,000 to $26,617,000, a decrease of 19%, when compared with the previous
year revenue of $32,913,000, due to decreased activity in the securities markets
for substantially all of the fiscal year. Investment banking, advisory and
administrative fees declined to $9,107,000 for the year ended June 30, 1995, a
decrease of $1,807,000, or 17%, when compared to the same period last year. The
1994 fiscal year included revenue from the largest equity offering in the
Company's history. Other income decreased $1,010,000 to $5,133,000 in fiscal
1995 primarily due to non-recurring fee income for providing data processing and
other specialized services during fiscal 1994.

Total expenses for fiscal 1995 increased $10,324,000 to $111,426,000, or
10% when compared to fiscal 1994 primarily as a result of increased interest
expense as discussed above. Commissions and other employee compensation
decreased $3,931,000 to $40,416,000, a decline of 9%, during fiscal 1995 as
compared to the same period last year as a result of decreased commissions
generated by Southwest brokers offset by an increase in BTS registered
representatives, who are independent contractors and are paid at higher rates
than Southwest's representatives. The number of BTS registered representatives
at June 30, 1995 was 361 compared to 273 at June 24, 1994. While the number of
employees increased to 553 at June 30, 1995 from 535 at June 24, 1994, this
increase occurred as a result of the acquisition of Barre; therefore, it did not
contribute significantly to compensation expense for fiscal 1995. Other expense
categories remained consistent with fiscal 1994. Net income for the year
decreased $2,524,000, a decrease of 31%, to $5,668,000 in 1995 from $8,192,000
in 1994 due to the decreased revenue from operating areas in 1995 offset by
fairly constant operating expenses.

LIQUIDITY AND CAPITAL RESOURCES
More than 99% of the Company's assets consist of cash, marketable
securities and receivables from clients, clients of Correspondents and
Correspondents themselves (representing borrowings from Southwest to finance the
purchase of securities on margin, which are secured by marketable securities),
broker/dealers, and clearing organizations. All 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. Southwest 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 themselves. As of June 28,
1996, the allowance was approximately $4,800,000.

Net cash used in operating activities during the current year was
$30,418,000. Cash was used to fund fluctuations in the receivable from broker,
dealer, and clearing organization accounts, assets segregated for regulatory
purposes and securities owned. The fluctuations in these accounts are generally
short-term in nature and are funded by Southwest's short-term credit
arrangement.

Southwest has credit arrangements with several commercial banks, which
include broker loan lines up to $210,000,000, to finance securities owned,
securities held for Correspondent accounts, and receivables in client margin
accounts. These credit arrangements are provided on an "as offered" basis and
are not committed lines of credit. As of June 28, 1996, the Company had
$94,995,000 in outstanding loans under these arrangements. Outstanding balances
under these credit arrangements are due on demand, bear interest at rates
indexed to the Federal Funds rate, and are collateralized by securities of
Southwest and its clients. In the opinion of management, these credit
arrangements are adequate to meet the short-term operating capital needs of
Southwest.

Southwest is subject to the requirements of the Securities and Exchange
Commission and the New York Stock Exchange 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.


EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company will adopt Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123") in fiscal year 1997. FAS
123 will not have a material impact on the Company's financial position or
results of operations, as the Company does not intend to adopt the value based
measurement concept, but will require extensive disclosures regarding the
Company's stock option plan.


EFFECTS OF INFLATION
Management does not believe that changes in replacement costs of fixed
assets will materially affect the Company's operations. The rate of inflation,
however, affects the Company's expenses, such as employee compensation, rent and
communications. Increases in these expenses may not be readily recoverable in
the price the Company charges for its services. Inflation can have significant
effects on interest rates which in turn can affect prices and activities in the
securities markets. These fluctuations may have an adverse impact on the
Company's operations.


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
(Dollars in thousands, except per share amounts)



1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------

Revenues $40,923 $46,313 $44,287 $50,285
Income before income taxes $ 4,021 $ 5,149 $ 5,774 $ 6,813
Net income $ 2,624 $ 3,347 $ 3,724 $ 4,345
Earnings per share/(2)/ $ .30 $ .38 $ .42 $ .49
Cash dividend declared per common share $ .040 $ .040 $ .040 $ .040
Stock Price Range
High $ 10.38 $ 10.63 $ 11.75 $ 11.75
Low $ 8.25 $ 8.75 $ 10.75 $ 11.00

1995 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
Revenues $27,731 $27,170 $30,693 $34,587
Income before income taxes $ 1,436 $ 1,261 $ 2,996 $ 3,062
Net income $ 946 $ 827 $ 1,841 $ 2,054
Earnings per share/(2)/ $ .12 $ .10 $ .23 $ .25
Cash dividend declared per common share $ .035 $ .035 $ .035 $ .035
Stock Price Range
High $ 8.00 $ 7.25 $ 8.81 $ 8.88
Low $ 6.00 $ 5.88 $ 6.25 $ 8.00

/(1)/ Adjusted to reflect the three-for-two stock split granted to shareholders
of record date June 15, 1993, issued July 1, 1993.
/(2)/ The sum of the quarters' earnings per share for fiscal years 1996 and
1995 do not equal the full fiscal year amount due to the effect of
averaging the number of shares of common stock throughout the year.


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 required by this item regarding Directors is incorporated by
reference to pages 2 through 4 of the Company's Proxy Statement dated September
26, 1996 which will be filed with the Commission pursuant to Regulation 240.14a
(6)(c) prior to October 26, 1996.


Item 11. Executive Compensation

The information required by this item regarding Executive Compensation is
incorporated by reference to pages 8 through 10 of the Company's Proxy Statement
dated September 26, 1996 which will be filed with the Commission pursuant to
Regulation 240.14a (6)(c) prior to October 26, 1996.


Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item regarding security ownership of certain
beneficial owners and management is incorporated by reference to pages 5 through
7 of the Company's Proxy Statement dated September 26, 1996 which will be filed
with the Commission pursuant to Regulation 240.14a (6)(c) prior to October 26,
1996.


Item 13. Certain Relationships and Related Transactions

The information required by this item regarding Directors is incorporated by
reference to pages 2 through 5 of the Company's Proxy Statement dated September
26, 1996 which will be filed with the Commission pursuant to Regulation 240.14a
(6)(c) prior to October 26, 1996.


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
S-2 Schedule II - Valuation and Qualifying Accounts

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
--------------
3.1 Certificate of Incorporation of the Registrant incorporated
by reference to the Registrant's Registration Statement No.
33-42338 filed August 21, 1991 (File No. 0-19483).
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 (File No. 0-19483).
10.1 Executive compensation information incorporated by reference
to the Registrant's Proxy Statement dated September 26,
1996, filed prior to October 26, 1996.
10.2 Employees 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 dated September 26, 1996, filed
prior to October 26, 1996.
10.4 Phantom Stock Plan. Incorporated by reference to the
Registrant's Proxy Statement dated September 26, 1996, filed
prior to October 26, 1996.
22 Registrant's Proxy Statement dated September 26, 1996, filed
prior to October 26, 1996.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule

(b) Reports on Form 8-K:

None.


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 26, 1996 /S/ David Glatstein
- ------------------ -----------------------------------
(Date) (Signature)
David Glatstein
Director and Chief
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 26, 1996 /S/ Don A. Buchholz
- ------------------ -----------------------------------
(Date) (Signature)
Don A. Buchholz
Chairman of the Board

September 26, 1996 /S/ Raymond E. Wooldridge
- ------------------ -----------------------------------
(Date) (Signature)
Raymond E. Wooldridge
Director and Vice
Chairman of the Board

September 26, 1996 /S/ David Glatstein
- ------------------ -----------------------------------
(Date) (Signature)
David Glatstein
Director and Chief
Executive Officer

September 26, 1996 /S/ Susan M. Byrne
- ------------------ -----------------------------------
(Date) (Signature)
Susan M. Byrne
Director

September 26, 1996 /S/ Frederick R. Meyer
- ------------------ -----------------------------------
(Date) (Signature)
Frederick R. Meyer
Director

September 26, 1996 /S/ Kenneth R. Hanks
- ------------------ -----------------------------------
(Date) (Signature)
Kenneth R. Hanks
Chief Financial Officer


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


FINANCIAL STATEMENTS PAGE(S)

Consolidated Statements of Financial Condition F-2
as of June 28, 1996 and June 30, 1995

Consolidated Statements of Income F-3
for the years ended June 28, 1996, June 30, 1995 and June 24, 1994

Consolidated Statements of Stockholders' Equity F-4
for the years ended June 28, 1996, June 30, 1995 and June 24, 1994

Consolidated Statements of Cash Flows F-5
for the years ended June 28, 1996, June 30, 1995 and June 24, 1994

Notes to Consolidated Financial Statements F-6-12

Independent Auditors' Report F-13

F-1


Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 28, 1996 and June 30, 1995
(Dollars in thousands, except par values and share amounts)





1996 1995
---------- ----------

ASSETS
Cash $ 5,284 $ 3,589
Assets segregated for regulatory
purposes (Note 2) 204,454 202,367
Receivable from brokers, dealers and
clearing organizations (Note 3) 1,455,645 958,025
Receivable from clients, net of
allowance for doubtful accounts of
$4,800 in 1996 and $4,100 in 1995
(Notes 4 and 6) 475,195 309,684
Securities owned, at market value
(Notes 5 and 6) 34,593 36,565
Other assets (Note 7) 21,226 25,749
---------- ----------
$2,196,397 $1,535,979
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings (Note 6) $ 104,984 $ 69,539
Payable to brokers, dealers and
clearing organizations (Note 3) 1,313,455 883,586
Payable to clients (Note 4) 647,787 456,820
Drafts payable 25,158 25,359
Other liabilities 20,564 29,134
---------- ----------
2,111,948 1,464,438

Stockholders' equity (Note 8):
Preferred stock of $1.00 par value.
Authorized 100,000 shares;
none issued -- --
Common stock of $ .10 par value.
Authorized 10,000,000 shares.
Issued 8,792,807 and outstanding
8,783,630 shares in 1996. 879 876
Issued and outstanding 8,763,396
shares in 1995.
Additional paid-in capital 27,107 26,860
Retained earnings 56,815 44,181
Receivable from employees under the
Employee Stock Purchase Plan (Note 9) (278) (376)
Treasury stock (9,177 shares, at
cost in 1996) (74) --
---------- ----------
Total stockholders' equity 84,449 71,541
Commitments and contingencies (Notes 6,
10 and 12) $2,196,397 $1,535,979
---------- ----------




See accompanying Notes to Consolidated Financial Statements.

F-2


Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 28, 1996, June 30, 1995, and June 24, 1994
(Dollars in thousands, except share and per share amounts)




1996 1995 1994
---------- ---------- ----------

Net revenues from clearing operations $ 17,897 $ 10,818 $ 14,062
Commissions 36,896 26,617 32,913
Interest 95,956 63,629 44,746
Investment banking, advisory and
administrative fees 12,533 9,107 10,914
Net gains on principal transactions 8,735 4,877 4,977
Other 9,791 5,133 6,143
---------- ---------- ----------
181,808 120,181 113,755
---------- ---------- ----------
Commissions and other employee
compensation (Note 9) 53,433 40,416 44,347
Interest 69,092 42,308 28,524
Occupancy, equipment and computer
service costs (Note 10) 9,591 8,577 8,523
Communications 9,109 6,751 6,090
Floor brokerage and clearing
organization charges 3,870 3,381 3,447
Other 14,956 9,993 10,171
---------- ---------- ----------
160,051 111,426 101,102
---------- ---------- ----------
Income before income taxes 21,757 8,755 12,653
Income taxes (Note 7) 7,717 3,087 4,461
---------- ---------- ----------
Net income $ 14,040 $ 5,668 $ 8,192
---------- ---------- ----------
Earnings per share $1.60 $.69 $.99
---------- ---------- ----------
Weighted average shares outstanding 8,789,873 8,180,198 8,303,106
---------- ---------- ----------




See accompanying Notes to Consolidated Financial Statements.

F-3


Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 28, 1996, June 30, 1995 and June 24, 1994
(Dollars in thousands, except share and per share amounts)



Receivable from
Additional Employee Stock
Common Stock paid-in Retained Purchase Treasury
Shares Amount capital earnings Plan stock Total
-------------------------------------------------------------------------------------------------------

Balance at June 25, 1993 7,312,814 $731 $13,057 $32,479 $ -- $ -- $46,267
Net proceeds from issuance
of common stock 1,359,285 136 13,167 -- -- -- 13,303
Net income -- -- -- 8,192 -- -- 8,192
Dividends ($.12/share) -- -- -- (1,000) -- -- (1,000)
Purchase of treasury stock (423,800) -- -- -- -- (2,896) (2,896)
-------------------------------------------------------------------------------------------------------
Balance at June 24, 1994 8,248,299 867 26,224 39,671 -- (2,896) 63,866
Purchase of treasury stock (286,727) -- -- -- -- (1,880) (1,880)
Issuance of common stock
for acquisition 740,702 9 636 -- -- 4,355 5,000
Net income -- -- -- 5,668 -- -- 5,668
Dividends ($.14/share) -- -- -- (1,158) -- -- (1,158)
Issuance of common stock
for Employee Stock
Purchase Plan 61,122 -- -- -- (421) 421 --
Proceeds from employees for
Employee Stock Purchase
Plan -- -- -- -- 45 -- 45
-------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 8,763,396 876 26,860 44,181 (376) -- 71,541
Purchase of treasury stock (9,177) -- -- -- -- (74) (74)
Issuance of common stock 29,411 3 247 -- -- -- 250
Net income -- -- -- 14,040 -- -- 14,040
Dividends ($.16/share) -- -- -- (1,406) -- -- (1,406)
Proceeds from employees for
Employee Stock Purchase
Plan -- -- -- -- 98 -- 98
-------------------------------------------------------------------------------------------------------
Balance at June 28, 1996 8,783,630 $879 $27,107 $56,815 $(278) $ (74) $84,449
-------------------------------------------------------------------------------------------------------



See accompanying Notes to the Consolidated Financial Statements.

F-4


Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 28, 1996, June 30, 1995 and June 24, 1994
(Dollars in thousands)


1996 1995 1994
-------- -------- --------

Cash flows from operating activities:
Net income $ 14,040 $ 5,668 $ 8,192
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,815 2,860 2,384
Provision for doubtful accounts 984 663 259
Deferred income taxes (1,208) (91) 188
Decrease (increase) in assets
segregated for regulatory
purposes (2,087) (47,957) 28,462
Net change in broker, dealer
and clearing organization
accounts (67,751) (52,373) (4,144)
Net change in client accounts 24,472 24,372 22,001
Decrease (increase) in
securities owned 1,972 (12,552) (1,470)
Decrease (increase) decrease
in other assets 5,153 (8,296) (2,273)
Increase (decrease) in drafts
payable (201) 6,997 (8,393)
Increase (decrease) in other
liabilities (8,607) 9,977 (117)
-------- -------- --------
Net cash provided by (used
in) operating activities (30,418) (70,732) 45,089
-------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets (2,725) (1,757) (2,220)
Proceeds from sale of fixed assets 481 -- --
-------- -------- --------
Net cash provided by (used
in) investing activities (2,244) (1,757) (2,220)
-------- -------- --------
Cash flows from financing activities:
Net change in short-term
borrowings 35,445 69,539 (46,130)
Payments on liabilities
subordinated to claims of
general creditors -- -- (345)
Payment of capital lease
obligation -- (723) (482)
Proceeds from employees for
employee stock purchase plan 98 45 --
Purchase of treasury stock (74) (1,880) (2,896)
Net proceeds from issuance of
common stock 250 -- 13,303
Payment of cash dividends on
common stock (1,362) (1,110) (886)
-------- -------- --------
Net cash provided by (used
in) financing activities 34,357 65,871 (37,436)
-------- -------- --------
Net increase (decrease) in cash 1,695 (6,618) 5,433

Cash at beginning of year 3,589 10,207 4,774
-------- -------- --------
Cash at end of year $ 5,284 $ 3,589 $ 10,207
-------- -------- --------



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 wholly owned subsidiaries
(collectively "Company"), Southwest Securities, Inc. ("Southwest"), Brokers
Transaction Services, Inc. ("BTS"), Southwest Investment Advisors, Inc.
("Advisors"), SW Capital Corporation ("Capital"), Trust Company of Texas ("Trust
Company"), and Westwood Management Corporation ("Westwood"). Southwest and BTS
are registered broker/dealers under the Securities Exchange Act of 1934 ("1934
Act"). Advisors and Westwood are registered investment advisors under the
Investment Advisors Act of 1940. All significant intercompany balances and
transactions have been eliminated.

Effective May 26, 1995, the Company acquired Barre & Company, Inc.
("Barre"), a Dallas based brokerage firm, through the issuance of 740,702 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. Simultaneous with the acquisition, the
assets and liabilities of Barre were merged with Southwest and Barre was
dissolved. Goodwill relating to this acquisition of approximately $270,000 is
recorded in other assets in the accompanying consolidated statements of
financial condition.

The annual consolidated financial statements are prepared as of the
close of business on the last Friday of June. Accordingly, the fiscal years for
1996, 1995, and 1994 ended June 28, 1996, June 30, 1995, and June 24, 1994,
respectively.

(b) Securities Transactions

Securities transactions are recorded on a settlement date basis with
such transactions generally settling three business days after trade date. Prior
to June 1995, these transactions generally settled five 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.

(d) Depreciation and Amortization

Depreciation of furniture, equipment, and leasehold improvements is
provided over the estimated useful lives of the assets (5 or 7 years). Equipment
under capital leases is amortized on a straight-line basis over the term of the
leases and goodwill is amortized on a straight-line basis over a period of forty
years.

(e) Drafts Payable

In the normal course of business, Southwest uses drafts to make
payments relating to its brokerage transactions. These drafts are presented for
payment through Southwest's bank and are sent to Southwest 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
(notes 2 and 6). 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.

The Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", on a prospective basis on June 26, 1993, having previously used the
deferred method of accounting for income taxes under APB 11. Under the asset and
liability method of

F-6


Statement 109, 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. Under Statement 109, 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. The
cumulative effect of the adoption of the provisions of Statement 109 in 1994 did
not have a material impact on the Company's consolidated financial statements.

(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 a cash
equivalent 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 $67,616,000,
$41,2808,543,000, and $27,901,000 in 1996, 1995 and 1994, respectively. Cash
paid during the year for income taxes was $8,742,000, $3,587,000, and $4,802,000
in 1996, 1995 and 1994, respectively.

During 1995, the Company loaned $421,000 to employees under an
Employee Stock Purchase Plan for the purchase of 61,122 shares of Treasury stock
(note 9). Also during 1995, the Company issued common stock valued at
approximately $5,000,000 related to an acquisition.

(i) Earnings Per Share

Earnings per share are computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding, after
taking into effect the issuance of common stock and the purchase of Treasury
shares as discussed in (j) and (k), respectively. Common share equivalents
include shares issuable under stock options and are determined under the
treasury stock method.

(j) Issuance of Common Stock

On August 26, 1993 the Company filed with the Securities and Exchange
Commission a public offering for the issuance of the Company's $.10 par value
common stock. Shares issued pursuant toduring the the public offering totaled
1,359,285 and proceeds totaled $13,303,000.

(k) Purchase of Treasury Stock

During fiscal 1994, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock in the open
market. A total of 710,527 shares were repurchased under this plan in fiscal
1994 and 1995. These shares were issued to employees under the Employee Stock
Purchase Plan and for the acquisition of Barre.

(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 borrowings, if
recalculated based on current interest rates, would not significantly differ
from the amounts recorded at June 28, 1996.


2. ASSETS SEGREGATED FOR REGULATORY PURPOSES

At June 28, 1996, the Company had U.S. Treasury securities with a
market value of $104,362,000 and reverse repurchase agreements of $100,092,000
segregated in special reserve bank accounts for the exclusive benefit of
customers under Rule 15c3-3 of the 1934 Act, at a subsidiary (note 11). Under a
master repurchase agreement ("Agreement") with Trust Company, securities
purchased under these reverse repurchase agreements are identified and
segregated by Trust Company on its books and records as subject to the
Agreement. Reverse

F-7


repurchase agreements are entered into with third parties. The underlying
securities purchased under these reverse repurchase agreements are delivered to
Trust Company by these third parties, versus payment. Reverse repurchase
agreements at June 28, 1996 were collateralized by U.S. Government securities
with market values of approximately $101,013,000. At June 30, 1995, the Company
had U.S. Treasury securities with a market value of $120,284,000 and reverse
repurchase agreements of $82,083,000 in these accounts. The reverse repurchase
agreements were collateralized by U.S. Government securities with market values
of approximately $82,953,000 at June 30, 1995.


3. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

At June 28, 1996 and June 30, 1995, the Company had receivable from
and payable to brokers, dealers and clearing organizations related to the
following (in thousands):



1996 1995
---------- --------

Receivable: $ 15,748 $ 15,748
Securities failed to deliver $ 22,013 $ 26,419
Securities borrowed 1,341,788 863,648
Correspondent broker/dealers 72,207 58,523
Clearing organizations 547 608
Other 19,090 8,827
---------- --------
$1,455,645 $958,025
---------- --------

Payable:
Securities failed to receive $ 15,138 $ 24,419
Securities loaned 1,286,199 848,722
Correspondent broker/dealers 7,293 7,246
Other 4,825 3,199
---------- --------
$1,313,455 $883,586
---------- --------


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.

Southwest 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.

Southwest 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 Southwest's clients, were $1,276,337,000
and $1,277,410,000 at June 28, 1996 and $836,958,000 and $836,490,000 at June
30, 1995.


4. 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
$2,815,000 and $3,093,000 at June 28, 1996 and $4,268,000 and $3,263,000 at June
30, 1995. 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.

Southwest pays interest on certain customer "free credit" balances
available for reinvestment. The aggregate balance of such funds was
approximately $494,391,000 and $377,202,000 at June 28, 1996 and June 30, 1995,
respectively. During fiscal years 1996 and 1995, the interest rates paid on
these balances ranged from 3.5% to 5.0%. While Southwest pays interest on these
funds at varying rates, the rate paid at June 28, 1996 was 4.5%.

Southwest 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
28, 1996 and June 30, 1995, all unsecured customer receivables had been provided
for in this allowance.

F-8


5. SECURITIES OWNED

Securities owned at June 28, 1996 and June 30, 1995, which are carried
at market value, included the following (in thousands):



1996 1995
------- -------

Reverse repurchase agreements $ -- $11,903
Corporate equity securities 2,456 2,516
Municipal obligations 16,318 9,997
U.S Government and Government agency
obligations 8,730 10,633
Corporate obligations 6,703 1,148
Other 386 368
------- -------
$34,593 $36,565
------- -------


The reverse repurchase agreements were collateralized by U.S.
Government securities held by a third party with market values totaling
$11,759,000 at June 30, 1995.

Certain of the above securities have been pledged to secure short-term
borrowings and as security deposits at clearing organizations for Southwest's
clearing business. These pledged securities amounted to $1,914,000 and
$2,631,000 at June 28, 1996 and June 30, 1995, respectively.


6. SHORT-TERM BORROWINGS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Southwest has credit arrangements with commercial banks, which include
a broker loan line up to $210,000,000 to finance securities owned, securities
held for correspondent broker/dealer accounts, and receivables in customers'
margin accounts. This line may also be used to release pledged collateral
against day loans. These credit arrangements are provided on an "as offered"
basis and are not committed lines of credit. These arrangements can be
terminated at any time by the lender. Any outstanding balance under this credit
arrangement is due on demand and bears interest at rates indexed to the federal
funds rate (6.125% to 6.375% at June 28, 1996). The amount outstanding under
these credit arrangements was $94,995,000 at June 28, 1996 and was
collateralized by marketable securities owned valued at approximately
$17,772,000, securities held for correspondent broker/dealer accounts valued at
approximately $68,193,000, and clients' securities valued at approximately
$57,436,000. The amount outstanding under these credit arrangements was
$59,550,000 at June 30, 1995 and was collateralized by marketable securities
owned valued at approximately $10,156,000, securities held for correspondent
broker/dealer accounts valued at approximately $66,220,000, and clients'
securities valued at approximately $35,410,000. The weighted average interest
rate was 6.12% and 6.40% for the years ended June 28, 1996 and June 30, 1995,
respectively.

At June 28, 1996 Southwest had a repurchase agreement totaling
$9,989,000 which matured July 3, 1996. The repurchase agreement was
collateralized by certain U.S. Government agency securities, held by a third
party, with a market value of $9,989,000. At June 30, 1995, Southwest also had a
repurchase agreement totaling $9,989,000 which matured July 5, 1995. This
repurchase agreement was collateralized by certain U.S. Government agency
securities, held by a third party, with a market value of $9,989,000.

Additionally, Southwest has an irrevocable letter of credit agreement
aggregating $12,800,000 at June 28, 1996 and $8,600,000 at June 30, 1995 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
$21,532,000 and $12,942,000 at June 28, 1996 and June 30, 1995, respectively.

F-9


7. INCOME TAXES

Income tax expense for the fiscal years ended June 28, 1996, June 30,
1995 and June 24, 1994 (effective rate of 35.5% in 1996 and 35.3% in 1995 and
1994) differs from the amount that would otherwise have been calculated by
applying the U. S. Federal corporate tax rate (35% in 1996, 1995 and 1994) to
income before taxes and is comprised of the following (in thousands):



1996 1995 1994
------ ------ ------

Income tax expense at the statutory rate $7,615 $3,064 $4,429
Tax exempt interest (274) (117) (152)
Other, net 376 140 184
------ ------ ------
$7,717 $3,087 $4,461
------ ------ ------



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



1996 1995 1994
------- ------ ------

Current $ 8,925 $3,178 $4,273
Deferred (1,208) (91) 188
------- ------ ------
Total income taxes $ 7,717 $3,087 $4,461
------- ------ ------




The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities as of June 28, 1996 and June
30, 1995 are presented below (in thousands):



1996 1995
------ ------

Deferred tax assets:
Allowance for doubtful accounts $1,680 $1,435
Deferred gains -- 10
Partnership basis in excess of
financial 649 --
reporting basis
Other 472 338
------ ------
Total gross deferred tax assets 2,801 1,783
Deferred tax liabilities:
Unrealized gains (44) (73)
Depreciation at rates different for
tax than for financial reporting (102) (263)
------ ------
Total gross deferred tax
liabilities (146) (336)
------ ------
Net deferred tax assets $2,655 $1,447
====== ======


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.

8. NET CAPITAL REQUIREMENTS

The broker/dealer subsidiaries are subject to the Securities and
Exchange Commission's Uniform Net Capital 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 28, 1996, Southwest had net capital of $50,707,000 or approximately 9% of
aggregate debit balances, which is $39,007,000 in excess of its minimum net
capital requirement of $11,700,000 at that date. Additionally, the net capital
rule of the New York Stock Exchange, Inc. 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 28, 1996, Southwest had net capital of
$21,457,000 in excess of 5% of aggregate debit items.

F-10


BTS follows the primary (aggregate indebtedness) method under Rule
15c3-1, which requires it to maintain minimum net capital of $100,000 at June
28, 1996. At that date, BTS had net capital of $153,000 which is $53,000 in
excess of its minimum net capital requirement at that date.

Trust Company is subject to the capital requirements of the Texas
Department of Banking, and has a minimum capital requirement of $1,000,000. At
June 28, 1996, Trust Company had total stockholder's equity of $4,690,000, which
is $3,690,000 in excess of its minimum capital requirement at that time.


9. EMPLOYEE BENEFITS

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 1996, 1995 and 1994 was approximately $3,692,000, $3,751,000, and
$4,014,000, respectively.

The Company adopted an Employee Stock Purchase Plan ("Plan") as of
August 30, 1994 to enable employees of the Company to purchase up to 468,227
shares of common stock of the Company. Substantially all full-time employees
were eligible to purchase a minimum of $2,500 up to a maximum of $50,000 of the
common stock, subject to certain limitations, at a price of $6.89 per share. The
terms of the Plan provide that the Company will loan the full purchase price of
the stock to the employee under a promissory note due in monthly installments
over a five year period bearing interest at the Applicable Federal Rate (6.39%
at June 28, 1996). A total of 61,122 shares were sold under the terms of the
Plan, resulting in loans to employees of $421,000. The amount outstanding under
these notes at June 28, 1996 was $278,000.

10. COMMITMENTS AND CONTINGENCIES

The Company leases its offices under noncancelable operating lease
agreements. Rental expense for fiscal years 1996, 1995 and 1994, aggregated
approximately $2,543,000, $2,092,000, and $1,990,000, respectively.

At June 28, 1996, the future rental payments for the noncancelable
leases for each of the following five fiscal years and thereafter follow (in
thousands):



Year ending:
1997 $ 2,913
1998 3,074
1999 2,887
2000 2,513
2001 2,472
Thereafter 8,487
-------
Total payments due $22,346
-------


During 1991, the Company entered into various noncancelable lease
agreements relating to data processing equipment used in the brokerage
operations. The leases expired in fiscal 1995, and the related equipment was
subsequently purchased. As of June 28, 1996, the Company had entered into an
agreement to purchase certain data processing equipment with a cost of
$5,000,000.

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 a defendant 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.

During January 1989, Southwest began performing execution and clearing
services for Security Pacific Investments, Inc., which merged into BA Investment
Services, Inc., a subsidiary of Bank America Corp., in 1992. BA Investment
Services, Inc., ("BAIS") accounted for 7% and 8% of the Company's revenues in
fiscal years 1993 and 1992, respectively. Under a modified clearing agreement,
Southwest will continue to execute equity, option, corporate bond and certain
mutual fund transactions until at least November 1996. In December 1993, BAIS
began clearing all of its other transactions except for certain mutual funds.
Due to delays in all phases of the conversion schedule as well as volume
increases in existing BAIS accounts, management believes that the impact of the
agreement modifications will be lower than previously estimated in fiscal 1995.


11. AFFILIATE TRANSACTIONS

The Company, through its principal subsidiary, Southwest, provides
accounting and administrative services for its subsidiaries and clears all
customer transactions for BTS. The assets discussed in Note 2 are segregated in
a special reserve account at Trust Company for the exclusive benefit of
customers under Rule 15c3-3 of the Act. Westwood serves as the investment
manager for these assets. In addition, Westwood serves as the investment manager
of the common trust funds of Trust Company.

F-11


12. 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, Southwest 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 Southwest 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.

F-12


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 schedules as listed in
the accompanying index at Part IV. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules 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 28, 1996 and June 30, 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended June 28, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

As discussed in note 1(g) to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1994 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."



KPMG Peat Marwick LLP


Dallas, Texas
July 25, 1996

F-13


S-1



SCHEDULE I - Condensed Financial Information of Registrant



SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES

Condensed Financial Information of Registrant

Condensed Statements of Financial Condition
-------------------------------------------
June 28, 1996 and June 30, 1995
(In thousands)




ASSETS 1996 1995
- ------ -------- --------


Investment in subsidiaries, at equity $64,939 $52,178
Notes receivable from subsidiaries 19,500 19,500
Other assets 1,624 1,049
-------- --------
$86,063 $72,727
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------

Other liabilities $ 1,614 $ 1,186
Stockholders' equity 84,449 71,541
-------- --------
$86,063 $72,727
======== ========




S-1 (CONTINUED)


SCHEDULE I - Condensed Financial Information of Registrant - Continued



SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES

Condensed Financial Information of Registrant

Condensed Statements of Income and
-----------------------------------
Stockholders' Equity
--------------------
Years Ended June 28, 1996, June 30, 1995 and June 24, 1994
(In thousands)




1996 1995 1994
---- ---- ----


Revenues - Interest and other income $ 3,211 $ 2,758 $ 1,985
------- ------- -------

Expenses:
Interest expense 2 39 148
Other expenses 780 972 1,690
------- ------- -------
782 1,011 1,838
------- ------- -------
Income before income tax (expense)
benefit and equity in earnings of
subsidiaries 2,429 1,747 147
Income tax (expense) benefit (1,189) (635) 816
------- ------- -------
Income before equity in earnings of
subsidiaries 1,240 1,112 963
Equity in earnings of subsidiaries 12,800 4,556 7,229
------- ------- -------
Net income 14,040 5,668 8,192
------- ------- -------

Stockholders' equity at beginning of
year 71,541 63,866 46,267
Net proceeds from issuance of common
stock 250 -- 13,303
Issuance of common stock for acquisition -- 5,000 --
Proceeds from employees for Employee
Stock Purchase Plan 98 45 --
Dividends (1,406) (1,158) (1,000)
Treasury stock acquired (74) (1,880) (2,896)
------- ------- -------
Stockholders' equity at end of year $84,449 $71,541 $63,866
======= ======= =======



S-1 (CONTINUED)



SCHEDULE I - Condensed Financial Information of Registrant - Continued



SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES

Condensed Financial Information of Registrant

Condensed Statements of Cash Flows
----------------------------------
Years Ended June 28, 1996, June 30, 1995 and June 24, 1994
(In thousands)



1996 1995 1994
-------- ------- -------

Cash flows from operating activities:
Net income $ 14,040 $ 5,668 $ 8,192
Adjustments:
Undistributed equity in
earnings of subsidiaries (12,800) (4,556) (7,229)
Depreciation and amortization 175 403 401
Other 887 (316) 167
-------- ------- -------
Net cash provided by
operating activities 2,302 1,199 1,531
-------- ------- -------
Cash flows from investing activities:
Proceeds from (payments on) notes
and other accounts with
subsidiaries (847) 5,593 (9,570)
Purchase of investments (367) (3,124) --
-------- ------- -------
Net cash provided by
(used in) investing
activities (1,214) 2,469 (9,570)
-------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock (74) (1,880) (2,896)
Net increase (decrease) in notes
payable -- -- (1,000)
Payments of capital lease
obligations -- (723) (482)
Net proceeds from issuance of
common stock 250 -- 13,303
Dividends on common stock (1,362) (1,110) (886)
Proceeds from employees for
Employee Stock Purchase
Plan 98 45 --
-------- ------- -------
Net cash provided by
(used in) financing
activities (1,088) (3,668) 8,039
-------- ------- -------
Net change in cash -- -- --
Cash at beginning of year 1 1 1
-------- ------- -------
Cash at end of year $ 1 $ 1 $ 1
======== ======= =======

- ---------------
Note: During 1995, the Company loaned $421,000 to employees under an Employee
Stock Purchase Plan for the purchase of 61,122 shares of Treasury stock. Also
during 1995, the Company issued common stock valued at $5,000,000 related to an
acquisition.


S-2



SCHEDULE II - Valuation and Qualifying Accounts



SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts
---------------------------------
Years ended June 28, 1996, June 30, 1995 and June 24, 1994
(In thousands)



Charged
Beginning to costs End of
of period and expenses Deductions period
--------- ------------ ------------ ------

Allowance for doubtful accounts:
Year ended June 28, 1996 $4,100 $984 $(284)(1) $4,800
====== ==== ===== ======

Allowance for doubtful accounts:
Year ended June 30, 1995 $3,045 $663 $ 392 (1) $4,100
====== ==== ===== ======

Allowance for doubtful accounts:
Year ended June 24, 1994 $3,296 $259 $(510)(1) $3,045
====== ==== ===== ======


____________
(1) Accounts written-off, net of recoveries.