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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

  For the fiscal year ended June 27, 2003

OR

  For the transition period from              to             

Commission file number 0-19483

SWS GROUP, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

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

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

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

The aggregate market value of Common Stock held by non-affiliates of the Registrant, computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, December 31, 2002, was $206,485,000.

As of September 18, 2003, there were 17,103,567 shares of the Registrant’s common stock, $.10 par value, outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be used in connection with the solicitation of proxies to be voted at the Registrant’s Annual Meeting of Stockholders to be held November 12, 2003, which will be filed with the Commission pursuant to Regulations 240.14a (6)(c) within 120 days after the Registrant’s fiscal year end, are incorporated by reference into Part I and Part III of this Report on Form 10-K.

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SWS GROUP, INC. AND SUBSIDIARIES

INDEX TO 2003 ANNUAL REPORT ON FORM 10-K

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PART I

BUSINESS

We are a full-service securities and banking firm delivering a broad range of investment, commercial banking and related financial services to our clients, which include individual and institutional investors, broker/dealers, corporations, governmental entities and financial intermediaries. We are a Delaware corporation and were incorporated in 1972.

For purposes of this annual report, references to “we,” “us,” “our” and “SWS” mean SWS Group, Inc. collectively with all of our subsidiaries, and references to “SWS Group” mean solely SWS Group, Inc. as a single entity.

Our principal executive offices are located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. Our telephone number is (214) 859-1800 and our company website is www.swsgroupinc.com. We do not intend for information contained on our website to be part of the Form 10-K. We make available free of charge on or through our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material or furnish it to the Securities and Exchange Commission (“SEC”). Additionally, we voluntarily will provide electronic or paper copies of our filings free of charge upon request.

We currently operate through three business segments:

Brokerage Group: We provide clearing services to 227 correspondent broker/dealers and over 400 independent registered representatives, as well as full-service and limited on-line brokerage services to individual investors. Clearing involves maintaining our correspondent clients’ accounts, processing securities transactions, extending margin loans and performing a variety of administrative services as agent for our correspondent broker/dealers. Our clearing business is complemented by our securities trading, securities lending and investment banking businesses.

Our principal subsidiary, Southwest Securities, Inc., formerly known as “SWS Securities, Inc.” (“Southwest Securities”), is a registered broker/dealer and a member of the New York Stock Exchange (“NYSE”), the American Stock Exchange, Inc. and the Chicago Stock Exchange, Inc. It is also a member of the National Association of Securities Dealers (“NASD”), Securities Investor Protection Corporation (“SIPC”), and other regulatory and trade organizations. Southwest Securities provides correspondent services to securities broker/dealers and other financial institutions in 33 states, Puerto Rico, Canada and Europe. Southwest Securities serves individual investors through its Private Client Group offices in Texas, New Mexico and Oklahoma and institutional investors nationwide from its Dallas, New York, Chicago, Milwaukee, Ft. Lauderdale and Newport Beach offices. Southwest Securities’ activities include execution and clearing of securities transactions, individual and institutional securities brokerage, securities lending, management of and participation in underwriting of equity and fixed income securities, market making in corporate securities and research and investment advisory services. For the year ended June 27, 2003, revenues of Southwest Securities accounted for approximately 69% of our consolidated revenues.

We operate other broker/dealer subsidiaries engaged in certain aspects of the securities brokerage business. All are NASD registered broker/dealers. SWS Financial Services, Inc. (“SWS Financial”) contracts with over 400 individual independent registered representatives who are NASD licensed salespersons for the administration of their securities business. While these registered representatives must conduct all of their securities business through SWS Financial, 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 Securities’ registered representatives to compensate them for their added expenses. May Financial Corporation (“May Financial”) was acquired on February 28, 2001 and conducts trading operations as a principal for

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its own account. SWS Financial and May Financial are each correspondents of Southwest Securities.

On June 13, 2003, we sold the accounts of Mydiscountbroker.com, Inc. (“Mydiscountbroker”), our on-line discount brokerage service to Ameritrade, Inc. and Ameritrade Canada, Inc., subsidiaries of Ameritrade Holding Company (“Ameritrade”). The sales price of $4,200,000 (generating an after tax gain of $2,730,000) was based on the actual accounts transferred at closing, approximately 16,500 accounts. The remaining accounts were consolidated into our brokerage operations in June 2003 or were closed.

Banking Group: We also offer full-service, traditional and Internet banking through First Savings Bank, FSB, Arlington, Texas (“First Savings” or “Bank”). The Bank is a federally chartered savings association organized and existing under the laws of the United States. Headquartered in Arlington, Texas, the Bank conducts business from its main office and its branch locations in Arlington, Granbury and Dallas, Texas and two loan production offices in northeast Tarrant County, Texas and Dallas, Texas.

First Savings has two subsidiaries. FSB Financial, LTD (“FSB Financial”) purchases non-prime automobile loans, and FSB Development, LLC (“FSB Development”) develops single-family residential lots.

Asset Management Group: We offer asset management services through SWS Capital Corporation (“SWS Capital”), which administers the Local Government Investment Cooperative (“LOGIC”) fund for cities, counties, schools and other local governments across Texas. LOGIC is an investment program tailored to the needs of local governments within the state of Texas. The fund’s investments are subject to the requirements of the Texas Public Funds Act.

See Note 24 to the Consolidated Financial Statements contained in this Report for the revenue, income (loss) and asset information of each of our business segments.

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PRODUCTS AND SERVICES

Brokerage Group

Execution and Clearing. We provide clearing and execution for other broker/dealers (primarily on a fully disclosed basis) including general broker/dealers, bank affiliated firms and firms specializing in high volume trading. In a fully disclosed clearing transaction, the identity of the correspondent’s client is known to us and we physically maintain the client’s account and perform a variety of services as agent for the correspondent. We provide clearing and execution services for 227 correspondents throughout the United States and Europe. Correspondent firms are charged fees based on their use of services according to a clearing schedule.

High-volume trading firms specialize in providing services to those customers who trade actively on a daily basis. As of June 27, 2003, Southwest Securities provided clearing services for 12 high-volume firms. The nature of services provided to the customers of high-volume firms and the internal costs necessary to support them are substantially different from the standard correspondent relationship and, accordingly, fees for services to these correspondents, on a trade basis, are discounted 50-95% from the fees normally charged to other customers. The following table reflects the number of client transactions processed for each of the last three years and the number of correspondents at the end of each year:

In addition to clearing trades, we provide other products and services to our correspondents such as recordkeeping, trade reporting, accounting, general back-office support, securities lending, reorganization and custody of securities. We also attempt to add value to our correspondent relationships by advising the correspondent on communications and networking functions as well as making available to them a variety of non-brokerage products and services on favorable terms.

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

Individual and Institutional Securities Brokerage. As a securities broker, we act as agent in the purchase and sale of securities, options, commodities and futures contracts traded on various securities and commodities exchanges or in the over-the-counter (“OTC”) market. In most cases, we charge commissions to our retail clients, on both exchange and OTC transactions, in accordance with our established commission schedule. In certain instances, varying discounts from the schedule are given, generally based upon the client’s level of business, the trade size and other relevant factors. We discount our commissions substantially on institutional transactions. For certain fee-based accounts, a fee is charged in lieu of standard commissions. In addition, we sell a number of professionally managed mutual funds and maintain dealer-sales agreements with most major distributors of mutual fund shares sold through broker/dealers. Some of our registered representatives maintain licenses to sell certain insurance products. We are registered with the Commodity Futures Trading Commission as a non-guaranteed introducing broker and are a member of the National Futures Association. We are a fully disclosed client of two of the largest futures commodity merchants in the United States.

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At June 27, 2003, Southwest Securities had twelve retail brokerage offices, three located in Dallas and one each in Austin, Georgetown, Longview, Lufkin, Nacogdoches, and San Antonio, Texas; Oklahoma City, Oklahoma; and Albuquerque and Santa Fe, New Mexico. A new branch was opened in Houston, Texas in August 2003. In addition, Southwest Securities has bond brokerage offices in Dallas, Texas, Chicago, Illinois, Ft. Lauderdale, Florida, Newport Beach, California and New York, New York; and institutional sales offices in Dallas and Milwaukee, Wisconsin. Southwest Securities also has trading offices in Dallas and Brighton, Michigan.

Customer Financing. We extend credit directly to our customers, the customers of correspondent firms and the correspondent firms themselves in order to facilitate customer and correspondent securities transactions. This credit, which earns interest income, is known as “margin lending.” Our correspondents indemnify us against margin losses on their customers’ accounts. We also extend credit directly to correspondents to the extent that such firms pledge proprietary assets as collateral. Since we must rely on the guarantees and general credit-worthiness of the correspondents, we may be exposed to significant risk of loss if correspondents are unable to meet their financial commitments should there be a substantial adverse change in the value of margined securities.

In margin transactions, the client pays a portion of the purchase price, and we make a loan to the client for the balance, collateralized by the securities purchased or by other securities owned by the client. We provide financing for margin transactions for our own clients as well as correspondents’ clients. We may extend credit directly to correspondents to the extent the correspondent holds securities positions for their own account. Interest is charged, at a floating rate, to clients on the amount borrowed to finance margin transactions. The rate charged is dependent on the average net debit balance in the client’s accounts, the activity level in the accounts and the applicable cost of funds. The amount of the loan is subject to the margin regulations (“Regulation T”) of the Board of Governors of the Federal Reserve System, NYSE margin requirements, and our internal policies. In most transactions, Regulation T limits the amount loaned to a customer for the purchase of a particular security to 50% of the purchase price. Furthermore, in the event of a decline in the value of the collateral, the NYSE regulates the percentage of client cash or securities that must be on deposit at all times as collateral for the loans.

In permitting clients to purchase on margin, we are subject to the risk of a market decline, which could reduce the value of our collateral below the client’s indebtedness. Agreements with margin account clients permit us to liquidate clients’ securities with or without prior notice in the event of an insufficient amount of margin collateral. Despite those agreements, we 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 trading halt is issued with regard to pledged securities.

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

Securities Lending Activities. We engage in securities lending for our own clients, clients of correspondents and correspondents themselves as well as for other broker/dealers and lending institutions. These 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, we are required to deposit cash or other collateral or to post a letter of credit with the lender, and we generally receive a rebate (based on the amount of cash deposited) or a fee calculated to yield a negotiated rate of return. When lending securities, we receive cash or similar collateral and generally pay interest (based on the amount of cash deposited) to the other party to the transaction. Generally, we earn net interest income based on the spread between the interest rate on cash or similar collateral deposited and the interest rate paid on cash or similar collateral received.

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Securities borrowing and lending transactions are generally executed pursuant to written agreements with counter-parties which require that securities borrowed and loaned be marked-to-market on a daily basis, excess collateral be refunded, and deficit collateral be furnished. Margin adjustments are usually made on a daily basis through the facilities of various clearinghouses. We are a principal in these securities borrowing and lending transactions and are liable for losses in the event of a failure of any other party to honor its contractual obligation. Our management sets credit limits with each counter-party and reviews these limits regularly to monitor the risk level with each counter-party.

The securities lending business is conducted primarily out of Southwest Securities’ New Jersey office using a highly specialized sales force. Competition for these professionals is intense, and there can be no assurance that we will be able to retain these securities lending professionals.

Investment Banking and Underwriting Activities. We earn investment banking revenues by assisting corporate clients in meeting their financial needs and advising them on the most advantageous means of raising capital. We manage or co-manage public offerings of securities or arrange private placements of securities with institutional or individual investors. In addition, we provide other consulting services, including valuations of securities and companies, arranging and evaluating mergers and acquisitions and advising clients with respect to financing plans and related matters.

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

We are also among the leaders in the Southwest in the origination, syndication and distribution of securities of municipalities and political subdivisions. The public finance department provides professional financial advisory and underwriting services to public entities. Southwest Securities maintains public finance branch offices in Austin, Dallas, Houston, Longview and San Antonio, Texas; Newport Beach, California; New York, New York; and Boston, Massachusetts.

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

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

Market Making Activities. Southwest Securities and May Financial are market makers in OTC and exchange-listed equity securities as well as dealers in tax-exempt and governmental fixed income securities. Trading securities in the OTC market involves the purchase of securities from and the sale of securities to our own clients or to other dealers who may be purchasing or selling securities for their own account or acting as agent for their clients. Profits and losses are derived from the spreads between bid and asked prices, as well as market trends for the individual securities during the holding period. At June 27, 2003, Southwest Securities acted as a market maker in 1,100 common stocks of which 658 were exchange-listed stocks. At June 27, 2003, May Financial acted as a market maker in 320 common stocks. Southwest Securities frequently acts as agent in the execution of OTC orders for its clients and, as such, transacts

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these trades with other dealers. When we receive a client order in a security in which we make a market, we may act as principal as long as we match or improve upon the best price in the dealer market, plus or minus a mark-up or mark-down not exceeding the equivalent agency commission charge. Regulations require that client limit orders be satisfied prior to our buying securities into or selling the securities from our own inventory at the same price.

We execute principal transactions to facilitate individual and institutional customer trades and maintain certain inventory positions for our own accounts. These inventories require the commitment of capital and expose us to the risk of a loss if market prices of the securities held in inventory decrease. We have established internal guidelines to limit the size and risk of inventories and management periodically reviews these guidelines.

Research Activities. We have a research department dedicated to the analysis and performance of market/industry conditions and the recommendation of stocks with an emphasis on the Southwest region. Research is a part of the capital markets effort, which works cooperatively to meet the needs of both our investor and issuer clients. At June 27, 2003, we had 7 senior securities analysts publishing research on 75 companies in sectors that include digital/interactive entertainment, specialty retail, natural gas, healthcare services, special situations and enterprise software.

Insurance. Effective April 28, 2003, Southwest Financial Insurance Agency, Inc. and Southwest Insurance Agency, Inc., together with its subsidiary, (Southwest Insurance Agency of Alabama), became consolidated subsidiaries of SWS Group due to our purchase of the outstanding stock of Southwest Financial Insurance Agency, Inc. and Southwest Insurance Agency, Inc. As a result of this transaction, we recognized an extraordinary gain, net of tax, of $445,300. Southwest Financial Insurance Agency, Inc. and Southwest Insurance Agency, Inc., together with its subsidiary hold insurance agency licenses in forty-two states for the purpose of facilitating the sale of insurance and annuities for Southwest Securities and SWS Financial.

Banking Group

The Bank offers services, such as certificates of deposit, checking and savings accounts, through traditional channels, the Internet, and direct offerings to customers of Southwest Securities. The Bank focuses on several sectors of the residential housing market, including interim construction lending and short term funding for mortgage bankers. In addition, the Bank originates commercial loans and purchases loans for investment.

FSB Financial purchases non-prime loans collateralized by liens on automobiles and light trucks. The loans are generally originated by car dealerships and other institutions dealing in such consumer paper. First Savings currently owns approximately 74% of the voting interest in FSB Financial.

FSB Development currently owns a 50% limited partnership interest in Harley Associates, Ltd., a Texas limited partnership (“Harley Associates”). Harley Associates develops single-family residential lots in the Dallas-Fort Worth metropolitan area. The lots are sold to high volume builders whose operating history indicates they will have the ability to complete the planned development. First Savings currently owns 100% of FSB Development.

Asset Management Group

SWS Capital administers the LOGIC program, which is targeted to the needs of cities, counties, schools and other local governments across Texas and conforms to the Interlocal Cooperation Act and the Public Funds Investment Act of the Texas Government Code. This program allows participants to pool their available funds, resulting in increased economies of scale, which allow higher returns while maintaining a high degree of safety and liquidity. At June 27, 2003, the average assets under management for the Asset Management Group were $1,166,000,000.

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Revenues by Source

The following table shows our revenue by source for the last three fiscal years (dollars in thousands):

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COMPETITION

We encounter intense competition in our business, and we compete directly with numerous securities firms and banks, many of which have substantially greater capital and other resources. We also encounter competition from insurance companies and financial institutions in many elements of our business. The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, allows for affiliations among banks, securities firms and insurance companies by means of a financial holding company. In addition, commercial banks have the possibility of engaging in a broad range of non-banking activities through operating subsidiaries. Such activities include all financial activities, including broker/dealer activities, with the exception of insurance underwriting and real estate investment or development.

During the past few years, a number of banks acquired securities firms and, in so doing, gained increased entry into the securities industry. These acquisitions have brought entirely new sources of capital into the securities industry, resulting in more formidable competition.

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

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

REGULATION

The securities industry in the United States is subject to extensive regulation under federal and state laws. The SEC is charged with administration of the federal securities laws. Much of the regulation of broker/dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the NYSE. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) for governing the industry and conduct periodic examinations of member broker/dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they conduct business. Southwest Securities, SWS Financial and Southwest Clearing Corp. (“Southwest Clearing”) are registered in all 50 states. Southwest Securities and Southwest Clearing are also registered in Puerto Rico. May Financial is registered in California, Colorado, Massachusetts, Michigan, Minnesota, New Jersey, South Carolina and Texas.

The regulations to which broker/dealers are subject cover all aspects of the securities business, including sales methods, trade practices among broker/dealers, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules often directly affect the method of operation and profitability of broker/dealers. The SEC and the self-regulatory organizations may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker/dealer, its officers or employees. The principal purpose of regulation and discipline of broker/dealers is the protection of clients and the securities markets rather than protection of creditors and shareholders of broker/dealers. See Note 17 to the Consolidated Financial Statements contained in this Report for further description of certain SEC regulations.

First Savings, as a federal savings bank, is registered with the Office of Thrift Supervision (“OTS”) and is subject to OTS regulation, examination, supervision and reporting requirements. Regulations applicable to the Bank generally relate to lending and investment activities, payment of dividends and maintenance of appropriate levels of capital. Failure to comply with these regulations may be considered an unsafe and unsound practice and may result in the imposition by the OTS of various sanctions. Because

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the Bank’s deposits are insured by the Savings Association Insurance Fund (“SAIF”), the Federal Deposit Insurance Corporation (“FDIC”) also has the authority to conduct special examinations. First Savings is required to file periodic reports with the OTS describing its activities and financial condition. This supervision and regulation is intended primarily for the protection of the Bank’s depositors.

INSURANCE

SIPC provides protection for clients up to $500,000 each with a limitation of $100,000 for claims for cash balances. Southwest Securities purchases insurance which, when combined with the SIPC insurance, provides total coverage in certain circumstances of up to $20 million per client for securities held in clients’ accounts with an $80 million aggregate limit.

The Bank’s deposits are insured by the SAIF, which is administered by the FDIC, up to applicable limits for each depositor.

EMPLOYEES

At June 27, 2003, we employed 941 individuals. Southwest Securities employed 790 of these individuals, 144 of whom were full-time registered representatives. In addition, 407 registered representatives were affiliated as independent contractors.

CUSTOMERS

Through our broker/dealer subsidiaries, we provide full-service securities brokerage services to approximately 32,000 client accounts. Through our securities clearance business, we provide securities services to approximately 257,000 additional client accounts. No single client constitutes a material percentage of our total business.

Through the Bank and its subsidiaries, we provide deposit and loan services to approximately 17,000 customers. No single customer constitutes a material percentage of the Bank’s total business.

Our asset management subsidiary, SWS Capital, provides investment management services to approximately 1,900 accounts representing over 350 cities, counties, schools and other local governments within the State of Texas.

TRADEMARKS

We own various registered trademarks and service marks, including “Investorview,” “My View,” and “Sovereign Securities.” We also own various design marks related to logos for various business segments. We do not consider any of these marks to be materially important to any of our business segments.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table lists our executive officers and their respective ages and positions, followed by a brief description of their business experience over the past five years. Each listed person has been elected to the indicated office by our board of directors.

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Donald W. Hultgren was elected Director and Chief Executive Officer in August 2002. He served as Executive Vice President and Director of Capital Markets from March 2000 to August 2002. From 1989 to 2000, Mr. Hultgren was employed by Raymond James & Associates in various capacities including Managing Director in the Healthcare sector of Corporate Finance and Director of Research. He is a member of the Association of Investment Management and Research and a member of the Advisory Committee for the University of Texas MBA Investment Fund. He also serves as a board member for the American Heart Association, Dallas, Texas Division, and is on the association’s Executive Committee.

William D. Felder was elected President in August 2002. He served as Executive Vice President from December 1995 to August 2002 and prior to that as Senior Vice President from 1993 to 1995. Mr. Felder has been associated with Southwest Securities in various other capacities since 1980, including Director since August 1993 and Senior Vice President in charge of Clearing Services from 1988 to 1998. Mr. Felder is a past Chairman of the District 6 Business Conduct Committee of the NASD and a past member of the Board of Governors of the Chicago Stock Exchange.

Kenneth R. Hanks was elected Treasurer and Chief Financial Officer in August 2002 and has served as Executive Vice President since June 1996. He served as Chief Operating Officer from August 1998 to August 2002. Mr. Hanks was the Chief Financial Officer from June 1996 to August 1998 and has been a Director of Southwest Securities since June 1997. Mr. Hanks served in various executive capacities of Rauscher Pierce Refsnes, Inc. from 1981 to 1996, including Executive Vice President and Chief Financial Officer. He serves as an arbitrator with the NASD and formerly served as a member of the NASD’s District 6 Business Conduct Committee.

Stacy M. Hodges has served as Executive Vice President since February 1999. She served as Treasurer and Chief Financial Officer from August 1998 to August 2002. Ms. Hodges was Controller from September 1994 to August 1998. Ms. Hodges served as Director of Southwest Securities from June 1997 to August 2002 and Chief Financial Officer of Southwest Securities since June 1997. Prior to joining Southwest Securities, Ms. Hodges was a Senior Audit Manager in the Financial Services division of KPMG LLP. Ms. Hodges is a member of the American Institute of Certified Public Accountants and the Texas Society of CPAs.

Daniel R. Leland has served as Executive Vice President since February 1999. He was elected President and Chief Executive Officer of Southwest Securities in August 2002. He served as Executive Vice President of Southwest Securities from July 1995 to August 2002. He has been in charge of the Fixed Income Division since November 1997 and SWS Financial and the Private Client Group since July 2000. Mr. Leland began his career at Barre & Company in June 1983 where he was employed in various capacities in fixed income sales and trading before becoming President of Barre & Company in 1993. Mr. Leland has been an arbitrator for the NASD and is a past Vice Chairman of the District 6 Business Conduct Committee.

Richard H. Litton has served as Executive Vice President and Executive Vice President of Southwest Securities in charge of the Public Finance Division since July 1995. Previously, Mr. Litton was President of a regional investment bank and headed the Municipal Group in the Southwest for Merrill Lynch. Mr. Litton served on various advisory committees for the Texas House of Representatives’ Financial Institutions Committee, is past member and director of the Municipal Advisory Council of Texas and is a past member of the Marketing Committee of the Public Securities Association. He currently represents Southwest Securities on the Bond Market Association’s Legal and Legislative Committee.

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

Paul D. Vinton has served as Executive Vice President since November 1998 and as Senior Vice President of Southwest Securities since June 1995. Mr. Vinton was associated with Stephens Inc. in

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various capacities from 1993 through 1995. Mr. Vinton has been employed within the securities industry since 1972 with various firms dealing primarily in operational, clearance and settlement activities. Mr. Vinton has served on various industry group boards including most recently the Depository Trust Company Settlement Advisory Board.

Richard J. Driscoll was elected Executive Vice President in August 2003. He has served as Chairman of the Board of Directors of First Savings since March 2002. He joined First Savings in 1991 as Chief Executive Officer and President and a member of the Board of Directors. Mr. Driscoll is a Director of the Texas Savings and Community Banker’s Association and serves as a member of Federal Reserve Board Thrift Institutions Advisory Council.

Allen R. Tubb was elected Vice President, General Counsel and Secretary in August of 2002. He joined SWS as Corporate Counsel and Secretary in October 1999. From 1979 to 1999, Mr. Tubb was employed with Oryx Energy Company and its predecessor Sun Exploration and Production Company in various capacities including Chief Counsel, Worldwide Exploration and Production. Mr. Tubb is a member of the Texas Bar Association.

PROPERTIES

Our executive offices and primary operations are located in approximately 188,000 square-feet of leased space in an office building in Dallas, Texas. The lease expires in 2008. Our branch office locations are leased and generally do not exceed 10,000 square feet of space. We conduct our clearing operations primarily at the Dallas headquarters and in our office in New York, and our securities lending activities are primarily conducted from our office in New Jersey.

We have thirteen retail brokerage offices with ten in Texas, one in Oklahoma and two in New Mexico. (The Houston, Texas branch was opened in August of 2003.) In keeping with Management’s goal to become the leading brokerage firm in the Southwest, we plan to expand our offices throughout the region. Currently, new branch offices are planned for Fort Worth and Dallas, Texas.

We have six public finance branch offices, five in Texas and one in California. (Public finance has two additional branches, one in Massachusetts and one in New York for which SWS does not maintain offices.) We have five fixed income branch offices in Illinois, Texas, California, Florida and New York. We have two trading offices in Texas and Michigan and two institutional sales offices in Texas and Wisconsin. We also have a disaster recovery site in Dallas, Texas.

The consolidation of trading operations and the sale of the Mydiscountbroker accounts left us with approximately 47,000 square feet of excess office space with lease terms ending through 2011. Currently, all but approximately 4,000 square feet of the excess space is subject to subleases with terms ending concurrently with the original leases.

First Savings leases its approximately 22,000 square-foot main office located in Arlington, Texas and branch offices in Dallas and Granbury, Texas, and leases separate space in northeast Tarrant County and Dallas, Texas for loan production offices. The Bank owns a drive-in facility located next to the main office and branch offices in Arlington, Texas. Management has planned an addition to the North Arlington, Texas branch in late fall 2003.

Management believes that our present and planned facilities and equipment are adequate for current and planned operations.

LEGAL PROCEEDINGS

Dottie Boykin, Individually and as Next Friend of Vielle Nichole Boykin, a Minor Child v. Westwood Trust (District Court, Alabama).

In connection with the Westwood Group spin-off, we agreed to indemnify the Westwood Group against all past and future liabilities or expenses in excess of $500,000 arising from the Richard A. Boykin Jr. Family Trust (“Boykin Trust”), for which Westwood Trust currently serves as trustee. The Boykin Trust

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is currently in Bankruptcy and is subject to various pending legal actions and judgments. The Bankruptcy petition seeks the liquidation of a block of land, the only asset of the Boykin Trust. We settled litigation with the beneficiaries of the Boykin Trust in May 2002 for $2 million. We believe that the resolution of the remaining issues associated with the Boykin Trust in Bankruptcy will not have a material impact on our consolidated financial statements.

First Savings Bank

During the first quarter of fiscal 2003, First Savings provided $3.4 million ($2.2 million after tax impact on earnings) to establish a reserve for fraudulent mortgages purchased from one New York based mortgage bank. Sixteen loans, aggregating approximately $3.4 million, were sold twice by the mortgage bank. Of these sixteen loans, First Savings has recorded assignments on fifteen. First Savings has verification on thirteen of the fifteen assignments from the County Clerk’s office of the county where the mortgaged property is located; with twelve of the liens indicating First Savings has filed first and one lien indicating First Savings filed second. However, we are not receiving payments on these loans. We are currently evaluating options to recover some of the loss from the underlying property or from other parties. First Savings also filed a claim with its insurance carrier who subsequently rejected the claim. First Savings may decide to pursue the recovery from the carrier through litigation. A court appointed receiver for the New York mortgage bank is investigating the fraud at the mortgage bank including the potential recovery of fraudulently received funds. At this time, the likelihood of recovery from any of these sources cannot be estimated.

NYSE

As a result of an NYSE examination for the period from January 2000 to January 2001, the NYSE’s staff indicated that we may have violated certain of the NYSE’s recordkeeping, continuing education, and floor brokerage rules. We believe our activities in those areas complied in all material respects with the applicable rules and regulations. Nevertheless, in order to resolve this matter expeditiously, we entered into a stipulation of facts and consent to penalty (the “Stipulation”) with respect to this matter without admitting or denying any of the NYSE’s Enforcement Division’s allegations. Under the terms of the Stipulation, we would be required to make a payment of $150,000. The Stipulation is subject to final approval by the NYSE board.

In the general course of our brokerage business and the business of clearing for other brokerage firms, our subsidiaries and we have been named as defendants in various pending lawsuits and arbitration proceedings. These claims allege violation of federal and state securities laws. First Savings is also involved in certain claims and legal actions arising in the ordinary course of business. We believe that resolution of these claims will not result in any material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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PART II

MARKET FOR REGISTRANT’S COMMON EQUITY

AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the NYSE under the symbol “SWS”. At September 18, 2003, there were 136 holders of record of our common stock and in excess of 7,000 beneficial holders of our common stock. The following table sets forth for the periods indicated the high and low market prices for the common stock and the cash dividend declared per common share:

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SELECTED FINANCIAL DATA

The selected financial data presented below for the five years ended June 27, 2003 have been derived from our Consolidated Financial Statements as audited by our independent certified public accountants. The historical financial data are qualified in their entirety by, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information contained in this Report.

The following items, all of which impact the comparability of the data from year-to-year, should be considered (i) the sale of the accounts of Mydiscountbroker in June 2003; (ii) the spin-off of Westwood Holdings Group (“Westwood Group”) in June 2002; (iii) the sale of First Consumer Credit, LLC (“First Consumer”); and (iv) the consolidation into our brokerage operations or discontinuance of the services provided by SWS Technologies Corporation (“SWS Technologies”).

(In thousands, except ratios and per share amounts)

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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

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

Brokerage Group

The U.S. equities markets continued to experience challenging conditions in fiscal 2003 as the equity markets endured a third year in a bear market and the world political scene faced the uncertainty of war in the Middle East. These conditions produced average daily volume on the NYSE of 1.5 billion shares in June 2003 versus 1.6 billion shares in June 2002. The Dow Jones Industrial Average was 9,243.30 at the end of June 2002 versus 8,989.05 at June 27, 2003. The volumes and thus the revenues generated by our clearing business are dependent on active markets. Until the U.S. equity markets show sustained growth, we expect volumes and revenues in the clearing business to remain stagnant or decline. The decline in volumes was most pronounced in our high-volume trading correspondents. We expect this overall trend to continue until the equity markets show consistent growth. At the conclusion of the war in Iraq, volumes in our clearing and retail businesses began to show some recovery. Continued improvement in the equity market is needed to insure that volumes continue to improve.

Additionally, average margin balances reported by NYSE member firms averaged $146 billion in June 2002. The average balance declined to $136 billion for fiscal 2003. We rely on margin lending to our customers to generate revenue. Similar to the NYSE member firm balances, SWS’s margin account balances declined in fiscal 2003. Again, sustained improvement in the market values of publicly traded companies is critical to our ability to grow revenues from margin lending. Stock loan balances are also influenced by these same market conditions. While balances in this business increased in the fourth quarter of fiscal 2003, continued improvement in the equity markets is needed to facilitate additional growth in these balances.

When interest rates begin to rise and equity markets strengthen, fixed income results will likely decline. Additionally, municipalities, whose volume of financings has been at record levels for the past year could be under pressure with rising interest rates and decreasing tax revenues. In July 2003, the fixed income markets were subject to a volatile interest rate environment. This volatility could lead to reduced revenues and profits from the sales and trading of fixed income products. Unstable interest rate environments also often delay offerings of debt by municipalities impacting the profitability of this business. The fixed income business accounted for 32% of our operating revenue in fiscal 2003.

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

To realize management’s goal to become a nationally recognized full-service regional brokerage firm it is essential to grow the retail brokerage distribution network. This will be accomplished through the hiring of additional registered representatives and the opening of new branch office locations in the Southwest. As a result of this effort, we increased the net number of registered representatives by 19 in fiscal year 2003, opening new branches in Oklahoma City, Oklahoma and Austin, Texas. Expansion of this network will require outlay of capital that may not be immediately offset by revenues, which will negatively

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impact results of operations until new locations become positive contributors. Breakeven points for new office locations generally take at least 12 months to achieve, depending on the successful recruiting of registered representatives. We expect to open two additional offices in fiscal 2004.

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

Management developed its two core goals after reviewing all areas of our operations in the first six months of calendar 2002. This review resulted in $6.3 million in charges in the fourth quarter of fiscal 2002 related primarily to fixed asset and lease impairments from the consolidation of geographic locations. In the fourth quarter of 2003, we recorded an additional $1 million charge for lease impairments. Additionally, we completed the sale of the retail on-line accounts of Mydiscountbroker, our internet brokerage firm. This sale resulted in a $4.2 million gain, $2.7 million after tax, and eliminated one non-core area of our operations. As management continues to refine our focus, additional impairments, acquisitions or dispositions could be warranted.

While we completed our conversion to a new electronic brokerage operating system in August of 2002, ongoing efforts to upgrade and enhance the core system will result in continued investment in the technology area. Management continues to review equipment and communications in an effort to offset some of the costs of software enhancement. Our system was developed by Comprehensive Software Systems, Ltd. (“CSS”), an entity that is backed by a consortium of brokerage firms. The development of the system required more time and capital from these brokerage firms than was originally anticipated. While the system is fully functional at SWS, other consortium members have yet to completely install the system. Decisions by these other firms will impact CSS’s ability to continue to deliver new modules and enhancements and could impact the cost of technology to us. See Note 11 to the Consolidated Financial Statements contained in this Report for further information.

Regulatory Environment

The brokerage group is subject to regulation by the SEC, the NYSE, the NASD and various state securities regulators. The events surrounding corporate accounting and other activities and the enactment of the Sarbanes-Oxley Act have caused the various regulatory bodies to increase their surveillance of public companies in general as well as brokerage firms. New regulations and new interpretation and enforcement of existing regulations are becoming more frequent. The recent Global Settlement of Conflicts of Interest between Research and Investment Banking among securities regulators and several securities firms regarding analysts reports and conflicts of interests has resulted in changes in the way brokerage firms conduct their business. More recently, investigations by the SEC and state regulators into mutual fund trading practices and adherence to breakpoint schedules are another indication of the regulators’ heightened sense of awareness in enforcing securities laws. While we are not party to any investigations relating to these businesses at this time, we conduct research, investment banking and mutual fund trading. This regulatory environment could result in increased costs of compliance with rules and regulations, increased exposure to regulatory actions and could potentially lead to the elimination of, or material changes to, certain lines of business.

Banking Group

A substantial portion of the Bank’s revenue is generated from the single-family construction loan and single-family mortgage loan markets. While the Bank’s purchased mortgage loan program is nationwide, the majority of the Bank’s other lending is concentrated in the North Texas geographic region. The housing market in North Texas has slowed and additional deterioration in the housing market could impede the Bank’s ability to maintain current levels of loans.

The purchased mortgage loan program operated at record levels during 2003 due to the high level of mortgage refinancing transactions driven by lower mortgage interest rates. Mortgage interest rates began to rise in July 2003 and volumes in this business have begun to show a decline. Additionally, during fiscal 2003, management reduced credit lines and eliminated certain customers in this line of business to reflect

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more stringent internal control guidelines. Lastly, due to the fraud incident in this line of business (see “Business-Legal Proceedings-First Savings Bank”), First Savings discontinued the purchase mortgage loan program in areas where loan closings are not regularly conducted at title companies. As a result of these factors, volumes in purchased mortgages may decline by as much as 30-50% during fiscal 2004.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results may differ from these estimates under different assumptions or conditions. The following policies involve a higher degree of judgment than do our other significant accounting policies detailed in Note 1 to the Consolidated Financial Statements contained in this Report.

Contingencies

Accounting for contingencies requires the use of judgment and estimates in assessing the magnitude of the exposure and the likely outcome of the situation. In many cases, the outcome will be determined by third parties, which may include governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent management’s best estimates of the current status of such matters and their potential outcome based on a review of the facts and, when warranted, in consultation with outside legal counsel. Management evaluates and revises its estimates on a quarterly basis. Adverse legal or arbitration judgments, inability to collect receivables, sudden declines in the market value of securities held in margin accounts or other actions could result in material changes to the estimates recorded in these financial statements. Resolution of these matters in amounts different from what has been accrued in the consolidated financial statements could materially impact our financial position and results of operations.

Investments

We generally classify our investment in debt instruments (including corporate, government and municipal bonds), mortgage-backed securities and marketable equity securities as either available-for-sale or trading. We have not classified any investments as held-to-maturity. The fair value of these securities is determined by obtaining quoted market prices. Unrealized gains and losses on available-for-sale securities are included in other comprehensive income and are excluded from earnings. Realized gains and losses and declines in fair value judged to be other than temporary are included in earnings.

We also hold strategic investments in several privately held companies, which are recorded at cost, or on the equity method of accounting, on our consolidated statements of financial condition. Generally accepted accounting principles require that these holdings be evaluated for declines in market value below cost that may be other than temporary. Determination of the market value for these privately held companies requires the use of judgment. General market conditions, as well as company-specific events, could indicate a decline in value. The consolidated financial statements could be materially impacted should a write-down from cost be necessitated. See “-Results of Operations-Events and Transactions-Investment in Comprehensive Software Systems, Ltd.” discussion below.

Long-Lived Assets and Goodwill

Our long-lived assets are subject to impairment testing if specific events warrant the review. Our goodwill is subject to annual impairment testing. The impairment tests are based on determining the fair value of the specified reporting units. Judgment is required in assessing the effects of external factors, including market conditions and projecting future operating results. These judgments and assumptions could materially change the value of the specified reporting units and, therefore, could materially impact

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our consolidated financial statements. If actual external conditions and future operating results differ from management judgments, impairment charges may be necessary to reduce the carrying value of these assets to the appropriate fair value. See “-Results of Operations-Events and Transactions-Impairment of Long-Lived Assets” and “-Results of Operations-Events and Transactions-Investment in Comprehensive Software Systems, Ltd.” discussion below.

Allowance for Probable Loan Losses

We provide an allowance for probable loan losses, which is increased by charges to income and decreased by charge-offs, net of recoveries. Management regularly reviews this allowance based on past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. Should actual losses differ from management’s estimates, the consolidated financial statements could be materially impacted.

RESULTS OF OPERATIONS

Net income (loss) for the fiscal years ended June 27, 2003, June 28, 2002 and June 29, 2001 totaled $2,868,000, $(7,184,000) and $18,403,000, respectively, representing an increase of $10,052,000, or 140% from fiscal 2002 to 2003 and a decrease of $25,587,000, or 139% from fiscal 2001 to 2002. Fiscal years 2003, 2002, and 2001 contained 251, 247, and 251 trading days, respectively.

Events and Transactions

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

Mydiscountbroker. On June 13, 2003, we sold the accounts of Mydiscountbroker to Ameritrade. The sales price of $4,200,000 (generating an after tax gain of $2,730,000) was based on the actual accounts transferred at closing, approximately 16,500 accounts.

Mortgage Loan Charge. During the first quarter of fiscal 2003, First Savings provided $3.4 million ($2.2 million after tax impact on earnings) to establish a reserve for fraudulent mortgages purchased from one New York based mortgage bank. Sixteen loans, aggregating approximately $3.4 million, were sold twice by the mortgage bank. Of these sixteen loans, First Savings has recorded assignments on fifteen. First Savings has verification on thirteen of the fifteen assignments from the County Clerk’s office of the county where the mortgaged property is located, with twelve of the liens indicating First Savings has filed first and one lien indicating First Savings filed second. However, we are not receiving payments on these loans. We are currently evaluating options to recover some of the loss from the underlying property or from other parties. First Savings also filed a claim with its insurance carrier who subsequently rejected the claim. First Savings may decide to pursue the recovery from the carrier through litigation. A court appointed receiver for the New York mortgage bank is investigating the fraud at the mortgage bank including the potential recovery of fraudulently received funds. At this time, the likelihood of recovery from any of these sources cannot be estimated.

Investment in Comprehensive Software Systems, Ltd. We are a part owner of CSS, a software development company formed in 1993 to develop a new brokerage front-and back-office system. We initially acquired a 7.96% interest in CSS and accounted for the investment on the cost basis. Through subsequent investments our ownership in CSS increased to 25.08% in fiscal 2002. Consequently, we implemented the equity method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investment in Common Stock,” with respect to our investment in CSS. As required by APB Opinion No. 18, we restated our fiscal 2001 financial statements to record our share of the undistributed loss from CSS’s operations, as well as amortization expense on the portion of the investment designated as goodwill. We recorded our portion of the loss from CSS’s operations of $2.9 million in fiscal 2002 and $1.1 million in fiscal 2001. We recorded amortization expense on the CSS goodwill of $370,000 in fiscal 2002 and $302,000 in fiscal 2001. At June 28, 2002, we determined that the investment in CSS and its related goodwill was fully impaired based on an analysis of the projected cash flow from the

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investment. Therefore, we wrote off the investment in CSS of $3,084,000 and the related goodwill of $933,000 in June 2002. We made no additional equity investments in CSS during fiscal 2003.

The continued enhancement of our brokerage system is important to the growth of our clearing and retail brokerage business. To ensure the continued enhancement of the systems developed by CSS, we entered into a loan agreement on December 6, 2002 with CSS that calls for the total advance to CSS of $3,250,000 in quarterly installments of $812,500 beginning January 6, 2003. Because of this commitment, we began recognizing our share of the undistributed losses of CSS in January of 2003. During fiscal 2003, our percentage interest in CSS’s losses was $2,076,000. Our percentage of losses was greater than the $1,625,000 loaned during the year by $451,000. As a result, there is no recorded equity investment or loan receivable from CSS at June 27, 2003. In June of 2003, we amended the loan agreement to provide that our two remaining quarterly installments would be increased to $937,500. All other terms of the agreement were unchanged.

Impairment of Long-Lived Assets. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” we recorded $6.3 million in fiscal 2002 in charges related to leasehold and fixed asset impairments resulting from consolidating and reorganizing certain business units. The impairment of fixed assets totaled $3.4 million, and represented 100% of the net book value of the fixed assets at the time of the charge. Leasehold impairments totaled $2.9 million as determined by the present value of future cash flows on the impaired leases offset by estimated sublease income. These charges are included in occupancy, equipment and computer service costs on the consolidated statements of income (loss) and comprehensive income (loss). In fiscal 2003, we recorded additional leasehold and fixed asset impairment charges of $1.4 million. Of the charges recorded in fiscal 2003, $891,000 relates to the space formerly occupied by Mydiscountbroker, $305,000 relates to space formerly occupied by a trading operation and $125,000 relates to space formerly occupied by a private client group office. As of September 2003, we have entered into sublease agreements for all but 4,000 square feet of these leased locations.

Westwood Group Spin-Off. On December 12, 2001, we formed Westwood Group to be a holding company for two of the businesses that substantially comprised our asset management segment. Prior to December 14, 2001, the Westwood Group had no assets or operations. On December 14, 2001, we contributed all of the issued and outstanding common stock of two wholly owned subsidiaries, Westwood Management and Westwood Trust to the Westwood Group and announced our intention to spin-off the Westwood Group to our stockholders. For financial statement purposes, the Westwood Group accounted for the contribution of Westwood Management and Westwood Trust to the Westwood Group as a reorganization of entities under common control at historical cost.

Also on December 14, 2001, we sold 1,065 shares of the Westwood Group’s common stock, constituting 19.8% of the Westwood Group’s outstanding common stock, to five of the Westwood Group’s executive officers for a cash consideration of $4,093,000, a price premised upon an understanding reached in October 2001 that we would sell the shares of Westwood Group common stock based on their value at September 30, 2001, after applying appropriate valuation discounts. The shares sold to management were not distributed in the spin-off. We recorded the difference between the book value of the minority interest we sold and the purchase price was recorded as an increase of $518,000 to additional paid-in capital.

To finance the purchase, the Westwood Group loaned its executive officers $4,093,000 on a full-recourse basis, evidenced by notes secured by the stock, payable in nine years bearing interest at 3.93%. Because the notes were receivables in connection with the sale of the Westwood Group’s common stock, they were recorded at their fair value of $3,536,000 as an offset to stockholders’ equity. The difference between the face amount of the notes and their fair value is due to the difference between the stated interest rate and an estimated market interest rate of 6.0%. The note receivable was distributed to stockholders as a part of the spin-off transaction and, accordingly, is not included in our consolidated statements of stockholders’ equity.

The difference between the fair value for financial reporting purposes of the stock on December 14, 2001, $7,512,000, and the fair value of the note, $3,536,000, was recorded as a compensation charge of $3,976,000. The difference between the value of the stock, $7,512,000, and the cash consideration paid of $4,093,000, is an expense incurred by us for the Westwood Group and is reflected as a compensation expense with the offset as a contribution to the Westwood Group’s additional paid-in capital. On a

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consolidated basis, 80.18% of this charge, or $2,741,000, is reflected in our stockholders’ equity as additional paid-in capital. The remainder of the equity-based compensation expense is the difference between the face and fair value of the notes, $557,000.

The difference between the price paid for the stock by the executives and the fair value of the stock for financial reporting purposes on December 14, 2001, is attributable to changes in assets under management and the common stock prices of comparable public companies between September 30, 2001 and December 14, 2001. The amount of assets under management, which is a factor in determining the Westwood Group’s revenues, and the common stock prices of comparable public companies, are significant considerations in estimating the Westwood Group’s value. In addition, the $4,093,000 valuation included a 35% discount for lack of marketability. For financial accounting purposes, no discount for lack of marketability was recorded, which accounts for $2,204,000 of the difference between $7,512,000 and $4,093,000.

Record date for the spin-off was June 17, 2002, with a distribution date of June 28, 2002. One share of Westwood Group stock was distributed to SWS’s stockholders for every four shares of SWS’s stock owned as of the close of business on the record date. Because the spin-off occurred on June 28, 2002, Westwood Group’s statement of financial condition is not included in the consolidated statement of financial condition as of that date; however, our share of Westwood Group’s operations is included in the consolidated statements of income (loss) and comprehensive income (loss) for fiscal 2002. During fiscal 2002, the Westwood Group generated $20,575,000 in revenue and $648,000 in net income. As of the date of the spin-off, the Westwood Group held $20,976,000 in total assets. For a detailed description of the financial condition and results of operations of the Westwood Group, see Note 2 to the Consolidated Financial Statements contained in this Report.

SFAS No. 133 and Sales of Knight Stock. The adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, in the first quarter of fiscal 2001 created a non-cash earnings impact on our financial statements in fiscal years 2003, 2002 and 2001. SFAS No. 133 is applicable to our 5% Exchangeable Subordinated Notes (“Notes”), issued in the form of DARTS^SM (or, “Derivative Adjustable Ratio Securities^SM”). The DARTS contain an equity-based derivative designed to hedge changes in fair value of our investment in Knight Trading Group, Inc. (“Knight”) common stock. At our option, the principal of the Notes can be paid in shares of Knight at maturity or in cash. The embedded derivative has been designated as a fair value hedge of our investment in Knight shares.

SFAS No. 133 requires fair value recognition of the DARTS’ embedded derivative in the consolidated statements of financial condition. Changes in the fair value of the embedded derivative are required to be recognized in earnings, along with the change in fair value of the Knight shares. Under SFAS No. 133, SWS recognized a net transition loss in the first quarter of fiscal 2001, which included gains on the change in the value of the embedded derivative, net of losses on the change in value of the corresponding Knight common stock reclassified from other comprehensive income (loss). The net transition loss represents the differences in the time value of money related to the embedded derivative.

For fiscal year ended June 27, 2003, the impact on the consolidated statements of income (loss) and comprehensive income (loss), representing the change in the time value of money of the embedded derivative was a loss of $21,000. For the comparable periods ended June 28, 2002 and June 29, 2001, SWS recognized losses of $253,000 and $2,199,000, respectively. Under SFAS No. 133, the related change in the time value of money in the embedded derivative and the changes in the fair value of the embedded derivative, along with the change in fair value of the hedged Knight shares, is calculated on a quarterly basis and recognized in the consolidated statements of income (loss) and comprehensive income (loss) until such time as the fair value hedge ceases to exist.

In December 2000, we repurchased 640,782, or 63%, of our 1,014,332 outstanding DARTS at a cost of approximately $17 million and recorded no material gain or loss on the repurchase. A like number of Knight shares were released from the hedging provisions of SFAS No. 133. Upon final disposition of these previously hedged shares of Knight stock, we recognized a non-cash gain of approximately $23.50 per share, equal to the decrease in the value of Knight stock from the hedging date (June 16, 1999), to the termination date of hedge accounting for these shares (December 20, 2000).

There were no sales of Knight stock in the fiscal year ended June 27, 2003.

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For the fiscal year ended June 28, 2002, we sold 532,634 shares of Knight with cash proceeds from the sales totaling $5,063,000. Realized cash gains on these sales totaled $4,994,000 for the fiscal year ended June 28, 2002. As all of the shares sold in fiscal 2002 were previously hedged stock under SFAS No. 133, we recorded a $19,257,000 non-cash gain on sale of stock in net gains from principal transactions in the accompanying consolidated statements of income (loss) and comprehensive income (loss). Therefore, total gains related to the sales of Knight common stock were $24,251,000 during fiscal 2002.

In fiscal 2001, we sold 646,292 shares of Knight with proceeds from the sales totaling $11,488,000, and realized cash gains on these sales totaling $11,405,000. Of the shares sold in fiscal 2001, 108,148 shares were previously hedged stock, therefore, a $4,075,000 non-cash gain on sale of stock was recorded in net gains from principal transactions in the accompanying consolidated statements of income (loss) and comprehensive income (loss). Therefore, total gains related to the sales of Knight common stock were $15,480,000 during fiscal 2001.

Of the Knight shares sold in fiscal 2002, 206,634 Knight shares were sold at a gain of $1,304,000 in order to reduce our position and relative risk in Knight. The remaining shares sold during fiscal 2002 were sold to fund the advertising commitment of Mydiscountbroker, our on-line brokerage subsidiary. All shares sold in fiscal 2001 were sold to fund Mydiscountbroker’s advertising commitments. Knight sales benefiting Mydiscountbroker are discussed below in “—Advertising and Promotional.”

At June 27, 2003 and June 28, 2002, we held 373,550 shares of Knight common stock, respectively, and had 373,550 DARTS outstanding as of both dates.

The DARTS mature on June 30, 2004, fiscal 2005. At that time, we may choose to deliver our remaining shares of Knight stock in satisfaction of our obligation. Extinguishment of this obligation will result in a non-cash gain equal to the difference in the fair value of the Knight stock at the hedging date and the fair value of the Knight stock at the maturity date of the DARTS. As of June 27, 2003, this gain would be approximately $23,000,000.

Sale of First Consumer Credit. In October 2001, the Bank sold its interest in its minority-owned subsidiary, First Consumer, receiving $1,050,000 and approximately 366,000 common shares of U.S. Home Systems, Inc. (“USHS”), a company publicly traded on NASDAQ. The shares of USHS were paid to us as a dividend and were recorded at fair market value. First Savings recorded a gain of approximately $1,163,000 on the sale of First Consumer. Under the terms of the sales agreement, an additional 91,000 shares of USHS stock was held in escrow, issuable in October 2003, provided no material contingencies related to the operations of First Consumer were discovered. As of the date of this report, we have not been notified of any contingencies that would prevent the issuance of these shares. As of September 2, 2003, USHS had a market price per share of $10.40.

Southwest Clearing Corp. On October 2, 2001, a bankruptcy court awarded us the accounts of a Midwest NASD broker/dealer. The SIPC assumed responsibility for the accounts when the Midwest broker/dealer reported that it was in violation of minimum capital requirements and its accounts were transferred to our wholly-owned subsidiary, Southwest Clearing, in October 2001. In April 2002, all remaining customer accounts were transferred to Southwest Securities from Southwest Clearing.. Southwest Clearing is currently an inactive broker/dealer.

Analysis of Operations

Our pretax income was $5,015,000 and $34,962,000, in fiscal 2003 and 2001, respectively versus pretax loss of $(7,385,000) in fiscal 2002. The following is a summary of year-to-year increases (decreases) in categories of net revenues and operating expenses (dollars in thousands):

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Net Revenues declined for fiscal year 2003 by $42.8 million. Of the total change, the spin-off of Westwood Group represents $20.6 million. In addition, we had $24.3 million of gains on the sale of Knight stock in fiscal 2002.

For fiscal year 2003, operating expenses declined $55.1 million. The spin-off of Westwood Group accounted for $17.3 million of the decrease. An additional $10.9 million of the savings in operating expenses relates to the clearing business acquired in October 2001 through a SIPC liquidation, discussed above. That business was operated on a separate system from the rest of our operations until April 2002. Upon completion of the conversion to our internal system, the costs for personnel and systems relating to that business were eliminated. Additionally, in fiscal 2002, we recorded $6.3 million in charges related to leasehold and fixed asset impairments resulting from consolidating and reorganizing certain business units. Lastly, in fiscal 2002, we recorded impairment charges related to our investment in CSS of $4.0 million.

Net Revenues from Clearing Operations. Net revenues from clearing decreased $11.8 million, or 38%, from fiscal 2002 to 2003 as a result of reduced transaction volumes. Total transactions processed in fiscal 2003 decreased 44% to approximately 29.3 million from approximately 52.3 million in the prior year. The decline in transactions processed was most pronounced in the company’s high volume trading correspondents. Revenue per transaction increased over the prior year as lower volumes led to reduced discounts for clearing customers. Revenue per transaction was $0.66 in fiscal 2003 versus $0.59 in fiscal 2002.

Net revenues from clearing decreased $18,961,000, or 38%, from fiscal 2001 to 2002. Total transactions processed in fiscal 2002 decreased 15% to approximately 52.3 million from approximately 61.3 million in the prior year. A substantial portion of transactions processed is related to high volume trading correspondents. These customers use a relatively low level of clearing services and, accordingly, are charged substantially discounted clearing fees from our standard clearing schedule. Increased margin pressure impacted net clearing revenues for the fiscal year ended June 28, 2002 as the average revenue per ticket decreased from $0.82 in fiscal 2001 to $0.59 in fiscal 2002.

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Southwest Securities signed clearing agreements with 44 correspondents through the SIPC liquidation. On April 8, 2002, all of the correspondent accounts, which represented $12 billion in assets, were converted to Southwest Securities’ system.

Commissions. Commission revenue increased $8.3 million for fiscal 2003 versus 2002, an increase of 11%. Increases in fixed income commissions due to a strong bond market, as well as 33% growth in institutional equity sales, drove the improvement. These increases were offset by decreased commissions from SWS Financial, the independent contractor network, and reduced commissions in the portfolio trading area.

The increase in commissions, despite fewer trading days in fiscal 2002 compared with fiscal 2001, is primarily attributable to results from the fixed income, institutional sales and portfolio trading departments, which were offset by decreased commissions from SWS Financial.

Commission revenue by type of representative follows for the fiscal years ended 2003, 2002 and 2001 (dollars in thousands):

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

The components of interest earnings are as follows for the fiscal years ended 2003, 2002 and 2001 (dollars in thousands):

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Index to Financial Statements

Brokerage Group. For the year ended June 27, 2003, net interest income from the Brokerage Group accounted for approximately 11% of our net revenue versus 13% in fiscal 2002 and 18% in fiscal 2001. Average balances of interest-earning assets and interest-bearing liabilities are as follows (in thousands):

Interest revenue from customer margin balances and interest expense from customer funds on deposit decreased due to lower interest rates and reduced balances in fiscal 2003 over fiscal 2002. Interest revenue on assets segregated for regulatory purposes also decreased due to lower interest rates. The average rate earned on these assets was 1.3% in fiscal 2003 versus 2.2% in fiscal 2002. Net interest revenue generated from securities lending activities has increased slightly from fiscal 2002 to fiscal 2003 due to increased balances.

Interest revenue from customer margin balances and interest expense from customer funds on deposit decreased due to falling interest rates in fiscal 2002. However, net interest revenue from margin and credit balances in fiscal 2002 increased to $15,168,000 from $12,321,000 in fiscal 2001, due to a slightly higher interest spread in fiscal 2002. Rates on customer margin balances and funds on deposit are influenced by changes in leading market interest rates and by competitive factors. Interest revenue on assets segregated for regulatory purposes decreased due to falling interest rates during fiscal 2002. The average rate earned on assets segregated for regulatory purposes was 2.2% in fiscal 2002 versus 5.4% in fiscal 2001.

Net interest revenue generated from securities lending activities decreased in fiscal 2002 versus 2001 as did average balances borrowed and loaned. Additionally, spreads on securities lending transactions narrowed as interest rates fell.

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Index to Financial Statements

Banking Group. Net interest revenue generated by First Savings accounted for approximately 15% of net revenues in 2003, 9% in 2002 and 8% in 2001. At the Bank, changes in net interest revenue are generally attributable to the timing of loan payoffs and volume.

The following table sets forth an analysis of the Bank’s net interest income by each major category of interest-earning assets and interest-bearing liabilities for fiscal 2003, 2002 and 2001 (dollars in thousands):