SECURITIES AND
EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 
 R ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 For the
fiscal year ended December 31, 2007
 
 OR
 
 £ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 For the
transition period from___________ to___________
 Commission
File No. 000-29235
 
 TEJAS INCORPORATED
 (Exact
Name of Registrant as Specified in its Charter)
 
 DELAWARE
              
              13-3577716(State
      or other jurisdiction of incorporation)
              
              (IRS
      Employer Identification No.)
 
 8226 Bee
Caves Road, Austin, Texas 78746
 (Address
of Principal Executive Offices)   (Zip Code)
 
 Registrant’s
telephone number, including area code (512) 306-8222
 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 $0.001 per share
 (Title of
Class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £No R
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes £No R
 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 and (2) has been subject to such filing
requirements for the past 90 days. Yes RNo £
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (check one):
 Large
      accelerated filer £
              Accelerated
      filer £
              Non-accelerated
      filer R
              Smaller
      reporting company £
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £No R
 The
aggregate market value of common stock held by non-affiliates as of June 30,
2007 was $9,343,907 using a market price of $3.30 as quoted on the
over-the-counter bulletin board as of the close of business on that
date.  As of February 29, 2008 there were 4,494,115 shares of the
Registrant’s common stock, $0.001 par value, outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Selected
portions of the Registrant’s definitive proxy statement for the 2008 annual
meeting of stockholders are incorporated by reference into Part III of the Form
10-K.
 
 TABLE OF CONTENTS
  PART
      I
              
              PageItem
      1.
              
              Business
              
              3Item
      1A.
              
              Risk Factors
              
              16Item
      1B.
              
              Unresolved Staff Comments
              
              16Item
      2.
              
              Properties
              
              16Item
      3.
              
              Legal Proceedings
              
              17Item
      4.
              
              Submission of Matters to a Vote of Security
      Holders
              
              17PART
      IIItem
      5.
              
              Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              
              17Item
      6.
              
              Selected Financial Data
              
              20Item
      7.
              
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              
              21Item
      7A.
              
              Quantitative and Qualitative Disclosures about Market
      Risk
              
              29Item
      8.
              
              Financial Statements and Supplementary
    Data
              
              30Item
      9.
              
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              
              30Item
      9A.
              
              Controls and Procedures
              
              30Item
      9B.
              
              Other Information
              
              30PART
      IIIItem
      10.
              
              Directors and Executive Officers of the
      Registrant
              
              30Item
      11.
              
              Executive Compensation
              
              30Item
      12.
              
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              
              30Item
      13.
              
              Certain Relationships and Related
      Transactions
              
              30Item
      14.
              
              Principal Accountant Fees and Services
              
              31PART
      IVItem
      15.
              
              Exhibits and Financial Statement
    Schedules
              
              31
 
 Subsidiaries of the Registrant
 Consent of Independent Registered Public Accounting
Firm
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section
906
  2
 Table of Contents
  PART
I
 
 ITEM1. BUSINESS
 
 GENERAL
 
 We are a
holding company whose primary operating subsidiary is Tejas Securities Group,
Inc., a Texas corporation. We were incorporated in New York on July 18, 1990,
and made an initial public offering in November 1991. We were acquired by Tejas
Securities in a reverse merger effected on August 27, 1999. On October 3, 2000,
we changed our state of incorporation to Delaware. Our primary office is located
in Austin, Texas.
 
 We are a
financial services holding company that focuses on the following:
 
 •
              proprietary
      research on distressed debt and special situation
    securities;
 
 •
              trading
      and other brokerage services to value-based institutional and retail
      investors active in fixed income and equity instruments;
    and
 
 •
              corporate
      finance and strategic advisory services to middle-market companies within
      our target industries.
 
 A key
component of our brokerage business is our research coverage. Currently, our
research department consists of analysts with expertise in equity, distressed
debt and special situation securities. The analyst group has a background in
analyzing many industries, but primarily focuses on wireless and wire-line
telecommunications, cable, satellite, transportation, energy, alternative
energy, and municipal securities. We believe that the rapid changes with respect
to distressed debt and special situation securities in several of these sectors
provide excellent investment opportunities that are overlooked or misunderstood
by traditional Wall Street brokerage firms and are not a focus of many existing
and emerging boutique investment banks. We believe our clients appreciate our
research and choose to do business with us because of this added
value.  While our clients do appreciate our research, the regulatory
environment has increased the costs associated with publishing industry related
research reports.  As such, we anticipate that the amount of research
coverage will decline in the upcoming year.
 
 We commit
extensive time and effort to performing due diligence and understanding the
fundamentals of the businesses and industries under coverage. We believe our
research performance is driven by understanding the complexities of particular
events such as bankruptcy proceedings and changes in the regulatory environment.
Our research recommendations are typically long term in nature due to the
complexities of the bankruptcy and restructuring process of distressed and
special situation companies. We cover approximately 60 companies and continue to
closely monitor other potential research issues. Notable companies that we have
covered include Nextwave Telecom, Enron, RCN Communications, Mirant Corp.,
Motient Corp., Charter Communications, MCI WorldCom, Delphi Corp., Calpine
Corp., Refco Inc.,  and United Airlines.
 
 We have
increased our business activities by:
 
 •
              recruiting
      experienced industry professionals with established client and industry
      relationships typically from well-known industry
    competitors;
 
 •
              increasing
      the number of companies under coverage by our research
      analysts;
 
 •
              increasing
      and expanding our participation in investment banking
      transactions;
 
 •
              expanding
      the number and enhancing the penetration of institutional investors to
      which we market our investment research, sales and trading products and
      services; and
 
 •
              increasing
      the number of securities in which we make an active trading
      market.
 
 We are
devoted to maintaining an entrepreneurial culture, characterized by experienced
professionals, a focus on maximizing our clients’ returns, and broad-based
employee ownership. Our employees currently own a large portion of our common
stock, and we anticipate that they will continue to maintain a substantial
ownership position in our equity.
  3
 Table of Contents
  We
conduct our business through two operating segments: our full service brokerage
segment and our investment banking segment. Our brokerage segment, which
includes all trading for our clients and for our own proprietary account as well
as our inventory positions and market making activities, is categorized as a
separate business segment from investment banking because these aforementioned
activities are all interrelated and service a different client base. Investment
banking requires a different skill set and knowledge base and engagements are
with the issuers, not the investors. Each segment reports to a different
individual on the management team in order to maintain the necessary regulatory
separation.
 
 Brokerage
Services
 
 We
provide brokerage services to approximately 500 institutional clients and a
network of retail clients. We offer clients the ability to buy and sell fixed
income products, equity securities, security options, mutual funds and other
investment securities. The fixed income products that we sell include distressed
corporate bonds, bank notes issued by distressed companies, mortgage-backed
derivative products, municipal bonds, and government and government-backed
securities. Through our Austin operations, we are a market maker for
approximately 45 public companies whose stocks are traded on the NASDAQ Stock
Market. We are also a dealer in New York Stock Exchange listed securities and
other non-listed securities.
 
 Investment
Banking
 
 In 2004,
we began to focus more attention on our investment banking efforts, particularly
in assisting public companies raise capital. Through this renewed focus, we
acted as placement agent for seven private investment in public equity, or PIPE,
transactions, and one exit convertible bond financing during 2004. These
transactions raised approximately $401 million, which included one of the
largest all equity domestic PIPE transactions in 2004. In 2005, we raised
approximately $440 million, which included one of the largest PIPE transactions
in 2005.  In 2006, we completed three private placements in private
equity, co-managed two registered public offerings raising in excess of $400
million, and completed two PIPE transactions.  In mid 2006, we
increased our investment banking staff to help facilitate the growth of that
segment.  In 2007, we acted as placement agent for seven private
placements, three of which were PIPE transactions.  In connection with
one of the PIPE transactions, we also negotiated an exchange of one debt
instrument for another which facilitated the subsequent raise.  These
transactions raised approximately $52 million.
 
 Recent
Developments
 
 None.
 
 Industry
Overview
 
 In the
last decade, the U.S. investment banking industry has been characterized and
influenced by the following trends:
 
 •
              continued
      industry consolidation, particularly involving smaller regional investment
      banks that primarily provided investment banking and brokerage services to
      middle-market companies and their institutional
  investors;
 
 •
              the
      tendency for global competitors and acquired firms, once part of larger
      organizations, to focus on larger market capitalization companies and
      larger transactions; and
 
 •
              the
      emergence of smaller boutique investment banking firms focused primarily
      on growth industries, particularly technology and
    healthcare.
 
 In recent
years there have been a number of acquisitions by larger financial services
institutions of U.S. brokerage and investment banking firms that offer similar
products and services to those that we provide. These larger financial
institutions have generally allocated capital and resources toward larger market
capitalization companies and transactions. This shift of focus away from smaller
market capitalization companies has led to a decline in service to these
companies, including investment banking and research coverage, and as a result
such companies have reduced access to capital.
 
 Additionally,
because the United States securities industry has also been subjected to
increased regulation and governmental scrutiny, including certain mandated
changes, many larger firms have restructured their research departments and
reduced coverage and market making activities for companies whose market
capitalization is below certain thresholds. Research and capital markets
resources previously dedicated to smaller market capitalization companies were
either reassigned to larger companies or eliminated. These circumstances have
contributed to both companies in, and investors focused on, the growth and
middle-market sectors seeking the services of boutique investment banking
professionals who have a high degree of applicable industry
knowledge.
  4
 Table of Contents
  To
facilitate access to capital markets and to industry and company specific
research, smaller boutique financial services firms have emerged to offer
investment banking and research support to small- and middle-market
capitalization companies. However, we believe the main focus of these boutique
firms has centered primarily on the growth sectors of technology and healthcare.
Few of these boutique investment banking and research based firms focus on
value-based investments, particularly distressed and special situation
companies.
 
 Our
Market Opportunity
 
 We
believe that, as a strategically positioned financial services holding company
recognized for our research focus on distressed debt and special situation
securities, the market opportunity available to us is significant due to the
following factors:
 
 Our Targeted Addressable Market
Continues to Grow As Our Research Coverage Expands to New
Industries
 
 Our
research coverage has expanded from the telecommunications industry to our
current focus on wireless and wire-line telecommunications, cable,
transportation, energy, alternative energy, homebuilders, automotive suppliers
and municipal securities. The growth from a primarily telecommunications-focused
research model has allowed us to include additional high yield debt in other
industries to our existing addressable market.
 
 Default
Rates are at Historic Lows, Creating Potential Opportunities for Distressed
Debt
 
 The high
yield and distressed market during 2007 was characterized by historically low
default rates, however, recent events in the domestic and global credit markets
indicate that default rates may increase during 2008.  According to
ratings agency Standard & Poor’s, the annual speculative-grade default rate
ended 2007 at 0.97%, below the long-term average of 4.54%.  Our
addressable market of distressed and bankrupt companies could improve if default
rates revert to historical averages.
 
 Our Research Department Fully
Investigates the Details of Each Investment Situation
 
 When our
research department commences coverage of distressed and special situation
opportunities, its goal is to fully investigate all complexities these
situations present and continue research based on the interests of our clients.
The duration and depth of our research allows our analysts to become extremely
familiar with the details of each situation, develop strong professional
relationships with many of the key persons involved in each situation and convey
to the market what we believe to be a more complete description of the situation
than those offered by any of our competitors.
 
 
 Our
Competitive Strengths
 
 Highly
Regarded Investment Research
 
 We
believe that we are widely recognized for the quality of the distressed debt and
special situation securities research we provide to our institutional and retail
clients. Our research department analyzes each material aspect of an issuer’s
business, develops strong professional relationships with management and related
industry professionals, and effectively communicates the situation to the
investor community. Many of the companies under research coverage have been
followed by our research staff for several years, enhancing our understanding of
the issuer.
 
 Experienced
Professionals
 
 We
believe that our team of professionals, including our executive management team,
has diverse and extensive experience in the financial services industries. Our
sales and trading professionals have developed long-term client relationships
with hedge funds, pension funds, state and local municipalities, banks,
insurance companies and high net worth individuals, and these core clients have
historically made up a significant portion of our revenues.
 
 Focus on “Under-Covered”
Securities
 
 Our
analysts target distressed debt and special situation securities of small- and
middle-market capitalization companies for which limited coverage currently
exists. We believe the businesses covered by our research analysts are typically
covered by fewer than five other analysts.
  5
 Table of Contents
  Entrepreneurial
Culture
 
 We have
fully embraced an entrepreneurial culture. Our employees own a large portion of
our common stock, which, when coupled with our highly competitive compensation
packages, enables our employees to directly benefit from their individual
production as well as our overall performance. Every employee has the incentive
to generate ideas and communicate them to management to maximize client returns
and our revenues.
 
 Our
Growth Strategies
 
 Our goal
is to become a leading financial services firm providing trading, investment
banking services and quality research to our clients. In order to achieve this
goal, we plan on implementing the following strategies:
 
 Maintain
Our Current Research Focus
 
 In the
past, we were limited in our ability to provide research coverage on distressed
and special situation companies outside of our core industries. The number of
companies and industries under coverage has a direct impact on commission and
trading revenues. We have expanded coverage with existing staff to provide
research coverage of products such as distressed mortgage and asset-backed
securities as well as to cover additional industries such as general
industrials, media and retail. We believe this will enable us to expand our
sales force, as potential sales professionals would be attracted to our expanded
product offering. Our current professional staff of analysts will allow us to
provide complementary research capabilities that we believe will generate
additional revenues from an existing and expanded client base.
 
 Expand
Investment Banking Efforts to Include Additional Capabilities
 
 In 2004,
we began to utilize our expertise, industry contacts and business experience to
grow our investment banking practice. These investment banking clients are
requesting additional services from us, including acquisition and restructuring
advisory services. As a result, we have hired additional experienced investment
banking professionals to exploit these opportunities.
 
 Grow
Through Acquisitions
 
 In the
past, we have entertained several potential acquisition candidates but our
balance sheet and thinly traded common stock have limited our ability to use our
equity as consideration in these potential transactions and has prevented us
from completing these transactions. We continue to seek out complementary
businesses from an acquisition perspective, and we believe that our balance
sheet and public equity currency will be a positive factor in any
acquisition.
 
 Diversify
Revenues
 
 While a
majority of our revenues have traditionally been generated from the distressed
debt and special situation security trading, we are continuing to diversify our
revenue base by growing our government, mortgage-backed and municipal securities
trading activity and building our investment banking revenues. Because these
revenue streams are driven by different market factors, cycle timing for each is
different, thus decreasing the volatility of the overall revenues.
 
 Revenues
and Industry Segments
 
 The
information required by Regulation S-K Items 101(b) and 101(d) related to
financial information about segments and financial information about sales is
contained in Note 17 of our consolidated financial statements, which are
included in this Annual Report on Form 10-K.
 
 Clients
 
 Historically,
our brokerage client base has been comprised of predominately large
institutional clients such as money managers, mutual funds, hedge funds, private
and public pension funds, banks, insurance companies, savings associations,
state and municipal funds and high net-worth retail clients with a particular
focus on value. These clients demand high quality research and sophisticated
trading capabilities. We believe that we have served the needs of this segment
of our client base as evidenced by increased volume with these clients. We
believe that the increase in the scope of our research services should increase
client satisfaction and increase our revenues from institutional clients and
high net-worth retail clients. We currently have no brokerage client that
provides more than 10% of our revenues.
  6
 Table of Contents
  Employees
 
 As of
December 31, 2007, we had 56 employees. Of these employees, 25 work in sales,
seven in trading, four in research and three in investment banking with the
remaining employees performing management and administrative functions. We
believe that this support structure is sufficient to support additional sales,
investment banking and research staff.
 
 Competition
 
 All
aspects of our business are highly competitive. In our investment banking
activities, we compete with large Wall Street investment banks as well as
regional boutique banks that offer private placement services to small- and
middle-market companies. We compete for these investment banking transactions on
the basis of our relationships with the issuers and potential investors, our
experience in the industry and transactional fees. In our general brokerage
activities, we compete directly with numerous other broker-dealers, many of
which are large well-known firms with substantially greater financial and
personnel resources. We compete for brokerage transactions on the basis of our
research ideas, our experience in the industry, our ability to execute
transactions and the strength of our relationships with our clients. Many of our
competitors for brokerage service and investment banking transactions employ
extensive advertising and actively solicit potential clients in order to
increase business. In addition, brokerage firms compete by furnishing investment
research publications to existing clients, the quality and breadth of which are
considered important in the development of new business and the retention of
existing clients. We also compete with a number of smaller regional brokerage
firms in Texas and the southwestern United States.
 
 The
securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than ours.
 
 Since the
adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
institutions have been able to engage in traditional brokerage and investment
banking services, thus increasing competition in the securities industry and
potentially increasing the rate of consolidation in the securities
industry.
 
 We also
compete with other securities firms for successful sales representatives,
securities traders, securities analysts and investment bankers. Competition for
qualified employees in the financial services industry is intense. Our continued
ability to compete effectively depends on our ability to attract new employees
and to retain and motivate our existing employees.
 
 Securities
Industry Practices/Regulation
 
 Tejas
Securities is registered as a broker-dealer with the Securities and Exchange
Commission (the SEC) and the National Association of Securities Dealers, Inc.
(the NASD). Tejas Securities is registered as a securities broker-dealer in 44
states and the District of Columbia. Tejas Securities is also a member of the
Securities Investors Protection Corporation, which provides Tejas Securities’
clients with insurance protection for amounts of up to $500,000 each, with a
limitation of $100,000 on claims for cash balances. Tejas Securities has also
acquired an additional $1,000,000 in insurance coverage through Seabury &
Smith, as added protection for individual clients’ securities, covering all
clients of Tejas Securities’ institutional and retail clients.
 
 Tejas
Securities is subject to extensive regulation by federal and state laws. The SEC
is the federal agency charged with administration of the federal securities
laws. Much of the regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules, subject to approval
by the SEC, which govern the industry and conduct periodic reviews of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they do business. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which 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 stockholders of
broker-dealers.
 
 As a
result of the most recent changes in the regulatory environment, Tejas
Securities restructured its compliance department. In May 2004, it hired a new
compliance director who had previously served as an examiner for the NASD office
in Dallas, Texas. In March 2004, it engaged an outside consultant who had
previously served as the head of the NASD office in Dallas, Texas. In 2005, it
hired an in-house general counsel. Additionally, in 2007 it augmented its
compliance department by the addition of a full time licensed
principal.  Through these additions and through a review of our
internal supervisory procedures, we believe that Tejas Securities will be better
situated to address compliance matters affecting us on a going forward
basis.
  7
 Table of Contents
  Net
Capital Requirements
 
 Tejas
Securities is subject to SEC Rule 15c3-1, or 15c3-1, which establishes minimum
net capital requirements for broker-dealers. 15c3-1 is designed to measure
financial integrity and liquidity in order to assure the broker-dealer’s
financial stability within the securities market. The net capital required under
15c3-1 depends in part upon the activities engaged in by the
broker-dealer.
 
 In
computing net capital under 15c3-1, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a broker-dealer’s position in securities. A deduction is made
against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with 15c3-1 could require intensive use
of capital and could limit our ability to pay dividends to our stockholders.
Failure to comply with 15c3-1 could require us to capitalize Tejas Securities
with additional cash equity investments, could limit the ability of Tejas
Securities to pay its debts or interest obligations and may subject Tejas
Securities to certain restrictions which may be imposed by the SEC, the NASD,
and other regulatory bodies. Moreover, in the event that we could not or elected
not to put additional capital or otherwise bring Tejas Securities into
compliance, Tejas Securities would ultimately be forced to cease
operations.
 
 At
December 31, 2007, Tejas Securities elected to use the basic method permitted by
15c3-1, which requires it to maintain minimum net capital, as defined in 15c3-1,
equal to the greater of $250,000 or 6-2/3% of aggregate indebtedness, as defined
in 15c3-1. At December 31, 2007, Tejas Securities had net capital of $4,223,674,
which was $3,973,674 in excess of the minimum amount required.
 
 FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
 
 From time
to time, we make statements (including some contained in this report) which
predict or forecast future events or results, which depend on future events for
their accuracy, which embody projections or that otherwise contain
“forward-looking information.” These statements may relate to anticipated
revenues or earnings per share, anticipated changes in our business or our
ability to successfully respond to such changes, the adequacy of our capital and
liquidity, the adequacy of our reserves for contingencies, including litigation,
or expectations regarding future financial market conditions. The statements
include those that are preceded by, followed by or that include the words
“believes,” “expects,” “anticipates,” “intends,” “estimates,” “may” or similar
expressions.
 
 We
caution readers that any forward-looking information provided by us or on our
behalf is not a guarantee of future performance. Actual results may differ
materially as a result of various factors, many of which are outside of our
control, including the factors discussed below, those discussed under the
heading “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and “Quantitative and Qualitative Disclosure About Market Risk,”
and those discussed in our periodic reports filed with and available from the
SEC.
 
 All
forward-looking statements speak only as of the date on which they are made and
we undertake no obligation to update them to reflect events or circumstances
occurring after the date on which they were made or to reflect the occurrence of
unanticipated events.
 
 Our Ability To
Retain Our Executive Management Team And To Recruit And Retain Key Employees Is
Critical To The Success Of Our Business.
 
 Our
ability to successfully execute our business model depends, among other things,
upon the personal reputation, judgment, business generation capabilities and
project execution skills of our executive management and key employees,
including, John J. Gorman, our Chairman. We depend on the personal reputations
and relationships that our executives and employees have with our clients to
obtain and maintain investment banking engagements and  brokerage
accounts. Accordingly, the retention of these executives and employees is
particularly important to our future success. The departure or other loss of any
such member of our executive management team or any key employee, each of whom
manages substantial client relationships and possesses substantial experience
and expertise, could harm our ability to secure and successfully complete
investment banking engagements and generate brokerage commissions. See
discussion under “Our Business is Highly Competitive” below.
 
 There Is No
Consistent Pattern In Our Financial Results From Quarter To Quarter And Year To Year,
Which May Result In Volatility In The Value Of Our Common Stock.
 
 We
experience variations in revenues and profits during the year and from year to
year. These variations can generally be attributed to:
 
 •
              fluctuations
      in the debt and equity markets;
  8
 Table of Contents
 
 •
              our
      ability to identify investment opportunities for our trading accounts and
      our clients’ accounts;
 
 •
              general
      economic and market conditions which impact the number of distressed
      securities opportunities that are available to us and our clients;
      and
 
 •
              our
      investment banking revenues being largely earned upon the successful
      completion of transactions, the timing of which is uncertain and subject
      to the volatility of the capital
markets.
 
 We also
invest in securities for our proprietary accounts and receive securities as a
portion of our fees in connection with a number of our investment banking
engagements. Changes in the market prices of these securities, and changes in
our estimates of market values of these securities, could result in losses to
us. The fair value of these securities directly impacts our net dealer inventory
and investment income in our consolidated statements of operations.
 
 Other
variable factors bearing on our revenues include fluctuations in the level of
institutional brokerage transactions, variations in personnel expenses and costs
incurred in pursuing investment banking and restructuring opportunities and new
brokerage clients. To the extent that the market price of our common stock bears
a relationship to our revenues and profits, the value of our common stock may
decline because of these fluctuations.
 
 A Key Part Of Our
Business Strategy Involves Acquisitions; However, Such Acquisitions May
Not Achieve All Intended Benefits.
 
 A key
part of our strategy is to obtain business opportunities, customers and
personnel through acquisitions. We acquired Capital & Technology Advisors,
Inc., or C&TA, in July 2005 and sold it in October 2006. We may pursue
selective acquisition opportunities in the future, but we may not be able to
identify and execute suitable acquisitions in the future on terms that are
favorable to us, or at all. We may encounter other risks in our acquisition
strategy, including:
 
 •
              diversion
      of management’s attention from our existing business;
 
 •
              increased
      competition for acquisitions which may increase the price of our
      acquisitions; and
 
 •
              our
      failure to discover material liabilities during the due diligence process,
      including the failure of prior owners of any acquired businesses or their
      employees to comply with applicable laws or regulations or their failure
      to fulfill their contractual
obligations.
 
 In
connection with our future acquisitions, we may incur significant acquisition
expenses as well as amortization expenses related to intangible assets. We also
may incur significant write-offs of goodwill associated with companies,
businesses or technologies that we may acquire. Our results of operations could
be adversely affected by these expenses and write-offs.
 
 We May Have
Difficulty Integrating The Operations Of Any Companies We Acquire, Which May
Adversely Affect Our Results Of Operations.
 
 The
success of our acquisition strategy will depend upon our ability to successfully
integrate any businesses we acquire. The integration of these businesses into
our operations may result in unforeseen events or operating difficulties, absorb
significant management attention and require significant financial resources
that would otherwise be available for the ongoing development of our business.
These integration difficulties could include:
 
 •
              the
      integration of personnel with disparate business backgrounds;
 
 •
              the
      transition of new information systems;
 
 •
              the
      coordination of geographically dispersed organizations;
 
 •
              the
      loss of key employees of acquired companies;
 
 •
              the
      reconciliation of different corporate cultures; and
  9
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 •
              the
      synchronization of disclosure and financial reporting controls of acquired
      companies with our controls and, where applicable, improvement of the
      acquired company’s controls.
 
 For these
or other reasons, we may be unable to retain key clients or to retain or renew
contracts of acquired companies. Moreover, any acquired business may fail to
generate the revenue or net income we expected or produce the efficiencies or
cost savings that we anticipated. Any of these outcomes could materially
adversely affect our operating results.
 
 We Invest Our Own
Principal Capital In Equities And Debt Securities That Expose Us To Risk Of
Capital Loss.
 
 We use a
portion of our own capital in a variety of principal investment activities, each
of which involves risks of illiquidity, loss of principal and revaluation of
assets. At December 31, 2007, our principal investments represented
approximately $1,389,000 invested in securities that had limited marketability
and approximately $12,796,000 invested in marketable securities in long
positions.  Additionally, we may on occasion concentrate our
securities holdings to one or two positions based upon our research and
potential for market appreciation. We face the risk of greater valuation losses
by not adequately diversifying our investment portfolio.
 
 We may
purchase equity securities and debt securities in companies that require
additional capital to complete a capital restructuring. The distressed companies
in which we invest may not be able to raise sufficient capital to complete their
restructurings. Market values for some of the distressed securities may not be
easily determinable depending upon the volume of securities traded on open
markets, the operating status of the companies or the types of securities issued
by companies. If the underlying securities of a company become illiquid, our
liquidity may be affected depending on the value of the securities involved.
During times of general market decline, we may experience market value losses,
which ultimately affect our liquidity through our broker-dealer net capital
requirements. In addition, we may decide not to liquidate our security holdings
to increase cash availability if our management believes a market turnaround is
likely in the near term or if our management believes the securities are
undervalued in the current market.
 
 If Institutional
Investors Conduct Less Business With Us, Our Revenues May Be Harmed.
 
 Mutual
funds, hedge funds and other institutional investors purchase a significant
portion of the securities offered by issuers in the private investment in public
equity, or PIPE, offerings for which we act as private placement agent. If
institutional investors conduct less business with us, our revenues may suffer.
Institutional investors may reduce their transaction volume with us for a number
of reasons, including, among others, a decrease in the flow of funds into
institutional investors, new regulations governing institutional investors,
increased competition in our businesses and redeployment of institutional assets
toward opportunities we do not offer.
 
 We Specialize In
A Few Discrete Sectors, And Any Downturn In Business In Those Sectors Could
Adversely Affect Our Revenues.
 
 We focus
our brokerage and investment banking activities in relatively few sectors, such
as wireless and wire-line telecommunications, cable, satellite, transportation,
energy and municipal securities. Consequently, a general decline in the market
for securities of companies within any such industry could result in fewer
brokerage and investment banking opportunities for us, and could reduce our
revenues. The market for securities offerings in each of the sectors in which we
focus may also be subject to industry-specific risks. In the event that one or
more of our core industries experiences an extended period of economic decline,
the number of investment banking opportunities available to us as well as the
volume of securities traded in these industries may decline. As a result, any
decline in our core industry markets could result in fewer investment banking
engagements for our investment banking team and a decline in the amount of
commission revenues generated by our brokers.
 
 In
addition, our research coverage and brokerage activities focus primarily on
distressed debt and special situation securities. A sustained period of
macroeconomic growth could limit the number of distressed and special situation
opportunities that our research analysts find attractive which could, in turn,
reduce our brokerage activity. A material reduction of our brokerage activity
would have a material adverse effect on our results of operations.
 
 Failure Of
Third-Party Vendors To Provide Critical Services Could Harm Our Business.
 
 We rely
on a number of third parties to assist in the processing of our transactions,
including online and internet service providers, our clearing organization,
market data providers such as Bloomberg and Reuters, and market makers. We have
no control over these third party service providers. As our business grows, we
cannot assure you that the technology and services we require from third parties
will be available. While we have had only short intermittent disruptions in
service from these providers historically, any more significant problems caused
by these third parties, including their not providing services for any reason
for significant periods or their performing their services poorly, could have a
material adverse effect on our business, financial condition and operating
results and could cause us to be unable to timely and accurately process our
clients’ transactions or maintain complete and accurate records of such
transactions.
  10
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  Credit Risk
Exposes Us To Losses Caused By Financial Or Other Problems Experienced By
Third Parties.
 
 Credit
risk in our business arises principally from our trading and market-making
activities. Credit risk refers to the risk that third parties that owe us money,
securities or other assets will not perform their obligations, such as
delivering securities or payments. These third parties include our trading
counterparties, clients, clearing agents, exchanges, clearing houses and other
financial intermediaries as well as issuers whose securities we hold. These
parties may default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. Credit risk may arise, for
example, from our holding securities of third parties, executing securities
trades that fail to settle at the required time due to non-delivery by the
counterparty or systems failure by clearing agents, exchanges, clearing houses
or other financial intermediaries, and extending credit to our clients through
bridge or margin loans or other arrangements. In the event that our clients or
counterparties default on their obligations to us, we, in turn, may not be able
to fulfill our obligations to others. Any default by us on our obligations to
others may harm our business.
 
 Further,
our clients sometimes purchase securities on margin through our clearing
organization. We are therefore subject to risks inherent in extending credit.
This risk is especially great when the market is rapidly declining. In such a
decline, the value of the collateral securing the margin loans could fall below
the amount of a client’s indebtedness. Specific regulatory guidelines mandate
the amount that can be loaned against various security types. If clients fail to
honor their commitments, the clearing organization would sell the securities
held as collateral. If the value of the collateral were insufficient to repay
the loan, a loss would occur, which we may be required to fund. We have also
experienced insignificant losses due to client fraud. Any material losses from
client failures, including fraud, could have a material adverse effect on our
cash flow from operations.
 
 Employee And
Consultant Misconduct Could Harm Our Businesses And Is Difficult To Detect And
Deter.
 
 There
have been a number of highly publicized cases involving fraud or other
misconduct by employees and consultants in the financial services industry in
recent years and we run the risk that employee and consultant misconduct could
occur at our company. Misconduct by employees and consultants could include
binding us to transactions that exceed authorized limits or present unacceptable
risk, or hiding from us unauthorized or unsuccessful activities, which, in
either case, may result in unknown and unmanaged risks or losses. Misconduct by
employees and consultants could also involve the improper use or disclosure of
confidential information, which could result in regulatory sanctions and serious
harm to our reputation or financial condition. Our investment banking business
often requires that we observe confidences of the greatest significance to our
clients, improper use of which may harm our clients and violate the terms of our
agreements with our clients. Any breach of our clients’ confidences may impair
our ability to attract and retain investment banking clients. It is not always
possible to deter employee and consultant misconduct, and the precautions that
we take to detect and prevent this activity may not be effective in all
cases.
 
 We Must Maintain
Certain Net Capital Requirements That Could Slow Our Expansion Plans Or Prevent
Payments Of Dividends.
 
 The SEC,
NASD and various other regulatory agencies have stringent rules with respect to
the maintenance of specific levels of net capital by securities broker-dealers.
Net capital is the net worth of a broker or dealer (assets minus liabilities),
less deductions for certain types of assets. If we fail to maintain the required
net capital, we may be subject to suspension or revocation of registration by
the SEC and suspension or expulsion by the NASD, which could ultimately lead to
our liquidation. If such net capital rules are changed or expanded, or if there
is an unusually large charge against net capital, our operations that require
the intensive use of capital, such as our ability to purchase investment
securities and conduct underwriting activities, would be limited. Such
operations may include trading activities and the financing of client account
balances. Also, our ability to pay dividends, repay debt and redeem or purchase
shares of our outstanding stock could be severely restricted. A large operating
loss or charge against net capital could adversely affect our ability to expand
or even maintain our present levels of business.
 
 We May Experience
Reduced Revenues Due To Declining Market Volume, Securities Prices And
Liquidity, Which Can Also Cause Counterparties To Fail To
Perform.
 
 Our
revenues may decrease in the event of a decline in the market volume of
securities transactions, securities prices or liquidity of the securities for
which we make a market. Declines in the volume of securities transactions and in
market liquidity generally result in lower revenues from trading activities and
commissions. Lower price levels of securities may also result in a reduction in
our revenues from corporate finance fees, as well as losses from declines in the
market value of securities held by us in our trading accounts. Sudden sharp
declines in market values of securities can result in illiquid markets and the
failure of counterparties to perform their obligations, as well as increases in
claims and litigation, including arbitration claims from clients. In such
markets, we may incur reduced revenues or losses in our principal trading,
market-making, investment banking and advisory services
activities.
  11
 Table of Contents
  Our Trading
Systems May Fail, Resulting In Service Interruptions.
 
 We
receive and process trade orders through internal trading software and
touch-tone telephones, and we depend heavily on the integrity of the electronic
systems supporting this type of trading. Heavy stress placed on our systems
during peak trading times could cause our systems to operate too slowly or fail.
If our systems or any other systems in the trading process slow down
significantly or fail even for a short time, our clients would suffer delays in
trading, potentially causing substantial losses and possibly subjecting us to
claims for such losses or to litigation claiming fraud or negligence. During a
system failure, we may be able to take orders by telephone; however, only
associates with a securities broker’s license can accept telephone orders, and
an adequate number of associates may not be available to take client calls in
the event of a system failure. In addition, a hardware or software failure,
power or telecommunications interruption or natural disaster could cause a
system failure. Any systems failure that interrupts our operations could result
in our losing clients or being subject to lawsuits resulting from such system
failures.
 
 Lack Of Liquidity
At Our Clearing Organization May Impair Our Business.
 
 We
utilize our equity in securities owned at our clearing organization to
facilitate the purchase of additional securities for trading purposes. The value
of the equity at the clearing organization is primarily affected by realized
trading gains and losses, unrealized gains and losses, the purchase and sale of
accrued interest on debt securities, and cash withdrawals and deposits at the
clearing organization. As a result of this activity, including the purchase and
sale of securities, we may have either a receivable or payable balance to the
clearing organization. In the event that we have a payable balance to the
clearing organization, we may be restricted in our ability to withdraw funds
from the clearing organization to cover routine operating expenses.
Additionally, if the value of the equity at the clearing organization is
insufficient to cover the margin requirements on the value of the securities
borrowed, we may be required to either liquidate our holdings at the clearing
organization or provide additional funds to cover margin requirements. As of
December 31, 2007, we had a net payable balance to our clearing organization of
approximately $3,653,000.
 
 Our Business Is
Highly Competitive.
 
 All
aspects of our business are highly competitive. In our investment banking
activities, we compete with large Wall Street investment banks as well as
regional boutique banks that offer private placement services to small- and
middle-market companies. We compete for these investment banking transactions on
the basis of our relationships with the issuers and potential investors, our
experience in the industry and transactional fees. In our general brokerage
activities, we compete directly with numerous other broker-dealers, many of
which are large well-known firms with substantially greater financial and
personnel resources. We compete for brokerage transactions on the basis of our
research ideas, our experience in the industry, our ability to execute
transactions and the strength of our relationships with our clients. Many of our
competitors for brokerage service and investment banking transactions employ
extensive advertising and actively solicit potential clients in order to
increase business. In addition, brokerage firms compete by furnishing investment
research publications to existing clients, the quality and breadth of which are
considered important in the development of new business and the retention of
existing clients. We also compete with a number of smaller regional brokerage
firms in Texas and the southwestern United States.
 
 The
securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than ours.
 
 Since the
adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
institutions have been able to engage in traditional brokerage and investment
banking services, thus increasing competition in the securities industry and
potentially increasing the rate of consolidation in the securities
industry.
 
 We also
compete with other securities firms for successful sales representatives,
securities traders, securities analysts and investment bankers. Competition for
qualified employees in the financial services industry is intense. Our continued
ability to compete effectively depends on our ability to attract new employees
and to retain and motivate our existing employees. If any of our executive
management team members or key employees were to leave our firm to join an
existing competitor or to form a competing company, some of our clients could
choose to use the services of that competitor instead of our services. There is
no guarantee that the compensation arrangements we have entered into with the
members of our executive management team and key employees will prevent them
from resigning to join our competitors or that the non-competition agreements
would be upheld if we were to seek to enforce our rights under those
agreements.
  12
 Table of Contents
  Any
material change in our competitors’ business practices may place us at a
competitive disadvantage and could impair our ability to generate fees and
commissions at an effective level, reduce our market share for investment
banking or brokerage services and negatively affect our ability to hire and
retain superior personnel.
 
 We Are Subject To
Market Forces Beyond Our Control.
 
 We, like
other investment banking firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have experienced significant volatility. Over the past few years, the stock
markets have suffered major declines and advances that have increased the
volatility of our revenues. If our trading volume decreases, our revenues
resulting from trading commissions will decline. Also, when trading volume is
low, our profitability is adversely affected because our overhead remains
relatively fixed, despite lower compensation costs associated with commission
revenues. Severe market fluctuations in the future could have a material adverse
effect on our business, financial condition and operating results.
 
 We Are Subject To
Strict Government Regulation And The Failure To Comply Could Result In
Disciplinary Actions.
 
 The
securities industry in the United States is subject to extensive regulation
under both federal and state laws. Broker-dealers and investment advisors are
subject to regulations covering all aspects of their business. Our business and
industry have changed substantially since we began offering brokerage services,
and we expect the pace of change in the brokerage industry to continue.
Recently, the brokerage industry has experienced a great deal of negative
exposure due to insider trading, research improprieties, mutual fund trading
improprieties and a lack of investor confidence in the industry as a whole. As a
result, regulatory agencies and the U.S. government have intervened in an
attempt to resolve these various issues. The demands placed upon our personnel
and financial resources may be too significant for us to quickly adapt to a
changing environment and may impact our ability to provide our current services
or to expand our services.
 
 The SEC,
the NASD, the Board of Governors of the Federal Reserve System, the various
stock exchanges and other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a system to ensure compliance with these laws and rules, as well
as our ability to attract and retain qualified compliance
personnel.
 
 The NASD,
in particular, extensively regulates our activities. The NASD can impose certain
penalties for violations of its advertising regulations, including censures or
fines, suspension of all advertising, the issuance of cease-and-desist orders or
the suspension or expulsion of a broker-dealer or any of its officers or
employees. We could be subject to additional disciplinary or other actions due
to claimed noncompliance in the future, which could have a material adverse
effect on our business, financial condition and operating results.
 
 In
addition, our operations and profitability may be affected by additional
legislation, changes in rules promulgated by the SEC, NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, and state securities commissions, or changes in
the interpretation or enforcement of existing laws and rules including, but not
limited to, existing regulations which restrict communications between our
research analysts and our other departments. We cannot assure you that such
future regulations will not require us to implement additional compliance
policies and that such policies will not materially increase our compliance
expenses.
 
 We Are Subject to
Increased Use of Legal Proceedings, Which May Negatively Impact Our
Business.
 
 Substantial
legal liability or a significant regulatory action against us could have a
material adverse financial effect or cause significant harm to our reputation,
which in turn could harm our business prospects. Participants in the securities
industry have faced increasing litigation and arbitration based on a number of
legal theories. Investors in the United States have been subjected to corporate
fraud and bankruptcies, volatile investment markets, biased investor research,
mutual fund trading irregularities and other negative images of the investment
securities industry. As a result of these incidents in the securities industry,
many investors have experienced significant losses in personal wealth. As a
broker-dealer, we are exposed to client lawsuits and arbitration should an
investor lose money in an investment that we may recommend.
  13
 Table of Contents
  We face
significant legal risks in our businesses, and the volume and amount of damages
claimed in litigation, arbitrations, regulatory enforcement actions and other
adversarial proceedings against financial services firms are increasing. These
risks include potential liability under securities and other laws for materially
false or misleading statements made in connection with securities or other
transactions, potential liability for the fairness opinions and other advice we
provide to participants in corporate transactions and disputes over the terms
and conditions of complex trading arrangements.
 
 We are
also subject to claims arising from disputes with employees under various
circumstances; these risks may be difficult to assess or quantify and their
existence and magnitude may remain unknown for substantial periods of time. In
addition, legal or regulatory matters involving our directors, officers or
employees in their individual capacities may create exposure for us because we
may be obligated or may choose to indemnify the affected individuals against
liabilities and expenses they incur in connection with such matters to the
extent permitted under applicable law.
 
 No Active Public
Market For Our Common Stock Currently Exists And None May Develop.
 
 An active
public market for our common stock does not currently exist. As of February 29,
2008, over 45% of our issued common stock was held by fewer than ten
individuals. Until a broader distribution of our common stock is made, no active
public market will develop. Our common stock is currently offered on the OTC
Bulletin Board and is subject to increased volatility due to the lack of trading
volume and liquidity for potential investors.
 
 Our Chairman Will
Have Significant Influence Over Matters Requiring
Stockholder Or Board Approval.
 
 Our
Chairman, John J. Gorman, beneficially owns or controls approximately 43% of our
outstanding common stock. Accordingly, Mr. Gorman will have substantial
influence over the outcome of corporate actions requiring director or
stockholder approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets and any other
significant corporate transaction. Mr. Gorman may also delay or prevent a change
of control of us, even if such change of control would benefit our other
stockholders.
 
 Investments By
Our Executive Officers And Employees May Conflict With The Interests Of
Holders Of Our Securities.
 
 From time
to time, we may invest in private or public companies in which our executive
officers are also investors or for which we provide investment banking services,
publish research or act as a market maker.  There is a risk that, as a
result of such investment or profit interest, our officers or employees may take
actions that conflict with the best interests of us or the holders of our common
stock.
 
 Our Common Stock
Price May Be Volatile, Which Would Adversely Affect The Value Of Your
Shares.
 
 The
market price of our common stock has in the past been, and may be in the future
continue to be, volatile. A variety of events may cause the market price of our
common stock to fluctuate significantly, including:
 
 •
              variations
      in quarterly operating results;
 
 •
              our
      announcements of significant contracts, milestones, acquisitions, or
      sales;
 
 •
              our
      relationships with other companies;
 
 •
              our
      ability to obtain needed capital commitments;
 
 •
              additions
      or departures of key personnel;
 
 •
              sales
      of common stock, conversion of securities convertible into common stock,
      exercise of options and warrants to purchase common stock or termination
      of stock transfer restrictions;
 
 •
              general
      economic conditions, including conditions in the securities brokerage and
      investment banking markets;
 
 •
              changes
      in financial estimates by securities analysts; and
  14
 Table of Contents
 
 •
              fluctuation
      in stock market price and volume.
 
 Many of
these factors are beyond our control. Any one of the factors noted herein could
have an adverse effect on the value of our common stock.
 
 In
addition, the stock market in recent years has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many companies and that often have been unrelated to the operating
performance of such companies. These market fluctuations have adversely impacted
the price of our common stock in the past and may do so in the
future.
 
 Future
Sales Of Our Common Stock Could Adversely Affect Its Price.
 
 Sales of
substantial amounts of common stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of our common stock
and our ability to raise capital. We may issue additional common stock in future
financing transactions or as incentive compensation for our executive management
and other key personnel, consultants and advisors. Issuing any equity securities
would be dilutive to the equity interests represented by our then-outstanding
shares of common stock. The market price for our common stock could decrease as
the market takes into account the dilutive effect of any of these
issuances.
 
 Finally,
if we file a registration statement to raise additional capital, some of our
existing stockholders hold piggyback registration rights that, if exercised,
will require us to include their shares in the registration statement, which
could adversely affect our ability to raise needed capital.
 
 We Do Not Expect
To Pay Cash Dividends On Our Common Stock For The Foreseeable Future.
 
 We have
never paid cash dividends on our common stock and do not anticipate that any
cash dividends will be paid on the common stock for the foreseeable future. The
payment of any cash dividend by us will be at the discretion of our board of
directors and will depend on, among other things, our earnings, capital,
regulatory requirements and financial condition. Furthermore, the terms of any
future financing arrangements could limit our ability to pay cash dividends on
our common stock. The terms of any future indebtedness of Tejas Securities may
restrict Tejas Securities’ ability to distribute earnings or to make payments to
us.
 
 Our By-Laws Could
Make It More Difficult For A Third Party To Acquire Us.
 
 Our
by-laws are designed to make it difficult for a third party to acquire control
of us, even if a change of control would be beneficial to stockholders. Our
by-laws do not permit any person other than the board of directors or certain
executive officers to call special meetings of the stockholders. In addition, we
must receive a stockholders’ proposal for an annual meeting within a specified
period for that proposal to be included on the agenda. Because stockholders do
not have the power to call meetings and are subject to timing requirements in
submitting stockholder proposals for consideration at an annual or special
meeting, any third-party takeover not supported by the board of directors would
be subject to significant delays and difficulties.
 
 EXECUTIVE
OFFICERS OF THE REGISTRANT
 
 The
following information sets forth certain information with respect to our
executive officers. Their respective backgrounds are described
below.
 
 Name
              
              Age
              
              PositionJohn
      J. Gorman
              
              47
              
              Director
      and ChairmanMark
      M. Salter
              
              48
              
              Chief
      Executive OfficerKurt
      J. Rechner
              
              47
              
              President,
      Chief Operating Officer, Chief Financial Officer, Treasurer and
      SecretaryKurt
      E. Morales
              
              42
              
              Director
      of Accounting
 
 
 John J. Gorman.Mr. Gorman became our Chairman of the board of directors in August 1999.
He was our Chief Executive Officer from August 1999 through June 2004. He was
the Chairman of Tejas Securities from July 1997 through August 2005. Mr. Gorman
has over 20 years of experience in the brokerage industry. Mr. Gorman became a
principal of Tejas Securities on April 18, 1995. From 1988 until joining Tejas
Securities, Mr. Gorman worked at APS Financial Inc., a broker-dealer in Austin,
Texas, as a Senior Vice President. Mr. Gorman served primarily in a broker
capacity at APS Financial Inc. Mr. Gorman has held positions at APS Financial
Inc., Landmark Group, Shearson Lehman and Dean Witter. Mr. Gorman is the nephew
of Charles H. Mayer and is the son-in-law of William A. Inglehart, both members
of our board of directors. Mr. Gorman received his B.B.A. from Southern
Methodist University in 1983.
  15
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 Mark M.
Salter.Mr. Salter became our Chief Executive Officer and
Director of Sales and Trading in June 2004. Prior to that, Mr. Salter managed
the investment grade, government and mortgage-backed bond area for us since May
2000. Mr. Salter joined us from Amherst Securities where he was Director of
Fixed Income Securities from October 1995 to May 2000. Mr. Salter has been in
the securities industry since 1981 and has been involved in fixed income sales
and trading for over 23 years. Mr. Salter holds a B.A. in Economics from York
University in Toronto, Canada.
 
 Kurt J. Rechner,
CPA, CFA.Mr. Rechner became our
President and Chief Operating Officer in June 2004, and our Secretary in
September 2002. Prior to that, Mr. Rechner was our Chief Financial Officer from
January 2000 to June 2004.  On August 31, 2006, Mr. Rechner assumed
the additional responsibilities of interim Chief Financial Officer and Treasurer
due to the resignation of the prior Chief Financial Officer and
Treasurer.  Mr. Rechner has spent the past 23 years in the financial
services industry. Prior to joining us, Mr. Rechner was employed from 1997
through 1999 as an Executive Vice President, Finance & Operations, CFO for
Xerox Federal Credit Union. From May 1995 to 1997, Mr. Rechner was the Chief
Executive Officer for Prism Capital Management, LLC, which managed a global
fixed income hedge fund. From 1990 through May 1995, Mr. Rechner was the Senior
Vice President of Accounting and Finance for Security Service Federal Credit
Union. Mr. Rechner earned a B.S. in Business Administration from the University
of Illinois in 1984 and an M.B.A. from Trinity University in 1985. Mr. Rechner
also holds the professional designations of Certified Public Accountant and
Chartered Financial Analyst.
 
 Kurt E. Morales,
CPA.  Mr. Morales became our Director of Accounting on August
7, 2006.  Mr. Morales returned to Tejas Securities in June 2006 as the
Director of Accounting since his prior service with us from 1999 to
2001.  Prior to rejoining Tejas Securities, Mr. Morales served as a
Vice President and Controller for NFP Securities, Inc. from 2001 through
2005.  Prior to joining NFP and Tejas Securities, Mr. Morales was
employed by KPMG LLP as a Senior Auditor in its Financial Services line of
business from 1996 to 1998.  Mr. Morales graduated from the University
of Texas in 1996 with a BBA and MPA in Accounting.  Mr. Morales holds
the professional designation of Certified Public Accountant and is also
registered with the National Association of Securities Dealers as a licensed
Series 27 - Financial and Operations Principal.
 
 AVAILABLE
INFORMATION
 
 We file
annual, quarterly, and current reports, proxy statements, and other documents
with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act.”).
You may read and copy any materials that are on file with the SEC at the SEC’s
public reference room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains these
SEC filings. You can obtain these filings at the SEC’s website at
http://www.sec.gov.
 
 We also
make available free of charge on or through our website
(http://www.tejassec.com) our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after we electronically file such materials with, or
furnish it to, the SEC.
 
 ITEM1A. RISK FACTORS
 
 The
information required by this item is set forth under “Forward-Looking Statements
and Risk Factors” in Part I, Item 1.
 
 ITEM1B. UNRESOLVED STAFF COMMENTS
 
 Not
applicable.
 
 ITEM2. PROPERTIES
 
 Our
headquarters are located at 8226 Bee Caves Road, Austin, Texas, which we own.
Additionally, we owned a building located at 8121 Bee Caves Road, Austin, Texas,
which was sold subsequent to December 31, 2007. We lease space for our office in
St. Louis, Missouri, which consists of approximately 1,000 square feet. The St.
Louis lease was for four years and contains renewal options. We also leased
approximately 24,700 square feet in Austin, Texas where our headquarters were
previously located.  This lease ended in early 2007, and we subleased
approximately 90% of such space during 2005 and 2006.
  16
 Table of Contents
  ITEM3. LEGAL PROCEEDINGS
 
 There are
no legal proceedings to which we or any of our subsidiaries is a party or to
which any of our properties is subject that management believes will have a
material adverse affect.
 
 ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None.
 
 PART
II
 
 ITEM5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
 
 RECENT
STOCK PRICES
 
 Our
common stock trades under the symbol “TEJS” on the OTC Bulletin Board. The
trading does not constitute a well-established public trading market for our
common stock. As of February 29, 2008 there were approximately 300 holders of
record of our common stock.
 
 The
following table sets forth for the periods indicated the high and low bid prices
at closing for our common stock for the periods indicated for 2007 and 2006 as
reported on the OTC Bulletin Board by Bloomberg LP. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
 
 High
              
              
              Low2007
      Price RangeFirst
      Quarter
              
              $
              3.35
              
              
              $
              3.10Second
      Quarter
              
              
              3.70
              
              
              
              3.10Third
      Quarter
              
              
              3.10
              
              
              
              1.70Fourth
      Quarter
              
              
              1.80
              
              
              
              1.202006
      Price RangeFirst
      Quarter
              
              $
              8.25
              
              
              $
              6.20Second
      Quarter
              
              
              7.75
              
              
              
              3.45Third
      Quarter
              
              
              4.00
              
              
              
              3.00Fourth
      Quarter
              
              
              4.20
              
              
              
              3.05
 
 DIVIDEND
POLICY
 
 We have
never paid cash dividends and have no present plan to pay any such dividends.
Currently, we intend to reinvest our earnings in order to facilitate expansion.
Any future dividends will be decided by our board of directors and will be based
upon our future earnings, financial condition and capital
requirements.
 
 RECENT
SALES OF UNREGISTERED STOCK
 
 None.
  17
 Table of Contents
  ISSUER
PURCHASES OF EQUITY SECURITIES
 
 On April
6, 2006, we announced a stock repurchase program for up to $5 million of our
outstanding common stock.
 
 Period
              
              (a) Total Number of Shares (or Units)
      Purchased
              
              
              (b) Average Price Paid per Share (or
      Unit)
              
              
              (c) Total Number of Shares (or Units) Purchased as
      Part of the Publicly Announced Plans or Programs
              
              
              (d) Maximum Number or (Approximate Dollar Value)
      of Shares (or Units) that May Yet Be Purchased Under the Plans or
      ProgramsDecember,
      2007
              
              
              331,498
              (1)
              
              $
              1.15
              
              
              
              331,498
              
              
              $
              3,946,493
 
 (1)
              These
      repurchases were made in open-market
  transactions.
 
  EQUITY COMPENSATION
PLANS
   The
following table summarizes information about our equity compensation plans as of
December 31, 2007.
  (a)
              
              (b)
              
              (c)Plan Category
              
              Number
      of Shares of Our Common Stockto
      be Issued UponExercise
      ofOutstandingOptions,
      Warrantsand
      Rights
              
              Weighted
      AverageExercise Price of Outstanding Options, Warrants and
      Rights
              
              Number
      of Shares ofOur Common StockRemaining
      Availablefor
      Future IssuanceUnder
      EquityCompensation
      Plans(exceeding
      securitiesreflected
      incolumn
      (a))Equity
      compensation plans approved by our security holders
              
              1,402,335
              
              $
              8.23
              
              341,100Total
              
              1,402,335
              
              $
              8.23
              
              341,100
  18
 Table of Contents
  PERFORMANCE
GRAPH
 
 Comparison
of Cumulative Total Return(1)
 Tejas
Incorporated, Standard and Poor’s 500,
 Standard
and Poor’s Small Cap 600, and
 Tejas
Incorporated’s Peer Group(2)
  
  Source:  SNL
Financial LC
  (1)
              Assumes
      $100.00 invested on December 31, 2002 and dividends reinvested. Historical
      performance does not predict future
results.
 (2)
              Our
      peer group for the 2007 fiscal year consists of Broadpoint Securities
      Group., Paulson Capital Corp., MCF Corporation, Evercore Partners, Inc.,
      Sanders Morris Harris Group, Inc., and Cowen Group,
  Inc.
  19
 Table of Contents
  ITEM6. SELECTED FINANCIAL DATA
 
 The
selected consolidated financial data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” The selected consolidated financial data for the
years ended December 31, 2003 and 2004 are derived from our audited consolidated
financial statements and notes to the consolidated financial statements, and are
not included in this Form 10-K. The selected consolidated financial data for the
years ended December 31, 2005, 2006 and 2007 are derived from our audited
consolidated financial statements and notes to the consolidated financial
statements, which are included elsewhere in this Form 10-K. Historical financial
results may not be indicative of our future performance and interim results may
not be reflective of the results for the fiscal year.
 
 AS
      OF AND FOR THE YEAR ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003STATEMENT
      OF OPERATIONS DATA:Commissions
              
              $
              14,599,080
              
              
              $
              15,192,207
              
              
              $
              17,139,488
              
              
              $
              20,945,763
              
              
              $
              29,260,473Underwriting
      and investment banking income
              
              
              4,254,497
              
              
              
              1,914,720
              
              
              
              16,436,706
              
              
              
              18,339,975
              
              
              
              72,799Net
      dealer inventory and investment income (loss)
              
              
              (1,578,137
              )
              
              
              1,090,273
              
              
              
              (5,800,745
              )
              
              
              9,087,139
              
              
              
              (2,793,103
              )Other
      income
              
              
              390,300
              
              
              
              656,584
              
              
              
              608,046
              
              
              
              307,419
              
              
              
              43,591Total
      revenues
              
              
              17,665,740
              
              
              
              18,853,784
              
              
              
              28,383,495
              
              
              
              48,680,296
              
              
              
              26,583,760Commissions,
      employee compensation and benefits
              
              
              16,859,882
              
              
              
              18,782,596
              
              
              
              22,756,977
              
              
              
              23,140,948
              
              
              
              19,140,520Clearing
      and floor brokerage
              
              
              678,199
              
              
              
              929,981
              
              
              
              741,817
              
              
              
              652,037
              
              
              
              589,913Communications
      and occupancy
              
              
              1,671,098
              
              
              
              1,685,574
              
              
              
              2,068,129
              
              
              
              1,903,404
              
              
              
              2,100,250Professional
      fees
              
              
              1,567,343
              
              
              
              1,891,098
              
              
              
              3,202,822
              
              
              
              7,874,990
              
              
              
              949,313Other
              
              
              3,595,978
              
              
              
              3,965,707
              
              
              
              5,607,761
              
              
              
              3,042,605
              
              
              
              2,274,380Total
      expenses
              
              
              24,372,500
              
              
              
              27,254,956
              
              
              
              34,377,506
              
              
              
              36,613,984
              
              
              
              25,054,376Income
      (loss) from continued operations before income taxes
              
              
              (6,706,760
              )
              
              
              (8,401,172
              )
              
              
              (5,994,011
              )
              
              
              12,066,312
              
              
              
              1,529,384Income
      tax expense (benefit) from continued operations
              
              
              (2,307,495
              )
              
              
              (2,760,679
              )
              
              
              (2,171,990
              )
              
              
              4,784,908
              
              
              
              682,254Net
      income (loss) from continued operations
              
              $
              (4,399,265
              )
              
              $
              (5,640,493
              )
              
              $
              (3,822,021
              )
              
              $
              7,281,404
              
              
              $
              847,130Loss
      from discontinued operations before income taxes
              
              $
              0
              
              
              $
              (36,444,683
              )
              
              $
              (931,322
              )
              
              $
              0
              
              
              $
              0Income
      tax expense (benefit) from discontinued operations
              
              
              0
              
              
              
              1,269,734
              
              
              
              (269,424
              )
              
              
              0
              
              
              
              0Net
      loss from discontinued operations
              
              $
              0
              
              
              $
              (37,714,417
              )
              
              $
              (661,898
              )
              
              $
              0
              
              
              $
              0Total
      net income (loss)
              
              $
              (4,399,265
              )
              
              $
              (43,354,910
              )
              
              $
              (4,483,919
              )
              
              $
              7,281,404
              
              
              $
              847,130Earnings
      (loss) from continued operations per share:Basic
              
              $
              (0.93
              )
              
              $
              (0.80
              )
              
              $
              (0.63
              )
              
              $
              2.41
              
              
              $
              0.28Diluted
              
              $
              (0.93
              )
              
              $
              (0.80
              )
              
              $
              (0.63
              )
              
              $
              2.06
              
              
              $
              0.27Earnings
      (loss) from discontinued operations per share:Basic
              
              $
              0
              
              
              $
              (5.25
              )
              
              $
              (0.11
              )
              
              $
              0
              
              
              $
              0Diluted
              
              $
              0
              
              
              $
              (5.25
              )
              
              $
              (0.11
              )
              
              $
              0
              
              
              $
              0Total
      earnings (loss) per share:Basic
              
              $
              (0.93
              )
              
              $
              (6.05
              )
              
              $
              (0.74
              )
              
              $
              2.41
              
              
              $
              0.28Diluted
              
              $
              (0.93
              )
              
              $
              (6.05
              )
              
              $
              (0.74
              )
              
              $
              2.06
              
              
              $
              0.27Weighted
      average shares outstanding:Basic
              
              
              4,824,712
              
              
              
              7,181,060
              
              
              
              6,097,903
              
              
              
              3,025,048
              
              
              
              3,024,048Diluted
              
              
              4,824,712
              
              
              
              7,181,060
              
              
              
              6,097,903
              
              
              
              3,540,392
              
              
              
              3,127,752STATEMENT
      OF FINANCIAL CONDITION DATA:Cash
      and cash equivalents
              
              $
              1,042,071
              
              
              $
              2,429,026
              
              
              $
              1,644,176
              
              
              $
              1,959,719
              
              
              $
              551,857Receivable
      from clearing organization
              
              
              185,207
              
              
              
              116,259
              
              
              
              316,604
              
              
              
              3,737,741
              
              
              
              0Securities
      owned
              
              
              14,185,486
              
              
              
              19,708,338
              
              
              
              23,819,028
              
              
              
              15,956,971
              
              
              
              5,601,782Other
      investment
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              1,155,000Property
      and equipment
              
              
              6,654,208
              
              
              
              6,749,668
              
              
              
              6,680,058
              
              
              
              265,238
              
              
              
              329,651Goodwill
      and intangible assets
              
              
              138,215
              
              
              
              138,215
              
              
              
              138,215
              
              
              
              138,215
              
              
              
              138,215Other
      assets
              
              
              2,961,058
              
              
              
              2,608,982
              
              
              
              3,127,305
              
              
              
              464,972
              
              
              
              579,948Assets
      of subsidiary to be disposed
              
              
              0
              
              
              
              0
              
              
              
              45,278,080
              
              
              
              0
              
              
              
              0Total
      assets
              
              $
              25,166,245
              
              
              $
              31,750,488
              
              
              $
              81,003,466
              
              
              $
              22,522,856
              
              
              $
              8,356,453Accounts
      payable, accrued expenses and other liabilities
              
              $
              2,799,224
              
              
              $
              2,598,398
              
              
              $
              4,615,481
              
              
              $
              8,986,909
              
              
              $
              2,376,535Securities
      sold, not yet purchased
              
              
              0
              
              
              
              3,110,165
              
              
              
              0
              
              
              
              90,838
              
              
              
              221,279Payable
      to clearing organization
              
              
              3,838,535
              
              
              
              2,616,279
              
              
              
              610,446
              
              
              
              0
              
              
              
              742,334Notes
      payable
              
              
              3,733,636
              
              
              
              3,822,612
              
              
              
              3,906,695
              
              
              
              2,800,000
              
              
              
              1,655,100Liabilities
      of subsidiary to be disposed
              
              
              0
              
              
              
              0
              
              
              
              332,335
              
              
              
              0
              
              
              
              0Total
      liabilities
              
              
              10,371,395
              
              
              
              12,147,454
              
              
              
              9,464,957
              
              
              
              11,877,747
              
              
              
              4,995,248Total
      stockholders’ equity
              
              
              14,794,850
              
              
              
              19,603,034
              
              
              
              71,538,509
              
              
              
              10,645,109
              
              
              
              3,361,205Total
      liabilities and stockholders’ equity
              
              $
              25,166,245
              
              
              $
              31,750,488
              
              
              $
              81,003,466
              
              
              $
              22,522,856
              
              
              $
              8,356,453
  20
 Table of Contents
  ITEM7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
 
 Company
Overview
 
 We are a
financial services holding company that focuses on the following:
 
 •
              proprietary
      research on distressed debt and special situation
    securities;
 
 •
              trading
      and other brokerage services to value-based institutional and retail
      investors active in fixed income and equity instruments;
    and
 
 •
              corporate
      finance and strategic advisory services to middle-market companies within
      our target industries.
 
 A key
component of our business is our research coverage. Currently, our research
department consists of analysts with expertise in  equity, distressed
debt and special situation securities. The analyst group has a background in
analyzing many industries, but primarily focuses on wireless and wire-line
telecommunications, cable, satellite, transportation, energy, alternative
energy, and municipal securities.  The current regulatory environment
has increased the costs associated with publishing industry related research
reports.  As such, we anticipate that the amount of published research
coverage will decline in the coming year.
 
 We
conduct our business through two operating segments: our full service brokerage
segment and our investment banking segment. Our brokerage segment, which
includes all trading for our clients and for our own proprietary account as well
as our inventory positions and market making activities, is categorized as a
separate business segment from investment banking because these aforementioned
activities are all interrelated and service a different client base. Investment
banking requires a different skill set and knowledge base and engagements are
with the issuers, not the investors. Each segment reports to a different
individual on the management team in order to maintain the necessary regulatory
separation.
 
 Brokerage
Services
 
 We
provide brokerage services to approximately 500 institutional clients and a
network of retail clients.  We offer clients the ability to buy and
sell fixed income products, equity securities, security options, mutual funds,
and other investment securities.  For the fiscal years ended December
31, 2007, 2006 and 2005, our full service brokerage segment contributed to our
total revenues $13,411,243, $16,939,064 and $11,946,789,
respectively.
 
 Investment
Banking
 
 In 2004,
we began to focus more attention on our investment banking efforts, particularly
in assisting public companies raise capital.  In mid 2006, we
increased our investment banking staff to help facilitate the growth of that
segment.  For the fiscal years ended December 31, 2007, 2006 and 2005,
our investment banking segment contributed to our total revenues $4,254,497,
$1,914,720 and $16,436,706, respectively.
 
 Recent
Developments
 
 None.
 
 Business
Environment
 
 Performance
in the financial services industry is highly correlated to the overall strength
of the economy and financial market activity. Our profitability is sensitive to
a variety of factors, including interest rate trends, the performance of public
equity markets and the demand for investment banking services.
 
 Overall
market conditions have been and may continue to be affected by political events,
legislative and regulatory developments and related changes in investor
sentiments. Some of the more recent uncertainties that have affected overall
market conditions are terrorist acts, geo-political events, corporate
bankruptcies and corporate accounting restatements. These factors, which are
unpredictable and beyond our control, may cause our earnings to fluctuate from
period to period.
  21
 Table of Contents
  Critical
Accounting Policies and Estimates
 
 We have
identified the policies and estimates set forth below as critical to our
operations and the understanding of our results of operations.
 
 Revenue
Recognition
 
 Agency
commission revenues and related expenses from customer security transactions are
recorded on a trade date basis. Customer security transactions that are executed
through our proprietary trading account are recorded on a trade date basis as
principal commission revenues. The related expenses are also recorded on a trade
date basis.
 
 Net
dealer inventory and investment income (loss) results from securities
transactions entered into for our account. Net dealer inventory and investment
income (loss) includes both realized and unrealized gains and losses, which are
recorded on a trade date basis.
 
 Manager’s
fees, underwriter’s fees, and other underwriting revenues are recognized at the
time the underwriting is completed.  Revenue from the receipt of
underwriter warrants is recognized on the date the warrants are received based
on the estimated fair value of the securities received as estimated using
intrinsic value.
 
 We do not
carry or clear customer accounts, and all customer transactions are executed and
cleared with other brokers on a fully disclosed basis. These brokers have agreed
to maintain such records of the transaction effected and cleared in the
customers’ accounts as are customarily made and kept by a clearing broker
pursuant to the requirements of Rules 17a-3 and 17a-4 of the Securities Exchange
Act of 1934, as amended, and to perform all services customarily incident
thereto.
 
 Fair
Value of Securities
 
 We
routinely purchase and sell securities for our proprietary accounts and our
clients, including employees. Financial securities used in our trading
activities are recorded at fair value, with unrealized gains and losses
reflected in investment income. Securities with readily determinable market
values are based on quoted market prices. Many of the securities held are those
of distressed companies in which there may be limited market activity. The value
of securities with limited market activity for which quoted market values are
not readily determinable are based on our management’s best estimate, which may
include dealer price quotations and price quotations for similar instruments
traded. In addition, changes in the market prices of securities (and changes in
our estimates of market values of securities) could result in losses to us. The
fair value of securities directly impacts our net dealer inventory and
investment income.
 
 Receivable
(Payable) to Clearing Organization
 
 We
utilize our equity in securities owned at our clearing organization to
facilitate the purchase of additional securities for trading purposes. The value
of the equity at the clearing organization is primarily affected by realized
trading gains and losses, unrealized gains and losses, the purchase and sale of
accrued interest on debt securities, and cash withdrawals and deposits at the
clearing organization. As a result of this activity, including the purchase and
sale of securities, we may have either a receivable or payable balance to the
clearing organization. In the event that we have a payable balance to the
clearing organization, we may be restricted in our ability to withdraw funds
from the clearing organization to cover routine operating expenses.
Additionally, if the value of the equity at the clearing organization is
insufficient to cover the margin requirements on the value of the securities
borrowed, we may be required to either liquidate our holdings at the clearing
organization or provide additional funds to cover margin requirements. For these
reasons, we carefully monitor our receivable or payable balance so that we can
provide sufficient funds for operations.
 
 Goodwill
and Other Intangible Assets
 
 We
adopted FASB Statement No. 142, Goodwill and Other Intangible Assets, on January
1, 2002. In accordance with SFAS No. 142, we assess our goodwill annually or
more frequently if events or changes in circumstances indicate that goodwill
might be impaired.
 Business
acquisitions typically result in goodwill and other intangible assets, and the
recorded values of those assets may become impaired in the future. The
determination of the value of such intangible assets requires us to make
estimates and assumptions that affect our financial statements. We assess
potential impairments to intangible assets on an annual basis or when there are
events or changes in circumstances that indicate the carrying amount of goodwill
and intangible assets may not be recovered. Judgments regarding the existence of
impairment indicators and future cash flows related to intangible assets are
based on operation and financial performance of the acquired businesses, market
conditions and other factors. Future events could cause us to conclude that
goodwill and intangible assets associated with business acquisitions are
impaired. Any resulting impairment loss could have an adverse impact on our
consolidated statements of operations.
  22
 Table of Contents
  Components
of Revenues
 
 We have
two reportable segments: brokerage services and investment banking. Our
brokerage services segment includes revenues from principal and agency
commissions, net dealer inventory and investment income, and other income.
Commission revenues include sales commissions and gross credits earned from
executing trades for institutional and retail clients. Net dealer inventory and
investment income includes realized and unrealized gains and losses on
securities transactions held for our own account, including income on securities
held as available for sale. Interest income and expenses associated with
securities held by us are also included in net dealer inventory and investment
income. Other income includes revenues associated with the sale of proprietary
research and other miscellaneous receipts. Underwriting and investment banking
revenues are fees from acting as a placement agent for private offerings and
retainer fees.
 
 Components
of our revenues may experience volatility associated with the overall economy
and based on the types of securities that we hold. The securities that we
typically trade and invest in include, equity, distressed debt and special
situation securities in the wireless and wire-line telecommunications, cable,
transportation, energy, alternative energy, homebuilder, and automotive supplier
industries, as well as government and mortgage-backed securities and municipal
securities. Distressed securities market opportunities have historically
increased in volume during times of economic turmoil and during times of
increasing interest rates. As companies become over-leveraged or have declining
business prospects, the level of corporate bankruptcies and restructurings
increases, resulting in our being able to identify a greater number of
investment opportunities. While it is during these times that these
opportunities have led to increased distressed and special situation
commissions, our equity trading business is negatively impacted by the less
robust economic environment. We tend to see increases in the level of
investments in government and mortgage-backed securities, as well as high-grade
municipal securities, during times of decreasing interest rates as investors try
to capture high long-term rates. As the economy recovers, a number of our
clients generally begin to allocate more funds to distressed securities in the
hope that the underlying companies will restructure or emerge from bankruptcy
with reduced debt and increased business prospects; however, the number of
distressed and special situation opportunities decreases as the economic
environment improves. Our equity trading commissions are closely tied to the
performance of the overall equity markets and thus increase during times of
economic recovery. Our retail clients begin to invest with more regularity
during economic growth periods. Investment banking revenues are directly related
to the overall business environment and fluctuate accordingly.
 
 Components
of Expenses
 
 Commissions,
employee compensation and benefits includes base salaries, incentive
compensation, sales commissions, forgiven employee debt, payroll taxes, health
insurance and related benefit expenses. Salaries, payroll taxes and employee
benefits are relatively fixed in nature. Sales commissions and incentive
compensation vary based upon revenue production.
 
 Clearing
and floor brokerage expense includes processing costs associated with executing
trades through our clearing organization and execution fees that we pay to floor
brokers and electronic communication networks. We are an introducing
broker-dealer that has engaged a third party clearing organization to perform
all of our clearing functions. The clearing organization processes and settles
our client and our proprietary transactions and maintains the detailed
transaction records. The amounts paid to our clearing organization as well as
floor brokers and electronic communication networks vary with the volume of
transactions and commissions we generate.
 
 Communications
and occupancy charges include rent, telecommunication costs, expenses associated
with news retrieval and price quotation services. These expenses are fixed in
nature and are typically associated with contracts exceeding one year in
duration.
 
 Professional
fees include legal fees, accounting fees, consulting fees and expenses related
to investment banking transactions. These fees vary depending upon the level of
our revenue generating activities.
 
 Other
expenses include fixed asset rentals, insurance, interest, depreciation and
amortization, office supplies and travel and entertainment. The costs associated
with fixed assets, insurance and office supplies tend to be fixed in nature.
Travel and entertainment expenses are variable in nature, and are often based
upon revenue production.
 
 Our
effective tax rate tends to differ from the federal statutory rate as a result
of estimated state franchise taxes and non-refundable expenses. We tend to incur
non-deductible expenses in the course of our operating activities, particularly
with respect to our investment banking activities, including meal and
entertainment expenses. As our investment banking activities increase, our
non-deductible expenses may increase as well. In addition, any fines levied
against us by the NASD or other regulatory organizations are also
non-deductible.
  23
 Table of Contents
 
 Results
of Continued Operations
 
 Fiscal
Year Ended December 31, 2007, 2006 and 2005
 
 Our total
revenues were $17,665,740 for the year ended December 31, 2007, which was a
decrease of $1,188,044 or 6% from $18,853,784 for the year ended December 31,
2006. Our total revenues were $18,853,784 for the year ended December 31, 2006,
which was a decrease of $9,529,711 or 34% from $28,383,495 for the year ended
December 31, 2005.
 
 Commission
revenues were $14,599,080 for the year ended December 31, 2007, which was a
decrease of $593,127 from $15,192,207 for the year ended December 31,
2006.  Commission revenues for the year ended December 31, 2006
decreased $1,947,281 from $17,139,488 for the year ended December 31, 2005. The
decrease during 2007 and 2006 resulted primarily from a decrease in agency
commissions.  As interest rates have continued to decline in the
United States and the general economy has worsened, we have identified fewer
attractive distressed situations and, as a result, our commission revenues have
decreased.  Commission revenues increased to 82.6% of total revenues
for the year ended December 31, 2007 and increased to 80.6% of total revenues
for the year ended December 31, 2006 from 60.4% of total revenues for the year
ended December 31, 2005.
 
 Underwriting
and investment banking revenues were $4,254,497 for the year ended December 31,
2007, which was an increase of $2,339,777 from $1,914,720 for the year ended
December 31, 2006. Underwriting and investment banking revenues for the year
ended December 31, 2006 decreased $14,521,986 from $16,436,706 for the year
ended December 31, 2005. The increase during 2007 was the result of eight
investment banking engagements.  The decrease during 2006 was due to
the completion of fewer private placements than in the preceding
year.  Underwriting and investment banking revenues increased to 24.1%
of total revenues for the year ended December 31, 2007 and decreased to 10.2% of
total revenues for the year ended December 31, 2006 from 57.9% of total revenues
for the year ended December 31, 2005.
 
 Net
dealer inventory and investment loss was $1,578,137 for the year ended December
31, 2007, which was an increase in loss of $2,668,410 from income of $1,090,273
for the year ended December 31, 2006. Net dealer inventory and investment income
for the year ended December 31, 2006 increased $6,891,018 from  a loss
of $5,800,745 for the year ended December 31, 2005. The decrease during 2007 was
primarily the result of decreased valuations on corporate equity securities
positions and warrants received in connection with underwriting and investment
banking activities.  The increase during 2006 resulted from increased
valuations of corporate equity securities and warrants received in connection
with underwriting and investment banking activities.  Net unrealized
trading losses for the year ended December 31, 2007 were $2,655,931. Net
realized trading profits for the same period were $719,965. Net dealer inventory
and investment income (loss) decreased to (8.9)% of total revenues for the year
ended December 31, 2007 and increased to 5.8% of total revenues for the year
ended December 31, 2006 from (20.4)% of total revenues for the year ended
December 31, 2005.
 
 Other
income was $390,300 for the year ended December 31, 2007, which was a decrease
of $266,284 from $656,584 for the year ended December 31, 2006. Other income for
the year ended December 31, 2006 increased $48,538 from $608,046 for the year
ended December 31, 2005. The decrease during 2007 resulted from a decrease in
fees earned on the sale of our research.  The increase during 2006
resulted from rental income from the office building we purchased in May, 2005
and fees earned on the sale of our research.  Other income decreased
to 2.2% of total revenues for the year ended December 31, 2007 and increased to
3.5% of total revenues for the year ended December 31, 2006 from 2.1% of total
revenues for the year ended December 31, 2005.
 
 Total
expenses were $24,372,500 for the year ended December 31, 2007, which was a
decrease of $2,882,456 or 11% from $27,254,956 for the year ended December 31,
2006. Total expenses for the year ended December 31, 2006 decreased $7,122,550
or 21% from $34,377,506 for the year ended December 31, 2005. Total expenses as
a percentage of total revenues were 138.0%, 144.6% and 121.1% for 2007, 2006 and
2005, respectively.
 
 Commissions,
employee compensation and benefits were $16,859,882 for the year ended December
31, 2007, which was a decrease of $1,922,714 from $18,782,596 for the year ended
December 31, 2006. Commissions, employee compensation and benefits for the year
ended December 31, 2006 decreased $3,974,381 from $22,756,977 for the year ended
December 31, 2005. Commission expense for the year ended December 31, 2007
increased $1,247,027 from $7,649,684 for the year ended December 31, 2006.
Commission expense for the year ended December 31, 2006 decreased $5,878,523
from $13,528,207 for the year ended December 31, 2005.  The increase
in commission expense during 2007 resulted from an increase in investment
banking revenues during 2007.  The decrease in commission expense
during 2006 resulted from a decrease in commission and investment banking
revenues during 2006.  Commissions, employee compensation and benefits
as a percentage of total revenues were 95.4%, 99.6% and 80.2% for 2007, 2006 and
2005, respectively.
  24
 Table of Contents
  Clearing
and floor brokerage expenses were $678,199 for the year ended December 31, 2007,
which was a decrease of $251,782 from $929,981 for the year ended December 31,
2006. Clearing and floor brokerage expenses for the year ended December 31, 2006
increased $188,164 from $741,817 for the year ended December 31,
2005.  The decrease in 2007 was primarily the result of lower trading
volumes than in the previous period.  The increase during 2006
resulted from an increase in corporate debt trading activity during 2006 through
the addition of a distressed debt trader as well as a general increase in the
number of securities transactions.  Clearing and floor brokerage
expenses as a percentage of total revenues were 3.8%, 4.9% and 2.6% for 2007,
2006 and 2005, respectively.
 
 Communications
and occupancy charges were $1,671,098 for the year ended December 31, 2007,
which was a decrease of $14,476 from $1,685,574 for the year ended December 31,
2006. Communications and occupancy charges for the year ended December 31, 2006
decreased $382,555 from $2,068,129 for the year ended December 31, 2005. The
decrease for 2007 was a combination of various factors with a negligible change
over the previous period. The decrease during 2006 resulted from reduced
telecommunications and other electronic services.  Communications and
occupancy charges as a percentage of total revenues were 9.5%, 8.9% and 7.3% for
2007, 2006 and 2005, respectively.
 
 Professional
fees were $1,567,343 for the year ended December 31, 2007, which was a decrease
of $323,755 from $1,891,098 for the year ended December 31,
2006.  Professional fees for the year ended December 31, 2006
decreased $1,311,724 from $3,202,822 for the year ended December 31,
2005.  The decrease during 2007 was largely the result of recouped
legal expenses, recorded in a prior period, afforded us from an indemnification
clause on a past investment banking engagement.  The decrease during
2006 resulted from fewer fees associated with investment banking
opportunities.  Professional fees as a percentage of total revenues
were 8.9%, 10.0% and 11.3% for 2007, 2006 and 2005, respectively.
 
 Other
expenses were $3,340,256 for the year ended December 31, 2007, which was a
decrease of $362,758 from $3,703,014 for the year ended December 31, 2006. Other
expenses for the year ended December 31, 2006 decreased $1,615,654 from
$5,318,668 for the year ended December 31, 2005. The decrease during 2007 is
primarily the result of decreased insurance costs and net decreases in meals and
entertainment, accommodations, and transportation.  The decrease
during 2006 is the result of overall reductions in office expense and travel
related expenses for sales and investment banking personnel.  Other
expenses as a percentage of total revenues were 18.9%, 19.6% and 18.7% for 2007,
2006 and 2005, respectively.
 
 Income
tax benefit was $2,307,495 for the year ended December 31, 2007, which was a
decrease of $453,184 from a benefit of $2,760,679 for the year ended December
31, 2006. Income tax benefit for the year ended December 31, 2006 increased
$588,689 from a benefit of $2,171,990 for the year ended December 31, 2005. The
decrease in benefit for 2007 resulted from a lower decrease in taxable income
than that in 2006.  The increase in benefit during 2006 resulted from
a decrease in taxable income from continued operations during that
year.  Our effective tax rate was 34% for 2007.  Our
effective tax rate differs from the federal statutory tax rate as a result of
estimated state income taxes and non-deductible expenses.
 
 Net loss
was $6,706,760 for the year ended December 31, 2007, which was a decrease in
loss of $1,694,412 from a net loss of $8,401,172 for the year ended December 31,
2006.  Net loss for the year ended December 31, 2006 increased
$2,407,161 from  a net loss of $5,994,011 for the year ended December
31, 2005. The decrease in loss during 2007 was primarily the result of decreased
operating expenses coupled with increased investment banking
revenues.  The increase in loss during 2006 was largely attributed to,
in addition to the other factors described above, the decrease in investment
banking revenue of $14,521,986.
 
 Results
of Discontinued Operations
 
 Fiscal
Year Ended December 31, 2007, 2006 and 2005
 
 In 2006,
we sold our subsidiary C&TA back to its original shareholders.  As
a  result of the sale we incurred a loss on sale of subsidiary of
$12,579,938.  Prior to the sale, we had recorded a goodwill impairment
of $22,050,056 related to this investment.  Our total net loss related
to this segment of discontinued operations was $0, $37,714,417, and $661,898 for
the years ending December 31, 2007, 2006, and 2005,
respectively.  Included in these net loss figures are income tax
expense (benefit) of $0, $1,269,734, and $(269,424) for the same periods,
respectively.  The increase in income tax expense for the period
ending December 31, 2006 is due to the non-deductible expense arising from the
goodwill impairment charge and the net taxable effect from the sale of the
subsidiary.
  25
 Table of Contents
  Liquidity
and Capital Resources
 
 As a
broker-dealer, we are required to maintain a certain level of liquidity or net
capital in accordance with NASD regulations. Factors affecting our liquidity
include the value of securities held in trading accounts, the value of
non-current assets, the amount of unsecured receivables, and the amount of
general business liabilities, excluding amounts payable to our clearing
organization and NASD approved subordinated debt.
 
 Our
inventory balance fluctuates daily based on the current market value and types
of securities held. We typically invest in securities in which we provide
research coverage. The types of securities may include publicly traded debt,
equity, options and private security issuances. As a market maker, we provide
bid and ask quotes on certain equity securities on the Nasdaq National
Market.
 
 Market
values for some of the distressed securities may not be easily determinable
depending upon the volume of securities traded on open markets, the operating
status of the companies or the types of securities issued by companies. If the
underlying securities of a company become illiquid, our liquidity may be
affected depending on the value of the securities involved. During times of
general market decline, we may experience market value losses, which ultimately
affect our liquidity through our broker-dealer net capital requirements. In
addition, we may decide not to liquidate our security holdings to increase cash
availability if our management believes a market turnaround is likely in the
near term or if our management believes the securities are undervalued in the
current market.
 
 We
utilize the equity in securities owned at our clearing organization to fund
operating and investing activities. The value of the equity at the clearing
organization is also used to secure temporary financing for the purchase of
investments in our trading accounts. The value of our equity balance held at the
clearing organization may fluctuate depending on factors such as the market
valuation of securities held in our trading accounts, realized trading profits,
commission revenues, cash withdrawals and clearing costs we are charged for
conducting our trading activities. As a result of this activity, we may have
either a receivable or payable balance to the clearing organization. As of
December 31, 2007, we had a net payable balance to the clearing organization of
$3,838,535.
 
 Cash
Flows From Operating Activities
 
 At
December 31, 2007, we had cash and cash equivalents and investments on hand of
$15,227,557. Net cash provided by (used in) operating activities was
$(14,949,600), $1,789,057, and $(677,742) in 2005, 2006 and 2007, respectively.
The net cash provided by (used in) operating activities is affected primarily by
the brokerage operating activities and changes in the brokerage-related assets
and liabilities.
 
 In 2007,
the primary uses of cash were from a decrease of $3,110,165 in securities owned,
not yet purchased.  The primary sources of cash were from a $5,522,852
decrease in securities owned, a decrease in federal income tax receivable of
$1,478,903, and a $1,222,256 increase in payable to clearing
organization.  The net effect of these transactions on cash flows from
operating activities was $5,113,846 of cash provided by operations, with the
remaining decrease consisting of $5,791,588 in net loss plus changes in other
asset and liability accounts.
 
 In 2006,
the primary sources of cash were from a $4,110,690 decrease in securities owned,
an increase of $2,005,833 in payable to clearing organization, and an increase
of $3,110,165 in securities sold, not yet purchased.  The net effect
of these transactions on cash flows from operating activities was $9,266,688 in
cash provided in operations with the remaining uses of cash of $7,477,631
resulting from general continued operations and costs incurred in the sale of
C&TA.
 
 As of
March 31, 2006, we recorded a non-cash expense of $22,050,056 representing the
implied impairment of goodwill of C&TA due to the industry-wide decrease in
telecommunication restructurings and the associated reduction in C&TA’s
customer engagements and fees.
 
 On
October 1, 2006, Tejas completed its sale of C&TA back to the original
Shareholders of C&TA.   The consideration paid by the
Shareholders to Tejas consisted of 3,157,895 shares of Tejas common stock, which
was the Tejas stock portion of the consideration paid by Tejas for C&TA in
connection with Tejas’ acquisition of C&TA in July 2005.  In
addition, as part of the sale, Tejas agreed to cancel the remaining balance of
receivables due from C&TA.  The sale was consummated on October 1,
2006 with a loss on sale of subsidiary recorded as of September 30,
2006.  Accordingly, we have included our consulting segment in
discontinued operations in the accompanying consolidated financial
statements.
  26
 Table of Contents
  In 2005,
the primary uses of cash were from a $8,362,057 increase in securities owned, an
aggregate $3,645,950 increase in federal income taxes receivable and decrease in
federal income taxes payable, and a $3,189,893 decrease in accounts payable,
accrued expenses and other liabilities.  The primary sources of cash
were from a $4,031,583 decrease in receivables from clearing
organization.  The net effect of these transactions on cash flows from
operating activities was $11,166,317 in cash used in operations, with the
remaining decrease consisting of $3,783,283 in net loss plus changes in other
asset and liability accounts.
 
 Cash
Flows from Investing Activities
 
 Net cash
used in investing activities was $11,898,161, $395,176, and $91,946 in 2005,
2006 and 2007, respectively. For the year ended December 31, 2005, the primary
use of cash was for the purchase of two office buildings and $5,210,332 payment
for our acquisition of C&TA.  For the years ended December 31,
2007 and 2006, the changes were primarily due to the purchase and sale of
property and equipment in the ordinary course of business.
 
 On July
1, 2005, we completed our acquisition of C&TA. The total consideration paid
by us in exchange for the outstanding capital stock of C&TA was
approximately $45.4 million, consisting of cash in the amount of $5.0 million
($2 million of which was paid upon the execution of the letter of intent
relating to this acquisition), which was paid out of our cash reserves, and
3,157,895 shares of our common stock valued at $12.63 per share. Of the
consideration paid by us, 309,316 shares of our common stock were held in escrow
for a period of two years following the closing date of the acquisition, to
satisfy possible indemnification claims made by us under the agreement and plan
of merger relating to this acquisition. The total purchase consideration,
including approximately $0.5 million in transaction costs, has been allocated to
the assets acquired, identifiable intangible assets and liabilities assumed,
based on the respective fair values at the date of acquisition. The allocation
resulted in goodwill of approximately $44.2 million.  In connection
with this acquisition, we and the former shareholders of C&TA entered into a
registration rights agreement pursuant to which such shareholders were granted
the right to register the shares of our common stock they received in this
acquisition for resale under a shelf registration statement filed by
us.  In addition, such shareholders were also granted “piggyback”
registration rights with respect to certain registrations initiated by us on our
own behalf or for the benefit of selling stockholders.
 
 Cash
Flows from Financing Activities
 
 Net cash
provided by (used in) financing activities was $26,532,218, $(609,031), and
$(617,267) in 2005, 2006 and 2007, respectively.
 
 On July
7, 2004, we entered into a subordinated convertible promissory note agreement
with Salter Family Partners, Ltd., a family limited partnership controlled by
Mark M. Salter, our Chief Executive Officer, to borrow $1,000,000 for operating
purposes. Under the terms of the promissory note, we were required to make
quarterly interest payments at a rate of 10% per annum. The promissory note was
unsecured. The maturity date of the note was December 1, 2005, at which time all
remaining unpaid principal and interest was to become due.  The
promissory note was convertible at any time into a number of shares of our
common stock equal to the unpaid principal divided by a conversion price of
$5.00 or a number of shares of our Series A Convertible Preferred Stock equal to
the unpaid principal divided by a conversion price of $1,000. On September 26,
2005, the Salter Partnership converted the promissory note into 1,000 shares of
our Series A convertible preferred stock. We have also granted the Salter
Partnership certain piggyback registration rights for the shares into which the
preferred stock may be converted.
 
 Under the
terms of our Series A convertible preferred stock (i) Salters Family Partners,
Ltd. is entitled to a 10% cumulative dividend, payable on a quarterly basis,
(ii) we may convert such preferred stock into common stock in the event our
common stock trades above $10.00 for ten consecutive trading days with a trading
volume of at least 50,000 shares for each such trading day, (iii) in the event
of a liquidation or dissolution of us, the preferred stock has a liquidation
preference over our common stock equal to $1,000 per share (or an aggregate
amount of $1,000,000), (iv) the preferred stock is convertible into common
stock, and (v) the preferred stock will vote on an as-converted basis with our
common stock on all matters requiring a stockholder vote except where a separate
class vote is required under the Delaware General Corporation Law.
 
 On
February 3, 2005, we issued 1,600,000 shares of our common stock through a
secondary public offering. As a result of this offering, we received
approximately $23,629,000 in net proceeds. On February 25, 2005, the underwriter
for the offering, C.E. Unterberg, Towbin LLC, exercised their option to purchase
an additional 60,000 shares of our common stock. As a result of the option
exercise, we received approximately $888,000 in additional net
proceeds.
  27
 Table of Contents
  On
February 22, 2005, we purchased an office building through our wholly-owned
subsidiary, TI Building Partnership, Ltd. The office building was purchased at a
price of approximately $3,470,000, with $2,200,000 being financed through
Community Credit Union, or CCU. Pursuant to the terms of a promissory note, this
loan accrues interest at a rate of 5.75% per annum, with monthly installments of
$13,840 through February 2011, at which time the outstanding principal and
accrued interest on the note shall be due and payable. A mortgage on the
building and the associated real property secures the repayment of such
borrowing. In connection with this acquisition, John J. Gorman, our Chairman,
agreed to (1) indemnify CCU against any losses incurred by CCU as a result of
any violations of environmental laws or certain building laws related to such
real property and (2) provide a limited guarantee of our performance under
certain provisions of the deed of trust entered into in connection with such
financing.
 
 On May
10, 2005, we borrowed $1,760,000 from First United Bank to finance in part the
purchase price of an office building through our wholly-owned subsidiary, TI
Building Partnership, Ltd. Pursuant to the terms of a promissory note, the
borrowing accrues interest at a rate of 6.75% per annum, with monthly
installments of $13,388 through May 2010, at which time the outstanding
principal and accrued interest on the note shall be due and payable. A mortgage
on the building and the associated real property secures the repayment of such
borrowing.  Subsequent to December 31, 2007, we sold this building
through our wholly-owned subsidiary, TI Building Partnership, Ltd.
 
 On April
6, 2006, Tejas authorized a stock repurchase program for up to $5 million of its
outstanding common stock.  Shares may be repurchased in open market
transactions, private transactions or otherwise at such times and at such
prices, as the officers of Tejas believe appropriate and in the best interest of
Tejas.  For the years ended December 31, 2007 and 2006, we had
purchased 331,498 and 195,000 shares of our common stock under the program,
respectively.   The net cost of these purchases was $381,225
and$672,281, respectively.
 
 As of
December 31, 2007, our contractual cash obligations and the periods in which
payments under such cash obligations were due are as follows:
 
 Payments Due by PeriodContractual
      Obligations
              
              Total
              
              
              Less
      Than
                1 Year*
              
              
              1-3 Years
              
              
              3-5 Years
              
              
              More
      Than
                5 YearsNotes
      Payable
              
              $
              3,733,000
              
              
              $
              1,691,000
              
              
              $
              99,000
              
              
              $
              1,943,000
              
              
              $
              —Operating
      Lease Obligations
              
              
              3,750,000
              
              
              
              1,155,000
              
              
              
              1,178,000
              
              
              
              684,000
              
              
              
              733,000Capital
      Lease Obligations
              
              
              153,000
              
              
              
              69,000
              
              
              
              84,000
              
              
              
              —
              
              
              
              —Total
      Contractual Cash Obligations
              
              $
              7,636,000
              
              
              $
              2,915,000
              
              
              $
              1,361,000
              
              
              $
              2,627,000
              
              
              $
              733,000
 *Includes
early paydown of note payable to First United Bank due to sale of building
subsequent to December 31, 2007 noted above.
 
 Our
primary sources of cash are cash flows from operations, borrowings and equity
offerings. Our cash flows from operations and our ability to make scheduled
payments of principal and interest on, or to refinance, our indebtedness will
depend on our future performance, which is subject to the risks discussed
elsewhere in this Form 10-K. Likewise, our ability to obtain proceeds from
borrowings and equity offerings will depend on these factors.
 
 We have
experienced significant trading losses subsequent to year end, however maintain
sufficient liquidity to fund operations for the next twelve
months.  We have made changes in the investment policies to mitigate
the risk of future trading losses.  However, significant changes in
market conditions could severely impact our ability to fund operations without
further actions being taken to reduce operating costs.  Additionally,
there can be no assurance that our business will generate sufficient cash flows
from operations or that future borrowings or equity offerings will be available
in an amount sufficient to enable us to service our indebtedness or to fund our
other liquidity needs.
 
 Effects
Of Inflation
 
 The
effects of inflation have been minimal on our results of operations and
financial condition in recent years. However, the rising cost of labor and
competitive market for brokers could affect our general and administrative costs
in the near term.
 
 Recently
Issued Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for the Company on January 1,
2008. The Company is evaluating the impact that SFAS No. 157 will have on its
consolidated financial statements.
  28
 Table of Contents
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement No.
115.SFAS No. 159 permits an entity to measure financial instruments and
certain other items at estimated fair value. Most of the provisions of SFAS No.
159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities,applies to all entities that own trading
and available-for-sale securities. The fair value option created by SFAS No. 159
permits an entity to measure eligible items at fair value as of specified
election dates. The fair value option (a) may generally be applied instrument by
instrument, (b) is irrevocable unless a new election date occurs, and (c) must
be applied to the entire instrument and not to only a portion of the instrument.
SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity (i) makes that choice in
the first 120 days of that year, (ii) has not yet issued financial statements
for any interim period of such year, and (iii) elects to apply the provisions of
SFAS No. 157. The Company is evaluating the impact that SFAS No. 157 will have
on its consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations – Revised
2007.  SFAS 141R provides guidance on improving the relevance,
representational faithfulness, and comparability of information that a reporting
entity provides in its financial reports about a business combination and its
effects.  SFAS 141R applies to business combinations where the
acquisition is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008.  The Company is evaluating
the impact that SFAS 141R will have on its consolidated financial
statements.
 
 ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
 
 Our
principal business activities are, by their nature, risky and volatile and are
directly affected by economic and political conditions and broad trends in
business and finance in the national and international markets. Any one of these
factors may cause a substantial decline in the securities markets, which could
materially affect our business. Managing risk is critical to our profitability
and to reducing the likelihood of earnings volatility. Our risk management
policies and procedures have been established to continually identify, monitor
and manage risk. The major types of risk that we face include credit risk,
operating risk and market risk.
 
 Credit
risk is the potential for loss due to a client or counterparty failing to
perform its contractual obligation. We clear our securities transactions through
a clearing organization. Under the terms of the clearing agreement, the clearing
organization has the right to charge us for losses that result from our clients’
failure to fulfill their contractual obligations. In order to mitigate risk, our
policy is to monitor the credit standing of our clients and maintain collateral
to support client margin balances. Further, significant portions of our assets
are held at our clearing organization. Therefore, we could incur substantial
losses if our clearing organization were to become insolvent or otherwise unable
to meet its financial obligations. Our clearing organization has historically
met all of its obligations to us.
 
 Operating
risk arises from the daily conduct of our business and relates to the potential
for deficiencies in control processes and systems, mismanagement of our
activities or mismanagement of client accounts by our employees. We rely heavily
on computer and communication systems in order to conduct our brokerage
activities. Third party vendors, such as the clearing organization and news and
quote providers, provide many of the systems critical to our business. Our
business could be adversely impacted if any of these systems were disrupted. We
mitigate the risk associated with systems by hiring experienced personnel, and
providing employees with alternate means of acquiring or processing information.
In order to mitigate the risk associated with mismanagement of our activities or
client accounts, we utilize compliance and operations personnel to review the
activities of administrative and sales personnel. In addition, the activities of
management are actively reviewed by other members of management on a regular
basis and by the board of directors.
 
 Our
primary market risk exposure is to market price changes and the resulting risk
of loss that may occur from the potential change in the value of a financial
instrument as a result of price volatility or changes in liquidity for which we
have no control. Securities owned by us are either related to daily trading
activity or our principal investing activities. Market price risk related to
trading securities is managed primarily through the daily monitoring of funds
committed to the various types of securities owned by us and by limiting
exposure to any one investment or type of investment. However, we will on
occasion concentrate our securities holdings to one or two positions based upon
our research and potential for market appreciation.
 
 Our
trading securities were $14,185,486 in long positions and $0 in short positions
as of December 31, 2007. These trading securities may be exchange listed, Nasdaq
Stock Market, warrants or over-the-counter, or with limited market activity on
both long and short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be $1,419,000 as of December
31, 2007. A 10% hypothetical decline was used to represent a significant and
plausible market change.
  29
 Table of Contents
  Our
investment securities are typically those reported on by our research analysts.
These positions often consist of high-yield debt securities and the related
equity securities. We monitor this risk by maintaining current operating and
financial data on the companies involved, and projecting future valuations based
upon the occurrence of critical future events. Any transactions involving the
investment securities are typically based upon the recommendations of our
research analysts versus current market performance.
 
 ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 The
information required by Item 8 is set forth in Item 15 of this
report.
 
 ITEM9. CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM9A. CONTROLS AND PROCEDURES
 
 As of
December 31, 2007, we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act, as of the end of the year. The evaluation was conducted based on
the framework established by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated
Framework.Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective in enabling us to record, process, summarize and report
information required to be included in the Company’s periodic SEC filings within
the required time period, and that such information is accumulated and
communicated to the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosure.
 
 Additionally,
our Chief Executive Officer and Chief Financial Officer determined, as of
December 31, 2007, that during the three months ended December 31, 2007, there
was no change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
 
 ITEM9B. OTHER INFORMATION
 
 None.
 
 PART
III
 
 ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 The
information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2008 annual meeting of
stockholders, except for the information regarding our executive officers, which
is presented in Part I of this Form 10-K. The information required by this item
contained in our definitive proxy statement is incorporated herein by
reference.
 
 ITEM11. EXECUTIVE COMPENSATION
 
 The
information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2008 annual meeting of stockholders
and is incorporated herein by reference.
 
 ITEM12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2008 annual meeting of stockholders
and is incorporated herein by reference.
 
 ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
 
 The
information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2008 annual meeting of stockholders
and is incorporated herein by reference.
  30
 Table of Contents
  ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The
information required by this item will be contained in our definitive proxy
statement to be filed in connection with our 2008 annual meeting of stockholders
and is incorporated herein by reference.
 
 PART
IV
 
 ITEM15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 1.
              
              Financial
      StatementsSee
      Financial Statements attached hereto.2.
              
              ExhibitsIncorporated
      by reference to the Exhibit Index at the end of this
    report.
  31
 Table of Contents
  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.
 
 TEJAS
      INCORPORATEDBy:
              /s/ Mark M. SalterMark
      M. SalterChief
      Executive Officer
 
 Date:
March 28, 2008
 
 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 dates indicated.
 
 Signature
              
              Title
              
              Date/s/  John
      J. Gorman
              
              Chairman
      of the Board
              
              March
      28, 2008John
      J. Gorman/s/  Mark
      M. Salter
              
              Chief
      Executive Officer
              
              March
      28, 2008Mark
      M. Salter
              
              (Principal
      Executive Officer)/s/  Kurt
      J. Rechner
              
              President,
      Chief Operating
              
              March
      28, 2008Kurt
      J. Rechner
              
              Officer,
      Chief Financial Officer (Principal Financial Officer), Treasurer and
      Secretary/s/
      Kurt E. Morales
              
              Director
      of Accounting
              
              March
      28, 2008Kurt
      E. Morales
              
              (Principal
      Accounting Officer)/s/  Michael
      F. Dura
              
              Vice-Chairman
      of the Board
              
              March
      28, 2008Michael
      F. Dura/s/  Clark
      N. Wilson
              
              Director
              
              March
      28, 2008Clark
      N. Wilson/s/  William
      A. Inglehart
              
              Director
              
              March
      28, 2008William
      A. Inglehart/s/  Dennis
      G. Punches
              
              Director
              
              March
      28, 2008Dennis
      G. Punches/s/
      Charles H. Mayer
              
              Director
              
              March
      28, 2008Charles
      H. Mayer/s/
      Barry A. Williamson
              
              Director
              
              March
      28, 2008Barry
      A. Williamson
  32
 
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Consolidated
Financial Statements
 
 Years
Ended December 31, 2007, 2006 and 2005
 
 (With
Report of Independent Registered Public Accounting Firm Thereon)
   
  TEJASINCORPORATEDAND SUBSIDIARIES
  Index
to Consolidated Financial Statements
 
 PageReport of Independent Registered Public Accounting
      Firm
              
              1Consolidated Statements of Financial Condition as of
      December 31, 2007 and 2006
              
              2Consolidated Statements of Operations for the years ended
      December 31, 2007, 2006 and 2005
              
              3Consolidated Statements of Stockholders' Equity for the
      years ended December 31, 2007, 2006 and 2005
              
              4Consolidated Statements of Cash Flows for the years ended
      December 31, 2007, 2006 and 2005
              
              5Notes to Consolidated Financial
    Statements
              
              7
  Index
  REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 The Board
of Directors and Stockholders
 Tejas
Incorporated and Subsidiaries
 
 We have
audited the accompanying consolidated statements of financial condition of Tejas
Incorporated and Subsidiaries (the Company) as of December 31, 2007 and 2006,
and the related statements of operations, stockholders’ equity, and cash flows
for the years ended December 31, 2007, 2006, and 2005.  These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits 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 Tejas Incorporated and
Subsidiaries at December 31, 2007 and 2006, and the results of their operations
and their cash flows for the years ended December 31, 2007, 2006, and 2005 in
conformity with U.S. generally accepted accounting principles.
 
 /s/ PMB
Helin Donovan, LLP
 
 Austin,
Texas
 March 28,
2008
  1
 Index
  TEJASINCORPORATED AND SUBSIDIARIES
 
 Consolidated
Statements of Financial Condition
 
 December
31, 2007 and 2006
 
 Assets
                  
                  2007
                  
                  
                  2006Cash
      and cash equivalents
                  
                  $
                  1,042,071
                  
                  
                  
                  2,429,026Receivable
      from clearing organization
                  
                  
                  185,207
                  
                  
                  
                  116,259Receivables
      from employees
                  
                  
                  123,807
                  
                  
                  
                  197,425Federal
      income taxes receivable
                  
                  
                  271,112
                  
                  
                  
                  1,750,015Securities
      owned, at fair value
                  
                  
                  14,185,486
                  
                  
                  
                  19,708,338Property
      and equipment, net
                  
                  
                  6,654,208
                  
                  
                  
                  6,749,668Deferred
      tax asset, net
                  
                  
                  1,938,975
                  
                  
                  
                  -Goodwill
                  
                  
                  138,215
                  
                  
                  
                  138,215Prepaid
      expenses and other assets
                  
                  
                  627,164
                  
                  
                  
                  661,542Total
      assets
                  
                  $
                  25,166,245
                  
                  
                  
                  31,750,488Liabilities
      and Stockholders' EquityAccounts
      payable, accrued expenses and other liabilities
                  
                  $
                  2,799,224
                  
                  
                  
                  2,388,903Securities
      sold, not yet purchased
                  
                  
                  -
                  
                  
                  
                  3,110,165Payable
      to clearing organization
                  
                  
                  3,838,535
                  
                  
                  
                  2,616,279Deferred
      tax liability, net
                  
                  
                  -
                  
                  
                  
                  209,495Notes
      payable
                  
                  
                  3,733,636
                  
                  
                  
                  3,822,612Total
      liabilities
                  
                  
                  10,371,395
                  
                  
                  
                  12,147,454Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $0.001 par value,
      100,000 shares authorizedSeries A convertible preferred stock,
      1,000 shares issued and outstanding at December 31, 2007 and
      2006
                  
                  
                  1
                  
                  
                  
                  1Common
      stock, $0.001 par value 30,000,000 shares authorized; 8,178,508
      issued at December 31, 2007 and 2006
                  
                  
                  8,179
                  
                  
                  
                  8,179Additional
      paid in capital
                  
                  
                  69,912,141
                  
                  
                  
                  69,839,835Retained
      earnings (deficit)
                  
                  
                  (44,045,648
                  )
                  
                  
                  (39,546,383
                  )Treasury stock, at cost, 3,684,393 and 3,352,895 shares atDecember 31, 2007 and 2006,
      respectively
                  
                  
                  (11,079,823
                  )
                  
                  
                  (10,698,598
                  )Total
      stockholders' equity
                  
                  
                  14,794,850
                  
                  
                  
                  19,603,034Total
      liabilities and stockholders' equity
                  
                  $
                  25,166,245
                  
                  
                  
                  31,750,488
 
 See
accompanying notes to consolidated financial statements.
  2
 Index
  
 TEJASINCORPORATED AND SUBSIDIARIES
 
 Consolidated
Statements of Operations
 
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 2007
                  
                  
                  2006
                  
                  
                  2005Revenue:Commissions
      from agency transactions
                  
                  $
                  3,955,196
                  
                  
                  
                  4,928,381
                  
                  
                  
                  6,218,258Commissions
      from principal transactions
                  
                  
                  10,643,884
                  
                  
                  
                  10,263,826
                  
                  
                  
                  10,921,230Underwriting
      and investment banking income
                  
                  
                  4,254,497
                  
                  
                  
                  1,914,720
                  
                  
                  
                  16,436,706Net
      dealer inventory and investment income (loss), net of trading interest
      expense of $259,205, $502,945 and $244,674, respectively
                  
                  
                  (1,578,137
                  )
                  
                  
                  1,090,273
                  
                  
                  
                  (5,800,745
                  )Other
      income
                  
                  
                  390,300
                  
                  
                  
                  656,584
                  
                  
                  
                  608,046Total
      revenue
                  
                  
                  17,665,740
                  
                  
                  
                  18,853,784
                  
                  
                  
                  28,383,495Expenses:Commissions,
      employee compensation and benefits
                  
                  
                  16,859,882
                  
                  
                  
                  18,782,596
                  
                  
                  
                  22,756,977Clearing
      and floor brokerage
                  
                  
                  678,199
                  
                  
                  
                  929,981
                  
                  
                  
                  741,817Communications
      and occupancy
                  
                  
                  1,671,098
                  
                  
                  
                  1,685,574
                  
                  
                  
                  2,068,129Professional
      fees
                  
                  
                  1,567,343
                  
                  
                  
                  1,891,098
                  
                  
                  
                  3,202,822Interest
      (including $73,425 to related parties included in the year ended December
      31, 2005)
                  
                  
                  255,722
                  
                  
                  
                  262,693
                  
                  
                  
                  289,093Other
                  
                  
                  3,340,256
                  
                  
                  
                  3,703,014
                  
                  
                  
                  5,318,668Total
      expenses
                  
                  
                  24,372,500
                  
                  
                  
                  27,254,956
                  
                  
                  
                  34,377,506Loss
      before income tax benefit from continued operations
                  
                  $
                  (6,706,760
                  )
                  
                  
                  (8,401,172
                  )
                  
                  
                  (5,994,011
                  )Income
      tax benefit from continued operations
                  
                  
                  (2,307,495
                  )
                  
                  
                  (2,760,679
                  )
                  
                  
                  (2,171,990
                  )Net
      loss from continued operations
                  
                  $
                  (4,399,265
                  )
                  
                  
                  (5,640,493
                  )
                  
                  
                  (3,822,021
                  )Loss
      before income tax expense (benefit) from discontinued operations
      (including loss from goodwill impairment of $22,050,056 and loss on
      disposal of $12,579,938 included in the year ended December 31,
      2006)
                  
                  $
                  -
                  
                  
                  
                  (36,444,683
                  )
                  
                  
                  (931,322
                  )Income
      tax expense (benefit) from discontinued operations
                  
                  
                  -
                  
                  
                  
                  1,269,734
                  
                  
                  
                  (269,424
                  )Net
      loss from discontinued operations available to common
      stockholders
                  
                  $
                  -
                  
                  
                  
                  (37,714,417
                  )
                  
                  
                  (661,898
                  )Total
      net loss
                  
                  $
                  (4,399,265
                  )
                  
                  
                  (43,354,910
                  )
                  
                  
                  (4,483,919
                  )Less:Dividends
      on Series A convertible preferred stock
                  
                  
                  (100,000
                  )
                  
                  
                  (100,000
                  )
                  
                  
                  (26,370
                  )Net
      loss from continued operations available to common
      stockholders
                  
                  $
                  (4,499,265
                  )
                  
                  
                  (5,740,493
                  )
                  
                  
                  (3,848,391
                  )Total
      net loss available to common stockholders
                  
                  $
                  (4,499,265
                  )
                  
                  
                  (43,454,910
                  )
                  
                  
                  (4,510,289
                  )Loss
      from continued operations per share of common stock:Basic
                  
                  $
                  (0.93
                  )
                  
                  
                  (0.80
                  )
                  
                  
                  (0.63
                  )Diluted
                  
                  $
                  (0.93
                  )
                  
                  
                  (0.80
                  )
                  
                  
                  (0.63
                  )Loss
      from discontinued operations per share of common stock:Basic
                  
                  $
                  -
                  
                  
                  
                  (5.25
                  )
                  
                  
                  (0.11
                  )Diluted
                  
                  $
                  -
                  
                  
                  
                  (5.25
                  )
                  
                  
                  (0.11
                  )Total
      loss per share of common stock:Basic
                  
                  $
                  (0.93
                  )
                  
                  
                  (6.05
                  )
                  
                  
                  (0.74
                  )Diluted
                  
                  $
                  (0.93
                  )
                  
                  
                  (6.05
                  )
                  
                  
                  (0.74
                  )Weighted
      average common shares outstanding:Basic
                  
                  
                  4,824,712
                  
                  
                  
                  7,181,060
                  
                  
                  
                  6,097,903Diluted
                  
                  
                  4,824,712
                  
                  
                  
                  7,181,060
                  
                  
                  
                  6,097,903
 
 See
accompanying notes to consolidated financial statements.
  3
 Index
 
 TEJASINCORPORATED AND SUBSIDIARIES
 
 Consolidated
Statements of Stockholders' Equity
 
 For the
Years Ended December 31, 2007, 2006 and 2005
 Shares
      Outstanding
                  
                  
                  
                  
                  
                  
                  
                  
                  AdditionalTreasury
                  
                  
                  Preferred
                  
                  
                  Common
                  
                  
                  Preferred
                  
                  
                  Common
                  
                  
                  Paid
      in
                  
                  
                  Retained
                  
                  
                  TreasuryShares
                  
                  
                  Shares
                  
                  
                  Shares
                  
                  
                  Stock
                  
                  
                  Stock
                  
                  
                  Capital
                  
                  
                  Earnings
      (Deficit)
                  
                  
                  Stock
                  
                  
                  TotalBalance
      at December 31, 2004
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,026,048
                  
                  
                  $
                  -
                  
                  
                  
                  3,026
                  
                  
                  
                  2,223,267
                  
                  
                  
                  8,418,816
                  
                  
                  
                  -
                  
                  
                  
                  10,645,109Issuance
      of common stock from option exercise
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,565
                  
                  
                  
                  -
                  
                  
                  
                  17
                  
                  
                  
                  140,518
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  140,535Issuance
      of common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,817,895
                  
                  
                  
                  -
                  
                  
                  
                  4,818
                  
                  
                  
                  64,225,161
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  64,229,979Issuance
      of preferred stock
                  
                  
                  -
                  
                  
                  
                  1,000
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  999,999
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,000,000Tax
      impact of stock option exercises
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  33,175
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  33,175Dividends
      on preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (26,370
                  )
                  
                  
                  -
                  
                  
                  
                  (26,370
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,483,919
                  )
                  
                  
                  -
                  
                  
                  
                  (4,483,919
                  )Balance
      at December 31, 2005
                  
                  
                  -
                  
                  
                  
                  1,000
                  
                  
                  
                  7,860,508
                  
                  
                  $
                  1
                  
                  
                  
                  7,861
                  
                  
                  
                  67,622,120
                  
                  
                  
                  3,908,527
                  
                  
                  
                  -
                  
                  
                  
                  71,538,509Issuance
      of common stock from option exercise
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  238,000
                  
                  
                  
                  -
                  
                  
                  
                  238
                  
                  
                  
                  297,262
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  297,500Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  80,000
                  
                  
                  
                  -
                  
                  
                  
                  80
                  
                  
                  
                  1,967,820
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,967,900Dividends
      on preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (100,000
                  )
                  
                  
                  -
                  
                  
                  
                  (100,000
                  )Purchase
      of treasury stock
                  
                  
                  195,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (672,281
                  )
                  
                  
                  (672,281
                  )Common
      stock and options received from sale of subsidiary
                  
                  
                  3,157,895
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (47,367
                  )
                  
                  
                  -
                  
                  
                  
                  (10,026,317
                  )
                  
                  
                  (10,073,684
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (43,354,910
                  )
                  
                  
                  -
                  
                  
                  
                  (43,354,910
                  )Balance
      at December 31, 2006
                  
                  
                  3,352,895
                  
                  
                  
                  1,000
                  
                  
                  
                  8,178,508
                  
                  
                  $
                  1
                  
                  
                  
                  8,179
                  
                  
                  
                  69,839,835
                  
                  
                  
                  (39,546,383
                  )
                  
                  
                  (10,698,598
                  )
                  
                  
                  19,603,034Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72,306
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72,306Dividends
      on preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (100,000
                  )
                  
                  
                  -
                  
                  
                  
                  (100,000
                  )Purchase
      of treasury stock
                  
                  
                  331,498
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (381,225
                  )
                  
                  
                  (381,225
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,399,265
                  )
                  
                  
                  -
                  
                  
                  
                  (4,399,265
                  )Balance
      at December 31, 2007
                  
                  
                  3,684,393
                  
                  
                  
                  1,000
                  
                  
                  
                  8,178,508
                  
                  
                  $
                  1
                  
                  
                  
                  8,179
                  
                  
                  
                  69,912,141
                  
                  
                  
                  (44,045,648
                  )
                  
                  
                  (11,079,823
                  )
                  
                  
                  14,794,850
 See
accompanying notes to consolidated financial statements.
  4
 Index
 
 TEJASINCORPORATED AND SUBSIDIARIES
 
 Consolidated
Statements of Cash Flows
 
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 2007
                  
                  
                  2006
                  
                  
                  2005Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (4,399,265
                  )
                  
                  
                  (43,354,910
                  )
                  
                  
                  (4,483,919
                  )Adjustments
      to reconcile net loss to net cash(used in) provided by operating
      activities:Deferred
      tax expense (benefit)
                  
                  
                  (2,148,470
                  )
                  
                  
                  (1,197,584
                  )
                  
                  
                  (293,927
                  )Depreciation
      and amortization expense
                  
                  
                  297,932
                  
                  
                  
                  726,220
                  
                  
                  
                  1,375,097Stock
      based compensation expense
                  
                  
                  72,305
                  
                  
                  
                  1,967,900
                  
                  
                  
                  -Gain
      on sale of property and equipment, net
                  
                  
                  (50,407
                  )
                  
                  
                  -
                  
                  
                  
                  -Goodwill
      impairment
                  
                  
                  -
                  
                  
                  
                  22,050,056
                  
                  
                  
                  -Loss
      on sale of discontinued operations
                  
                  
                  -
                  
                  
                  
                  12,579,938
                  
                  
                  
                  -Changes
      in operating assets and liabilities:Receivable
      from clearing organization
                  
                  
                  (68,948
                  )
                  
                  
                  200,345
                  
                  
                  
                  3,421,137Receivables
      from employees
                  
                  
                  73,618
                  
                  
                  
                  (74,741
                  )
                  
                  
                  (102,684
                  )Federal
      income tax receivable/payable, net
                  
                  
                  1,478,903
                  
                  
                  
                  78,235
                  
                  
                  
                  (3,645,950
                  )Securities
      owned
                  
                  
                  5,522,852
                  
                  
                  
                  4,110,690
                  
                  
                  
                  (8,362,057
                  )Prepaid
      expenses and other assets
                  
                  
                  34,378
                  
                  
                  
                  (44,597
                  )
                  
                  
                  (187,012
                  )Accounts
      payable, accrued expenses and other liabilities
                  
                  
                  397,269
                  
                  
                  
                  (368,493
                  )
                  
                  
                  (3,189,893
                  )Payable
      to clearing organization
                  
                  
                  1,222,256
                  
                  
                  
                  2,005,833
                  
                  
                  
                  610,446Securities
      sold, not yet purchased
                  
                  
                  (3,110,165
                  )
                  
                  
                  3,110,165
                  
                  
                  
                  (90,838
                  )Net
      cash (used in) provided by operating activities
                  
                  
                  (677,742
                  )
                  
                  
                  1,789,057
                  
                  
                  
                  (14,949,600
                  )Cash
      flows from investing activities:Purchase
      of business, net of cash acquired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,210,332
                  )Cash
      disbursed in sale of subsidiary
                  
                  
                  -
                  
                  
                  
                  (17,746
                  )
                  
                  
                  -Cash
      proceeds from sale of property and equipment
                  
                  
                  64,850
                  
                  
                  
                  -
                  
                  
                  
                  -Purchase
      of property and equipment
                  
                  
                  (156,796
                  )
                  
                  
                  (377,430
                  )
                  
                  
                  (6,687,829
                  )Net
      cash used in investing activities
                  
                  
                  (91,946
                  )
                  
                  
                  (395,176
                  )
                  
                  
                  (11,898,161
                  )Cash
      flows from financing activities:Payments
      on capital lease
                  
                  
                  (47,066
                  )
                  
                  
                  (50,166
                  )
                  
                  
                  (48,884
                  )Payment
      of accrued dividend on preferred stock
                  
                  
                  (100,000
                  )
                  
                  
                  (100,000
                  )
                  
                  
                  (1,370
                  )Proceeds
      from notes payable, net of repayment
                  
                  
                  (88,976
                  )
                  
                  
                  (84,084
                  )
                  
                  
                  2,106,695Payments
      for purchase of treasury stock
                  
                  
                  (381,225
                  )
                  
                  
                  (672,281
                  )
                  
                  
                  -Proceeds
      from issuance of common stock
                  
                  
                  -
                  
                  
                  
                  297,500
                  
                  
                  
                  24,475,777Net
      cash provided by (used in) financing activities
                  
                  
                  (617,267
                  )
                  
                  
                  (609,031
                  )
                  
                  
                  26,532,218
 5
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Consolidated
Statements of Cash Flows
 
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 
 2007
                
                
                2006
                
                
                2005Net
      change in cash and cashequivalents
                
                $
                (1,386,955
                )
                
                
                784,850
                
                
                
                (315,543
                )Cash
      and cash equivalents at beginning of year (includes $77,094 of cash
      related to subsidiary to be disposed for 2006)
                
                
                2,429,026
                
                
                
                1,644,176
                
                
                
                1,959,719Cash
      and cash equivalents at end of year (includes $77,094 of cash related to
      subsidiary to be disposed for 2005)
                
                $
                1,042,071
                
                
                
                2,429,026
                
                
                
                1,644,176Supplemental
      disclosures:Interest
      paid
                
                $
                256,554
                
                
                
                258,178
                
                
                
                296,843Taxes
      paid
                
                $
                55,000
                
                
                
                133,995
                
                
                
                1,750,000
 
 
 Summary
of non-cash investing and financing activies:
  In
May 2007 and July 2006, the Company acquired assets through a capital lease
totaling $60,118 and $24,917, respectively.
  On
September 29, 2006, the Company recorded $10,026,317 of treasury stock for the
sale of Capital & Technology Advisors, Inc.
  On
December 31, 2005, 2006 and 2007, the Company had $25,000 of preferred stock
dividends declared, but not yet paid, respectively.
  On
September 25, 2005, Salter Family Partners Ltd. converted the $1,000,000 notes
payable to stockholders into 1,000 shares of Series A convertible preferred
stock.
  On
July 1, 2005, the Company issued 3,157,895 shares of common stock worth
$39,894,737 for the purchase of Capital & Technology Advisors,
Inc.
 
 
 See
accompanying notes to consolidated financial statements.
  6
 Index
  TEJASINCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (1)
              Organization
      and Basis of Presentation
  Tejas
Incorporated, a Delaware corporation ("Tejas"), is a financial services holding
company whose primary wholly owned operating subsidiaries are Tejas Securities
Group, Inc., a Texas corporation ("TSG") and TI Building Partnership, Ltd., a
Texas limited partnership (“TI Building”).  TSG is engaged in the
business of providing brokerage and related financial services to institutional
and retail customers nationwide.  TI Building owns and manages the
real estate in which Tejas and TSG are headquartered.  In addition,
prior to October 1, 2006, Tejas owned Capital & Technology Advisors, Inc., a
Delaware corporation (“C&TA”).  C&TA is an advisory and
consulting firm that provides operational and financial restructuring services
for companies primarily within the telecommunications and technology
industries.  Tejas sold C&TA effective October 1, 2006, as further
described in Note 11.
 
 Tejas was
incorporated as a shell corporation in New York on July 18, 1990, and made
an initial public offering in November 1991.  On August 27, 1999,
Tejas was acquired by TSG in a reverse merger.  On August 29, 2001,
Tejas acquired all of the outstanding minority interest in TSG.
 
 On
February 3, 2005, Tejas issued 1,600,000 shares of its common stock through a
secondary public offering.  On February 25, 2005, the underwriter for
the secondary public offering exercised their option to purchase an additional
60,000 shares of Tejas’ common stock.
 
 On June
6, 2005, Tejas’ shareholders approved a proposal to amend Tejas’ Certificate of
Incorporation to authorize the issuance of up to 100,000 shares of preferred
stock upon terms to be established by Tejas’ board of directors and to increase
the number of shares of common stock which Tejas has the authority to issue from
10,000,000 to 30,000,000.  On June 29, 2005, Tejas filed a Certificate
of Amendment to the Certificate of Incorporation to affect these
measures.  On August 9, 2005, Tejas’ board of directors designated
1,000 shares of Tejas’ authorized preferred stock as Series A Convertible
Preferred Stock pursuant to a Certificate of Designations for Series A
Convertible Preferred Stock.
 
 On April
6, 2006, Tejas authorized a stock repurchase program for up to $5 million of its
outstanding common stock.  Shares may be repurchased in open market
transactions, private transactions or otherwise at such times and at such
prices, as the officers of Tejas believe appropriate and in the best interest of
Tejas.
 
 Tejas’
and TSG’ business is conducted from their headquarters at 8226 Bee Caves Road,
Austin, Texas.  TSG maintains a branch office in Clayton,
Missouri.  TSG is a registered broker-dealer and investment advisor
offering: (i) brokerage services to retail and institutional customers;
(ii) high quality investment research to institutional and retail
customers; (iii) market-making activities in stocks traded on the Nasdaq
National Market System and other national exchanges; and (iv) investment
banking services.
 
 References
to the Company within the accompanying notes to the consolidated financial
statements are to Tejas and its subsidiaries.
 
 Liquidity
 
 The
Company has experienced significant trading losses subsequent to year end,
however maintains sufficient liquidity to fund operations for the next twelve
months.  There have been changes in the investment policies to
mitigate the risk of future trading losses.  However, significant
changes in market conditions could severely impact our ability to fund
operations without further actions being taken to reduce operating
costs.
  7
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (2)
              Summary
      of Significant Accounting Policies
  (a)
              Principles
      of Consolidation
  The
accompanying consolidated financial statements reflect the consolidated accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
 (b)
              Basis
      of Accounting
  These
consolidated financial statements are presented on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles
whereby revenues are recognized in the period earned and expenses when
incurred.
 
 (c)
              Revenue
      Recognition
  Agency
commission revenues and related expenses from customer security transactions are
recorded on a trade date basis. Customer security transactions that are executed
through the Company’s proprietary trading account are recorded on a trade date
basis as principal commission revenues. The related expenses are also recorded
on a trade date basis.
 
 Net
dealer inventory and investment income (loss) results from securities
transactions entered into for the account of the Company. Net dealer inventory
and investment income (loss) includes both realized and unrealized gains and
losses, which are recorded on a trade date basis.
 
 The
Company does not carry or clear customer accounts and all customer transactions
are executed and cleared with other brokers on a fully disclosed basis. These
brokers have agreed to maintain such records of the transaction effected and
cleared in the customers’ accounts as are customarily made and kept by a
clearing broker pursuant to the requirements of Rules 17a-3 and 17a-4 of the
Securities Exchange Act of 1934, as amended, and to perform all services
customarily incident thereto.
 
 (d)
              Underwriting
      and Investment Banking
  Investment
banking revenues include gains, losses, and fees, net of syndicate expenses,
arising from securities offerings in which the Company acts as an underwriter or
agent. Investment banking revenues also include fees earned from providing
merger-and-acquisition and advisory services. Investment banking management fees
are recorded on the offering date, sales concessions on the settlement date, and
underwriting fees at the time the underwriting is completed and the income is
reasonably determinable.  Investment banking transactions may be
completed on a best efforts or firm commitment basis.
 
 The
Company periodically receives equity securities, including warrants and options,
as part of its compensation for investment banking engagements.  These
securities are valued at the intrinsic value at the time the engagement is
completed, and are included in investment banking revenues.  The
Company may distribute the equity securities to its employees either through
compensation agreements or by sale, based upon the intrinsic
value.
  8
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (e)
              Cash
      and Cash Equivalents
  Cash and
cash equivalents include cash and highly liquid investments with a maturity at
date of purchase of ninety days or less.
 
 (f)
              Securities
      Owned and Securities Sold, Not Yet
Purchased
  Long and
short positions in securities are reported at fair value. Securities with
readily determinable market values are based on quoted market prices. Securities
with limited market activity for which quoted market values are not readily
determinable are based on management’s best estimate which may include dealer
price quotations and price quotations for similar instruments traded. Warrants
are valued based upon the value of the underlying securities.  The
difference between cost and fair value has been included in net dealer inventory
and investment income (loss) in the accompanying consolidated statements of
operations. These investments are subject to the risk of failure of the issuer
and the risk of changes in market value based on the ability to trade such
securities on the open market.
 
 (g)
              Property
      and Equipment
  Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets.
Estimated useful lives for equipment approximate those used for federal income
tax purposes and range from 3 to 7 years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives of
the improvements or the terms of the related leases.  Buildings and
building improvements are amortized using the straight-line method over 10 to 40
years.
 
 Long-lived
assets, such as property and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the statements of financial condition and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be
depreciated.
 
 (h)
              Goodwill
      and Other Intangible Assets
  Goodwill
represents the excess of costs over fair value of assets of businesses acquired
and was recorded in connection with the minority interest purchase of TSG in
August, 2001. Goodwill and other intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least
annually.  Intangible assets determined to have finite lives are
amortized over their expected lives.
 
 Business
acquisitions typically result in goodwill and other intangible assets, and the
recorded values of those assets may become impaired in the future. The
determination of the value of such intangible assets requires the Company to
make estimates and assumptions that affect the Company’s consolidated financial
statements. Management assesses potential impairments of goodwill on an annual
basis or when there are events or changes in circumstances that indicate that
the carrying amount of goodwill and other intangible assets may not be
recovered. Management’s judgments regarding the existence of impairment
indicators and future cash flows related to intangible assets are based on
operational performance of the acquired businesses, market conditions and other
factors. Future events could cause management to conclude that goodwill and
other intangible assets associated with the acquired businesses are impaired.
Any resulting impairment loss could have an adverse impact on the Company’s
results of operations.
  9
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (i)
              Repurchase
      and Resale Agreements
  Repurchase
and resale agreements are treated as financing transactions and are carried at
the amounts at which the securities will be subsequently reacquired or resold as
specified in the respective agreements. There were no repurchase or resale
agreements outstanding at December 31, 2007 or 2006.
 
 (j)
              Income
      Taxes
  Deferred
income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax benefits or
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the year that includes the enactment
date.
 
 In July
2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
  The
evaluation of a tax position in accordance with FIN 48 is a two-step process.
The first step is a recognition process whereby the enterprise determines
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether
a tax position has met the more-likely-than-not recognition threshold, the
enterprise should presume that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information. The second
step is a measurement process whereby a tax position that meets the
more-likely-than-not recognition threshold is calculated to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement.
  The
provisions of FIN 48 were effective for the Company on January 1, 2007. The
provisions of FIN 48 are to be applied to all tax positions upon initial
adoption of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to be
recognized upon adoption of FIN 48. The adoption of FIN 48 did not have a
significant impact on the Company’s consolidated financial
statements.
  10
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (k)
              Estimates
  The
preparation of financial statements in conformity accounting principles
generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 (l)
              Stock-Based
      Compensation
  The
Company implemented Statement of Financial Accounting Standards No. 123R
(“SFAS 123R”), Share-Based
Payment,on
January 1, 2006. SFAS 123R requires public entities to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
is recognized over the period during which an employee is required to provide
service in exchange for the award – the requisite service period (usually the
vesting period).  SFAS 123R applies to the portion of outstanding
awards for which the requisite service has not been rendered and all awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. The impact that this statement will have on the
Company’s consolidated financial statements is dependent upon the levels of
equity-based awards granted in the future.  For all periods prior to
January 1, 2006, the Company accounted for stock based compensation under
Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to
Employee.
  11
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
  The pro
forma disclosures below use the fair value method of SFAS 123 to measure
compensation expense for stock-based employee compensation
plans.  There was no stock based employee compensation costs included
in the determination of net income (loss) as reported for the year ended
December 31, 2005.
   Year
      EndedDecember 31,2005Net
      income (loss) available to common stockholders as reported for
      basic
              
              $
              (4,510,289
              )Deduct
      or add stock-based compensation expense determined under the fair value
      based method
              
              
              (245,777
              )Pro
      forma net income (loss) available to common stockholders for
      basic
              
              $
              (4,756,066
              )Net
      income (loss) available to common stockholders as reported for diluted
      (Note 15)
              
              $
              (4,510,289
              )Deduct
      or add stock-based compensation expense determined under the fair value
      based method
              
              
              (245,777
              )Pro
      forma net income (loss) available to common stockholders for
      diluted
              
              $
              (4,756,066
              )Earnings
      (loss) per share of common stock as reported:Basic
              
              $
              (0.74
              )Diluted
              
              $
              (0.74
              )Pro
      forma earnings (loss) per share of common stock:Basic
              
              $
              (0.78
              )Diluted
              
              $
              (0.78
              )
 
 (m)
              Recent
      Accounting Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for the Company on January 1,
2008. The Company is evaluating the impact that SFAS No. 157 will have on its
consolidated financial statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement No.
115.SFAS No. 159 permits an entity to measure financial instruments and
certain other items at estimated fair value. Most of the provisions of SFAS No.
159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities,applies to all entities that own trading
and available-for-sale securities. The fair value option created by SFAS No. 159
permits an entity to measure eligible items at fair value as of specified
election dates. The fair value option (a) may generally be applied instrument by
instrument, (b) is irrevocable unless a new election date occurs, and (c) must
be applied to the entire instrument and not to only a portion of the instrument.
SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity (i) makes that choice in
the first 120 days of that year, (ii) has not yet issued financial statements
for any interim period of such year, and (iii) elects to apply the provisions of
SFAS No. 157. The Company is evaluating the impact that SFAS No. 157 will have
on its consolidated financial statements.
  12
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations – Revised
2007.  SFAS 141R provides guidance on improving the relevance,
representational faithfulness, and comparability of information that a reporting
entity provides in its financial reports about a business combination and its
effects.  SFAS 141R applies to business combinations where the
acquisition is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008.  The Company is evaluating
the impact that SFAS 141R will have on its consolidated financial
statements.
 
 (3)
              Receivables
      From and Payables To Clearing
Organization
  At
December 31, 2007 and 2006, the Company had receivables from and payables to its
clearing organization consisting of the following:
 
 2007
              
              
              2006Receivable:Receivable
      from clearing organization
              
              $
              68,699
              
              
              
              59,599Fees
      and commissions receivable
              
              
              116,508
              
              
              
              56,660$
              185,207
              
              
              
              116,259Payable:Payable
      to clearing organization
              
              $
              3,838,535
              
              
              
              2,616,279
 
 (4)
              Receivables
      from Employees
  On
occasion, the Company makes unsecured advances to employees in months when their
commission payout does not meet a predetermined amount and for other reasons
deemed hardships by the Company.  These advances are to be repaid
through reductions of future commissions or bonuses or through regular salary
withholdings.  At December 31, 2007 and 2006, the balance of advances
due to the Company was $8,164 and $2,807, respectively.
 
 In
November 2005, the Company received a $100,000 unsecured note from an employee
as part of an employment agreement.  The note does not bear interest
and was due and payable in sixteen monthly installments of $6,250 beginning in
February 2006.  In September 2006, the employee left the Company and
the employee’s new employer assumed $75,000 of the unpaid balance of the
note.  The Company forgave approximately $14,000 of the note as part
of the assumption by the new employer.  In September 2007, the note
was deemed uncollectible due to non-payment by the new employer and was fully
reserved as the possibility of collection was unsure.  This expense is
included in other expenses in the accompanying statements of
operations.
  13
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 In March
2006, the Company received a $50,000 unsecured note from an
employee.  The note does not bear interest and was due and payable on
September 1, 2006.  The note was delinquent at, and subsequent to,
September 1, 2006 and in November 2006, the Company increased the balance of the
remaining note by $21,000 and extended the due date for the remaining balance
until paid in full under a structured payment plan.  In February 2007,
the employee left the Company but has continued to make payments under a
renegotiated payment plan.  The balance of the note was $37,400 as of
December 31, 2007.
 
 In July
2006, the Company received a $40,000 unsecured note from an
employee.  The note does not bear interest and is to be paid in
monthly installments of $500 with any discretionary bonuses used to offset the
balance until paid in full.  The note is due and payable in full on
July 1, 2007.  In 2007, the notes maturity was extended and the
employee was allowed to repay the remaining balance in increments of $250 per
month.  The balance of the note was $5,350 as of December 31,
2007.
 
 In
November 2006, the Company received a $40,000 unsecured note from an
employee.  The note does not bear interest and is due and payable in 7
and 41 monthly installments of $500 and $890, respectively.  The
balance of the note was $31,160 as of December 31, 2007.
 
 These
note receivables are included in receivables from employees in the accompanying
consolidated statements of financial condition.
 
 (5)
              Securities
      Owned and Securities Sold, Not Yet
Purchased
  At
December 31, 2007 and 2006, securities owned and sold, not yet purchased
consisted of the following:
 
 2007
              
              
              2006Owned
              
              
              Sold,
                not yet
                purchased
              
              
              Owned
              
              
              Sold,
                not yet
                purchasedState
      and municipal obligations
              
              $
              271,498
              
              
              
              --
              
              
              
              964,634
              
              
              
              --US
      Government bonds
              
              
              2,217,868
              
              
              
              --
              
              
              
              4,241,410
              
              
              
              3,096,515Corporate
      bonds and notes
              
              
              1,796,854
              
              
              
              --
              
              
              
              4,790,689
              
              
              
              12,375Equity
      securities
              
              
              9,899,266
              
              
              
              --
              
              
              
              6,728,455
              
              
              
              1,275Warrants
              
              
              --
              
              
              
              --
              
              
              
              2,983,150
              
              
              
              --$
              14,185,486
              
              
              
              --
              
              
              
              19,708,338
              
              
              
              3,110,165
 
 At
December 31, 2007 and 2006, the Company recognized unrealized gains (losses)
associated with securities owned and securities sold, not yet purchased, in the
amounts of $(2,655,931) and $(227,860), respectively.
 
 Approximately
25% of the value of total assets as of December 31, 2007 related to equity
securities in two companies.  Approximately 19% of the value of total
assets as of December 31, 2006 related to equity securities and warrants in
three companies.
  14
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (6)
              Property
      and Equipment
  Property
and equipment consists of the following:
 
 December 31,2007
              
              
              2006Furniture
      and equipment
              
              $
              800,011
              
              
              
              863,720Land
              
              
              783,886
              
              
              
              762,236Buildings
              
              
              4,607,170
              
              
              
              4,607,170Building
      and leasehold improvements
              
              
              1,304,167
              
              
              
              1,605,9947,495,234
              
              
              
              7,839,120Accumulated
      depreciation and amortization
              
              
              (841,026
              )
              
              
              (1,089,452
              )$
              6,654,208
              
              
              
              6,749,668
 
 (7)
              Accrued
      Commissions and Bonuses
  Accrued
commissions and bonuses are included in accounts payable, accrued expenses and
other liabilities in the accompanying consolidated statements of financial
condition.
 
 As of
December 31, 2007 and 2006, the Company had accrued approximately $1,058,000 and
$510,000, respectively, in commissions and related payroll taxes
payable.
 
 The
Company pays bonuses to its employees and officers at interim periods and
year-end. Accrued bonuses as of December 31, 2007 and 2006 were $561,000 and
$556,000, respectively.  Management of the Company reviews both
contractual and discretionary bonus amounts, with discretionary bonus amounts
approved by the Compensation Committee of the Company.
 
 (8)
              Notes
      Payable
  On
February 22, 2005, the Company purchased an office building through its
wholly-owned subsidiary, TI Building.  The office building was
purchased at a price of approximately $3,470,000, with $2,200,000 being financed
through a financial institution.  Pursuant to the terms of the
promissory note, this loan accrues interest at a rate of 5.75% per annum, with
monthly payments of $13,840 through February 2011, at which time the outstanding
principal and accrued interest on the note shall be due and
payable.  A mortgage on the building and the associated real property
secures the repayment of such borrowing.  In connection with this
acquisition, the Company’s Chairman agreed to (1) indemnify the financial
institution against any losses incurred by the financial institution as a result
of any violations of environmental laws or certain building laws related to such
real property and (2) provide a limited guarantee of the Company’s
performance under certain provisions of the deed of trust entered into in
connection with such financing.  The balance of the promissory note
was $2,087,961 and $2,130,956 at December 31, 2007 and 2006,
respectively.  The Company paid approximately $123,000 and $127,000 in
interest during 2007 and 2006, respectively, in relation to this promissory
note.
 
 On May
10, 2005, the Company borrowed $1,760,000 from a financial institution to
finance in part the purchase price of another office building through its
wholly-owned subsidiary, TI Building.  Pursuant to the terms of a
promissory note, the loan accrues interest at a rate of 6.75% per annum, with
monthly installments of $13,388 through May 2010, at which time the outstanding
principal and accrued interest on the note shall be due and
payable.  A mortgage on the building and the associated real property
secures the repayment of such borrowing.  The balance of the
promissory note was $1,645,675 and $1,691,655 at December 31, 2007 and 2006,
respectively.  The Company paid approximately $114,000 and $120,000 in
interest during 2007 and 2006, respectively, in relation to this promissory
note.
  15
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 Subsequent
to December 31, 2007, the Company, through its wholly-owned subsidiary, TI
Building, sold the building it purchased on May 10, 2005.  The sale
occurred on January 28, 2008 with the Company receiving net proceeds of
$2,513,866 which resulted in a gain on sale of assets of $409,515.
 
 (9)
              Notes
      Payable to Stockholders
  On July
7, 2004, the Company entered into a subordinated convertible promissory note
agreement with a family limited partnership controlled by the Company’s Chief
Executive Officer (the "Lender"), to borrow $1,000,000 for operating purposes.
Under the terms of the promissory note, the Company made quarterly interest
payments at a rate of 10% per annum. The promissory note was unsecured. The
maturity date of the note was December 1, 2005, at which time all remaining
unpaid principal and interest was due. The promissory note was convertible at
any time into common stock of the Company in an amount equal to the unpaid
principal divided by the conversion price of $5.00 per share. The promissory
note originally required the Company to designate a series of preferred stock by
July 1, 2005, which the promissory note could be convertible into at any time.
The Company amended the terms of the promissory note so that the Lender could
convert the promissory note into the Company’s Series A Convertible Preferred
Stock in an amount equal to the unpaid principal divided by a conversion price
of $1,000 per share. The promissory note was convertible until the note was
repaid. The Company has also granted the Chief Executive Officer, through the
Lender, certain piggyback registration rights for the shares into which the
preferred stock may be converted. On September 26, 2005, the Lender converted
the promissory note into 1,000 shares of Series A convertible preferred
stock.  The Company paid approximately $99,000 in interest during 2005
in relation to this promissory note.
 
 (10)
              Preferred
      Stock
  On June
6, 2005, the Company’s shareholders approved a proposal to amend its Certificate
of Incorporation to authorize the issuance of up to 100,000 shares of preferred
stock upon terms to be established by the Company’s board of
directors.  On June 29, 2005, the Company filed a Certificate of
Amendment to the Certificate of Incorporation to affect these
measures.  On August 9, 2005, the Company’s board of directors
designated 1,000 shares of its authorized preferred stock as Series A
Convertible Preferred Stock pursuant to a Certificate of Designations for Series
A Convertible Preferred Stock.  On September 26, 2005, Salter Family
Partners, Ltd., a family partnership controlled by Mark M. Salter, the Company’s
Chief Executive Officer, converted a $1,000,000 promissory note into 1,000
shares of Series A convertible preferred stock, par value $0.001 per
share.  The terms of the Series A convertible preferred stock include:
a cumulative dividend of 10% payable on a quarterly basis; a mandatory
conversion feature to convert the preferred stock into the Company’s common
stock in the event the common stock trades above $10.00 per share for ten
consecutive trading days; a liquidation preference over the Company’s common
stock equal to the conversion price, and; the right for Salter Family Partners,
Ltd. to convert the preferred stock into the Company’s common stock on a
one-for-two hundred basis, which is consistent with the $5.00 per share
conversion price under the original convertible note agreement (Note
9).  The preferred stock is also subject to anti-dilution provisions
and the right to vote the preferred stock on an as converted basis with the
Company’s common stock.
  16
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (11)
              Business
      Combination and Disposition
  On
July 1, 2005, the Company completed its acquisition of
C&TA.  The total consideration paid by the Company in exchange for
the outstanding capital stock of C&TA was approximately $45.4 million,
consisting of cash in the amount of $3.0 million, which was paid out of the
Company’s cash reserves on the closing date, and 3,157,895 shares of the
Company’s common stock valued at $12.63 per share for a total value of
$39,894,737.   A deposit of $2.0 million had previously been paid
to C&TA as paying agent for the Shareholders in connection with the
execution of the letter of intent relating to the merger.  Of the
consideration paid by the Company, 309,316 shares of the Company’s common stock
was being held in escrow, pursuant to an escrow agreement, for a period of two
years following the closing date, to satisfy possible indemnification claims
made by the Company under the Agreement and Plan of Merger.
 
 The
allocation of the purchase price was based on an evaluation of the tangible and
intangible assets acquired and liabilities assumed.  The fair values
of the intangible assets acquired are based on management’s
estimate.  The excess of the purchase price over the fair value of net
assets acquired (goodwill) reflects the benefits from expansion of the Company’s
business segments.
 
 Non-Compete
      (2 year useful life)
              
              $
              100,000Revenue
      backlog (1 year useful life)
              
              
              1,440,000Total
      intangible assets
              
              
              1,540,000Goodwill
              
              
              44,767,280Total
      intangible assets acquired
              
              
              46,307,280Deduct
      liabilities in excess of fair value of net tangible assets acquired, which
      approximates book value
              
              
              (365,343
              )Net
      assets acquired
              
              $
              45,941,937
 The
      consideration paid is as follows:Cash
      deposit paid on May 10, 2005
              
              $
              2,000,000Cash
      paid on July 1, 2005 from sale of securities owned
              
              
              3,000,000Common
      stock
              
              
              40,441,937Acquisition
      costs
              
              
              500,000Total
      consideration
              
              $
              45,941,937
  17
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 On
September 29, 2006, the board of directors of Tejas approved the sale of
C&TA back to the original Shareholders in an agreement dated October 1,
2006.  The consideration paid by the Shareholders to Tejas consisted
of 3,157,895 shares of Tejas common stock, which was the Tejas stock portion of
the consideration paid by Tejas for C&TA in connection with Tejas’
acquisition of C&TA in July 2005.  In addition, as part of the
sale, Tejas agreed to cancel the remaining balance of receivables due from
C&TA.    The sale was recorded on September 29, 2006 and
the loss incurred was as follows:
 
 Fair
      value of common stock received
              
              $
              10,026,317Return
      and cancellation of stock options
              
              
              47,366Less
      net assets sold
              
              
              (22,653,621
              )Net
      loss on sale of subsidiary
              
              
              (12,579,938
              )Net
      tax effect from taxable gain on sale of subsidiary
              
              
              (2,024,448
              )Tax
      effected loss on sale of subsidiary
              
              $
              (14,604,386
              )
 
  Prior to
this transaction, the Company recognized a goodwill impairment of $22,050,056
related to this investment.
 
 (12)
              Fair
      Value of Financial Instruments
  Substantially
all of the Company’s financial assets and liabilities are carried at fair value
or at amounts which, because of their short-term nature or because they carry
market rates of interest, approximate current fair value. The Company’s notes
payable, if recalculated based on current interest rates, would not
significantly differ from the amounts recorded at December 31, 2007 and
2006.
 
 (13)
              Income
      Taxes
  The
Company files a consolidated tax return. Income tax expense (benefit) consists
of the following:
 
 2007
              
              
              2006
              
              
              2005FederalCurrent
              
              $
              (282,685
              )
              
              
              (402,528
              )
              
              
              (1,920,195
              )Deferred
              
              
              (2,148,470
              )
              
              
              (1,057,156
              )
              
              
              (222,846
              )StateCurrent
              
              
              123,660
              
              
              
              109,168
              
              
              
              (227,292
              )Deferred
              
              
              -
              
              
              
              (140,429
              )
              
              
              (71,081
              )$
              (2,307,495
              )
              
              
              (1,490,945
              )
              
              
              (2,441,414
              )
  18
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 A
reconciliation of expected income tax expense (benefit) (computed by applying
the statutory income tax rate of 34% to income before income tax expense) to
total tax expense (benefit) in the accompanying consolidated statements of
operations follows:
 
 2007
              
              
              2006
              
              
              2005Expected
      federal income expense
              
              $
              (2,280,298
              )
              
              
              (15,247,591
              )
              
              
              (2,354,613
              )Net
      tax effect of non-deductible goodwill impairment and net taxable gain on
      sale of subsidiary
              
              
              -
              
              
              
              13,575,303
              
              
              
              -Meals
      and entertainment
              
              
              93,466
              
              
              
              119,606
              
              
              
              104,850State
      income tax
              
              
              81,617
              
              
              
              (20,632
              )
              
              
              (293,927
              )Other,
      net
              
              
              (202,280
              )
              
              
              82,369
              
              
              
              102,276$
              (2,307,495
              )
              
              
              (1,490,945
              )
              
              
              (2,441,414
              )
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2007 and 2006 are as
follows:
 
 2007
              
              
              2006Deferred
      tax assets:Non-qualified
      stock option expense
              
              $
              555,425
              
              
              
              480,562Lease
      termination liability
              
              
              -
              
              
              
              8,547Charitable
      contributions carryforwards
              
              
              353,865
              
              
              
              249,684Net
      operating loss carryforwards
              
              
              517,416
              
              
              
              -Accrued
      expenses
              
              
              28,959
              
              
              
              60,643Property
      and equipment
              
              
              75,385
              
              
              
              72,697Net
      deferred tax asset
              
              
              1,531,050
              
              
              
              872,133Deferred
      tax liabilities:Unrealized
      gains on securities held for investment
              
              
              869,952
              
              
              
              (96,416
              )Non-qualified
      stock option income
              
              
              (462,027
              )
              
              
              (985,212
              )Net
      deferred tax liability
              
              
              407,925
              
              
              
              (1,081,628
              )Net
      deferred tax asset (liability)
              
              $
              1,938,975
              
              
              
              (209,495
              )
 
 In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences net of the existing valuation allowances.
  19
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (14)
              Profit
      Sharing and Stock Option Plans
 Profit
Sharing Plan
  In 1997,
the Company instituted a profit sharing plan under section 401(k) of the
Internal Revenue Code. The plan allows all employees who are over 21 years old
to defer a predetermined portion of their compensation for federal income tax
purposes. Contributions by the Company are discretionary. During 2007, 2006 and
2005, the Company contributed approximately $282,000, $248,000 and $228,000,
respectively, to the employee profit sharing plan.
 
 Stock
Option Plans
  The
Company established the Tejas Incorporated 1999 Stock Option Plan (“the 1999
Plan”) for employees, directors and consultants of the Company and its
subsidiaries on October 15, 1999. Under the 1999 Plan, the Company was
originally authorized to grant up to 600,000 shares of the Company’s common
stock through incentive stock options or nonqualified stock options. In August
2000, the board of directors of the Company amended the 1999 Plan to increase
the number of shares available to 800,000 shares of the Company’s common
stock.  In September 2004, the board of directors of the Company
amended the 1999 Plan to increase the number of shares available to 2,000,000
shares of the Company’s common stock.  The exercise price of each
incentive stock option is determined by the Compensation Committee of the
Company, and shall not be less than 100% of the fair market value of the stock
on the grant date. Incentive stock options awarded to ten-percent owners of the
Company’s common stock shall not have an exercise price of less than 110% of the
fair market value of the stock on the grant date. Incentive stock options may
only be granted to employees of the Company or a subsidiary.
 
 Options
become exercisable as determined at the date of the grant by the Compensation
Committee or the Board, in the case of non-employee directors. No option under
the 1999 Plan shall be exercisable after the expiration of ten years from the
date of the grant. Options granted to a ten-percent owner of the Company shall
not be exercisable after the expiration of five years from the date of the
grant. The aggregate fair market value of stock purchased under the 1999 Plan by
an employee during any calendar year shall not exceed $100,000. In the event
that the purchased stock exceeds $100,000, the excess amount shall constitute a
nonqualified stock option.
 
 During
2005, options totaling 668,500 shares were granted to employees under the 1999
Plan.  The options vest ratably over three years, and expire five
years from the date of the grant.  The weighted average purchase price
of the common stock was $13.18 per share.  The options were granted at
or above the market value of the Company’s common stock.
 
 During
2006, options totaling 80,000 shares were granted to employees under the 1999
Plan.  The options vest ratably over three years, and expire five
years from the date of the grant.  The weighted average purchase price
of the common stock was $6.52 per share.  The options were granted at
or above the market value of the Company’s common stock.
 
 During
2007, options totaling 327,500 shares were granted to employees under the 1999
Plan.  The options vest ratably over three years, and expire five
years from the date of the grant.  The weighted average purchase price
of the common stock was $3.72 per share.  The options were granted at
or above the market value of the Company’s common stock.
 
 20
 Index
  A summary
of the Company’s stock option and warrant activity, and related information for
the years ended December 31, follows.
 2007
                
                
                2006
                
                
                2005Weighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                Average
                
                
                
                
                
                AverageExercise
                
                
                
                
                
                Exercise
                
                
                
                
                
                ExerciseOptions
                
                
                Price
                
                
                Options
                
                
                Price
                
                
                Options
                
                
                PriceOutstanding
      – beginning of year
                
                
                1,230,835
                
                
                $
                9.65
                
                
                
                1,703,602
                
                
                $
                6.71
                
                
                
                1,480,000
                
                
                $
                4.69Granted
                
                
                327,500
                
                
                $
                3.72
                
                
                
                80,000
                
                
                $
                6.52
                
                
                
                668,500
                
                
                $
                13.18Exercised
                
                
                -
                
                
                
                -
                
                
                
                (238,000
                )
                
                $
                1.25
                
                
                
                (16,565
                )
                
                $
                8.48Forfeited
                
                
                (156,000
                )
                
                $
                12.68
                
                
                
                (314,767
                )
                
                $
                7.41
                
                
                
                (428,333
                )
                
                $
                14.71Canceled
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      – end of Year
                
                
                1,402,335
                
                
                $
                8.23
                
                
                
                1,230,835
                
                
                $
                9.65
                
                
                
                1,703,602
                
                
                $
                6.71Exercisable
      – end of year
                
                
                1,160,662
                
                
                $
                8.73
                
                
                
                1,136,329
                
                
                $
                9.29
                
                
                
                1,146,477
                
                
                $
                5.74
  At
December 31, 2007 the intrinsic value of both the stock options outstanding and
stock options exercisable was $40,000.
 
 The fair
value of options at date of grant was estimated using the Black Scholes
option-pricing model.  During 2007, 2006 and 2005, stock options were
granted with the following weighted average assumptions:
 
 2007
              
              
              2006
              
              
              2005Risk-free
      interest rate
              
              
              5.24
              %
              
              
              4.59
              %
              
              
              3.04
              %Expected
      holding period
              
              5
      years
              
              
              5
      years
              
              
              5
      yearsExpected
      volatility
              
              
              .421
              
              
              
              .365
              
              
              
              .130Expected
      dividend yield
              
              
              0.00
              %
              
              
              0.00
              %
              
              
              0.00
              %Weighted
      average fair value of options granted during the period
              
              $
              1.66
              
              
              $
              2.46
              
              
              $
              3.64
  21
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 The
following table summarizes the Company’s options outstanding and exercisable
options at December 31, 2007:
 Stock Options Outstanding
                
                
                Stock Options ExercisableExercise Price
                
                
                Shares
                
                Average Remaining Contractual
      Life
                
                Weighted
      Average Exercise Price
                
                
                Shares
                
                
                Weighted
      Average Exercise Price$
                1.25
                
                
                
                160,000
                
                .4
      years
                
                $
                1.25
                
                
                
                160,000
                
                
                $
                1.25$
                3.30
                
                
                
                60,000
                
                4.2
      years
                
                $
                3.30
                
                
                
                19,998
                
                
                $
                3.30$
                3.80
                
                
                
                267,500
                
                4.4
      years
                
                $
                3.80
                
                
                
                89,166
                
                
                $
                3.80$
                4.00
                
                
                
                20,000
                
                3.9
      years
                
                $
                4.00
                
                
                
                13,333
                
                
                $
                4.00$
                4.50
                
                
                
                250,000
                
                1.4
      years
                
                $
                4.50
                
                
                
                250,000
                
                
                $
                4.50$
                7.00
                
                
                
                50,000
                
                3.1
      years
                
                $
                7.00
                
                
                
                33,330
                
                
                $
                7.00$
                9.00
                
                
                
                467,335
                
                1.9
      years
                
                $
                9.00
                
                
                
                467,335
                
                
                $
                9.00$
                9.90
                
                
                
                35,000
                
                1.9
      years
                
                $
                9.90
                
                
                
                35,000
                
                
                $
                9.90$
                10.00
                
                
                
                20,000
                
                2.9
      years
                
                $
                10.00
                
                
                
                20,000
                
                
                $
                10.00$
                12.00
                
                
                
                20,000
                
                1.9
      years
                
                $
                12.00
                
                
                
                20,000
                
                
                $
                12.00$
                15.00
                
                
                
                15,000
                
                2.6
      years
                
                $
                15.00
                
                
                
                15,000
                
                
                $
                15.00$
                16.50
                
                
                
                27,500
                
                2.4
      years
                
                $
                16.50
                
                
                
                27,500
                
                
                $
                16.50$
                17.03
                
                
                
                10,000
                
                2.2
      years
                
                $
                17.03
                
                
                
                10,000
                
                
                $
                17.031,402,335
                
                
                
                
                
                
                
                
                1,160,662
 Restricted
Stock Awards
  In July
2006, the Company awarded 320,000 shares of its common stock (in the form of
restricted stock units) to several of its employees.  In August 2006,
80,000 of these shares became fully vested.  In 2007, the remaining
240,000 unvested shares were forfeited.  The Company recognized
637,778 of compensation expense related to these awards in 2006.  In
2007, the Company recaptured 317,778 of prior period compensation expense
associated with the forfeiture of the unvested portion of these
awards.
 
 (15)
              Earnings
      (Loss) Per Share of Common Stock
  Basic
earnings (loss) per share of common stock are based on the weighted average
common shares outstanding without any dilutive effects considered. Diluted
earnings (loss) per share of common stock reflect dilution from all contingently
issuable common shares, including options and convertible notes issued.
Contingently issuable common shares are not included in the weighted average
number of common shares when the inclusion would increase earnings per share of
common stock or decrease the net loss per share of common
stock.
  22
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 Earnings
(loss) per share of common stock is calculated as follows.
 
 2007
              
              
              2006
              
              
              2005Basic
      earnings (loss) per share of common stock:Net
      loss from continued operations available to common
      stockholders
              
              $
              (4,499,265
              )
              
              
              (5,740,493
              )
              
              
              (3,848,391
              )Net
      loss from discontinued operations available to common
      stockholders
              
              $
              --
              
              
              
              (37,714,417
              )
              
              
              (661,898
              )Total
      net loss available to common stockholders
              
              $
              (4,499,265
              )
              
              
              (43,454,910
              )
              
              
              (4,510,289
              )Weighted
      average common shares outstanding
              
              
              4,824,712
              
              
              
              7,181,060
              
              
              
              6,097,903Basic
      loss from continued­­­­­ operations per share of
      common stock
              
              $
              (0.93
              )
              
              
              (0.80
              )
              
              
              (0.63
              )Basic
      loss from discontinued­­­­­ operations per share of
      common stock
              
              $
              --
              
              
              
              (5.25
              )
              
              
              (0.11
              )Basic
      total loss per share of common stock
              
              $
              (0.93
              )
              
              
              (6.05
              )
              
              
              (0.74
              )Diluted
      earnings (loss) per share of commonstock:Net
      loss from continued operations available to common
      stockholders
              
              $
              (4,499,265
              )
              
              
              (5,740,493
              )
              
              
              (3,848,391
              )Net
      loss from discontinued operations available to common
      stockholders
              
              $
              --
              
              
              
              (37,714,417
              )
              
              
              (661,898
              )Total
      net loss available to common stockholders
              
              $
              (4,499,265
              )
              
              
              (43,454,910
              )
              
              
              (4,510,289
              )Weighted
      average common shares outstanding
              
              
              4,824,712
              
              
              
              7,181,060
              
              
              
              6,097,903Effect
      of dilutive securities:Options
              
              
              --
              
              
              
              --
              
              
              
              --Convertible
      preferred stock
              
              
              --
              
              
              
              --
              
              
              
              --Weighted
      average common shares outstanding after effect of dilutive
      securities
              
              
              4,824,712
              
              
              
              7,181,060
              
              
              
              6,097,903Diluted
      loss from continued operations per share of common stock
              
              $
              (0.80
              )
              
              
              (0.80
              )
              
              
              (0.63
              )Diluted
      loss from discontinued operations per share of common
stock
              
              $
              --
              
              
              
              (5.25
              )
              
              
              (0.11
              )Diluted
      total loss per share of common stock
              
              $
              (0.80
              )
              
              
              (6.05
              )
              
              
              (0.74
              )
 
 Options
to purchase 1,703,602 shares of the Company’s common stock for the year ended
December 31, 2005 were not included in the computation of diluted earnings
(loss) per share because the options were antidilutive.  Options to
purchase 1,230,835 shares of the Company’s common stock for the year ended
December 31, 2006 were not included in the computation of diluted earnings
(loss) per share because the options were antidilutive. Options to purchase
1,402,335 shares of the Company’s common stock for the year ended December 31,
2007 were not included in the computation of diluted earnings (loss) per share
because the options were antidilutive.
  23
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 Options
to purchase 200,000 shares of the Company’s common stock under the convertible
notes payable and convertible preferred stock were not included in the
computation of diluted earnings (loss) per share for the year ended December 31,
2005 because the options were antidilutive.  Options to purchase
200,000 shares of the Company’s common stock under the convertible preferred
stock were not included in the computation of diluted earnings (loss) per share
for the year ended December 31, 2006 because the options were
antidilutive.  Options to purchase 200,000 shares of the Company’s
common stock under the convertible preferred stock were not included in the
computation of diluted earnings (loss) per share for the year ended December 31,
2007 because the options were antidilutive.
 
 
 (16)
              Concentrations
      and Off Statement of Financial Condition
Risk
  The
Company’s customers’ securities transactions are introduced on a fully disclosed
basis with its clearing organization.  The clearing organization
carries all of the accounts of the customers of the Company and is responsible
for execution, collection and payment of funds, and receipt and delivery of
securities relative to customer transactions.  Off statement of
financial condition risk exists with respect to these transactions due to the
possibility that customers may be unable to fulfill their contractual
commitments wherein the clearing organization may charge any losses it incurs to
the Company.  The Company seeks to minimize this risk through
procedures designed to monitor the credit worthiness of its customers and that
customer transactions are executed properly by the clearing
organization.  Included in the Company’s clearing agreement with its
clearing organization is an indemnification clause.  This clause
relates to instances where the Company’s customers fail to settle security
transactions.  In the event this occurs, the Company will indemnify
the clearing organization to the extent of the net loss on any unsettled
trades.  As of December 31, 2007 and 2006, the Company had not been
notified by the clearing organization, nor was the Company otherwise aware of
any potential losses relating to this indemnification.
 
 The
Company has $13,221,227 or approximately 53% of its total assets in securities
owned and receivable due from or held by its clearing organization as of
December 31, 2007.
 
 The
Company enters into transactions in various financial instruments, including
securities sold, not yet purchased, for trading purposes.  Securities
sold, not yet purchased represent obligations of the Company to deliver the
underlying securities sold.  The Company’s obligation to purchase the
security may exceed the amount recognized in the statement of financial
condition.  The Company monitors its positions in securities sold, not
yet purchased continuously to reduce the risk of potential losses due to changes
in market value.
 
 The
Company deposits its cash with financial institutions. Periodically such
balances exceed applicable FDIC insurance limits.  As of December 31,
2007 and 2006, the Company had balances of approximately $792,400 and
$2,107,100, respectively, in excess of FDIC insurance limits.
 
 The
Company had one investment banking customer that generated approximately 37% of
the Company’s total revenue for 2005.
  24
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (17)
              Industry
      Segment Data
  The
Company has two reportable segments: brokerage services and investment banking.
The brokerage services segment includes sales, trading and market-making
activities of the Company and encompasses both retail and institutional customer
accounts. The investment-banking segment participates in underwriting of
corporate securities as a managing underwriter and a syndicate member, and
provides advisory services to companies.
 
 The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes.
 
 The
following table presents segment revenues, income (loss) before income tax
expense (benefit), and assets for the year ended December 31, 2007.
 
 Brokerage
              
              
              Investment Banking
              
              
              TotalRevenues
      from external customers
              
              $
              13,053,414
              
              
              
              4,254,497
              
              
              
              17,307,911Interest
      revenue
              
              
              617,034
              
              
              
              --
              
              
              
              617,034Interest
      expense
              
              
              514,927
              
              
              
              --
              
              
              
              514,927Depreciation
      and amortization
              
              
              297,932
              
              
              
              --
              
              
              
              297,932Income(loss)
      before income tax expense (benefit)
              
              
              (8,231,683
              )
              
              
              1,524,923
              
              
              
              (6,706,760
              )Segment
      assets
              
              
              25,166,245
              
              
              
              --
              
              
              
              25,166,245Capital
      expenditures (including capital leases)
              
              
              216,915
              
              
              
              --
              
              
              
              216,915
 
 The
following table presents segment revenues, income (loss) before income tax
expense (benefit), and assets for the year ended December 31, 2006.
 
 Brokerage
              
              
              Investment Banking
              
              
              TotalRevenues
      from external customers
              
              $
              16,911,677
              
              
              
              1,914,720
              
              
              
              18,826,397Interest
      revenue
              
              
              530,332
              
              
              
              --
              
              
              
              530,332Interest
      expense
              
              
              765,638
              
              
              
              --
              
              
              
              765,638Depreciation
      and amortization
              
              
              326,898
              
              
              
              --
              
              
              
              326,898Income(loss)
      before income tax expense (benefit)
              
              
              (7,546,987
              )
              
              
              (854,185
              )
              
              
              (8,401,172
              )Segment
      assets
              
              
              31,750,488
              
              
              
              --
              
              
              
              31,750,488Capital
      expenditures (including capital leases)
              
              
              402,347
              
              
              
              --
              
              
              
              402,347
  25
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 The
following table presents segment revenues, income (loss) before income tax
expense (benefit), and assets for the year ended December 31, 2005.
 
 Brokerage
              
              
              Investment Banking
              
              
              TotalRevenues
      from external customers
              
              $
              11,413,689
              
              
              
              16,436,706
              
              
              
              27,850,395Interest
      revenue
              
              
              777,774
              
              
              
              --
              
              
              
              777,774Interest
      expense
              
              
              533,737
              
              
              
              --
              
              
              
              533,767Depreciation
      and amortization
              
              
              269,238
              
              
              
              --
              
              
              
              269,238Income(loss)
      before income tax expense (benefit)
              
              
              (11,949,972
              )
              
              
              5,955,961
              
              
              
              (5,994,011
              )Segment
      assets
              
              
              35,474,322
              
              
              
              --
              
              
              
              35,474,322Capital
      expenditures
              
              
              6,687,829
              
              
              
              --
              
              
              
              6,687,829
 
 (18)
              Lease
      Commitments
  The
Company leases its office facilities and certain office equipment under
operating and capital leases. The future minimum payments due under these leases
as of December 31, 2007 are as follows:
 
 Operating
              
              
              Capital2008
              
              $
              1,155,000
              
              
              
              69,0002009
              
              
              815,000
              
              
              
              64,0002010
              
              
              363,000
              
              
              
              20,0002011
              
              
              342,000
              
              
              
              --2012
              
              
              342,000
              
              
              
              --Thereafter
              
              
              733,000
              
              
              
              --Minimum
      commitments
              
              $
              3,750,000
              
              
              
              153,000Less
      interest
              
              
              
              
              
              
              (15,000
              )Net
      present value of capital lease obligations
              
              
              
              
              
              $
              138,000
 
 Furniture
and office equipment, under capital leases, with a recorded cost of $235,729,
net of depreciation of $65,666 as of December 31, 2007, collateralizes the above
capital lease obligations and is included in the consolidated statements of
financial condition under the caption of “Property and
Equipment.”  Depreciation expense for assets under capital lease was
$30,097, $23,011and $71,511 in 2007, 2006 and 2005, respectively.
 
 In 2005,
the Company relocated its Austin, Texas headquarters to buildings owned by its
TI Building subsidiary.  Rent expense amounted to approximately
$189,756, $80,400and $1,483,000 for the years ended December 31, 2007, 2006 and
2005, respectively. Rent expense is reported net of sublease revenue which is
disclosed below.
 
 In
October 2006, the Company subleased a portion of its former Austin, Texas
headquarters, furniture and equipment through February 2007.  The
sublease was entered into with a Texas non-profit organization as a charitable
contribution to the organization.  As such, no payments are due under
the agreement.  The fair market value of rent on the subleased
premises was determined to approximate $8,000 per month.  During 2007
and 2006, the Company recorded approximately $16,000 and $25,000 of charitable
contributions in relation to this sublease agreement,
respectively.  These contributions are included in other expenses in
the accompanying statements of operations.
  26
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 In August
2005, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007.  The lease was
terminated in September 2006 with no further future minimum payments
due.  During 2006 and 2005, the Company received approximately $56,000
and $31,000, respectively, in relation to this sublease agreement.
 
 In
January 2005, the Company subleased its Houston, Texas office space through
August 2006.  The lease went to term with no further future minimum
payments due.  During 2006 and 2005, the Company received
approximately $32,000 and $44,000, respectively, in relation to this sublease
agreement.
 
 In June
2004, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007.  The lease was
terminated in December 2006 with no further future minimum payments
due.  During 2006 and 2005, the Company received approximately $90,000
and $70,000,respectively, in
relation to this sublease agreement.
 
 In June
2003, the Company subleased a portion of its former Austin, Texas headquarters,
furniture and equipment through February 2007.  The lease went to term
with no further minimum lease payments due.  During 2007, 2006 and
2005, the Company received approximately $12,000, $84,000 and $76,000,respectively, in
relation to this sublease agreement.
 
 In
September 2002, the Company subleased its Atlanta, Georgia office
space.  The Company received approximately $63,000 during 2005 in
relation to this sublease agreement.  The lease and sublease
agreements terminated in 2005.
 
 (19)
              Contingencies
  The
Company is involved in various claims and legal actions, including arbitrations,
that have arisen in the ordinary course of business. It is management's opinion
that liabilities, if any, arising from these actions will not have a significant
adverse effect on the financial condition or results of operations of the
Company.
 
 In
October 2001, an officer of the Company purchased a liability of the Company in
the amount of approximately $121,000 originally payable to a third
party.  The liability originated from the Merger (Note 1) and is now
payable to the officer upon the Company’s successful listing on a national
exchange.
 
 (20)
              Net
      Capital Requirements
  TSG, as a
registered fully licensed broker and dealer in securities, is subject to the
Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1 of the
Securities Exchange Act of 1934, as amended). Under this rule, TSG is required
to maintain a minimum "net capital" and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to
1.  Rule 15c3-1 also provides that equity capital may not be withdrawn
or cash dividends paid by TSG if the resulting net capital ratio would exceed 10
to 1.  At December 31, 2007, the minimum “net capital” requirement for
TSG was $250,000. "Net capital" at December 31, 2007 aggregated $4,223,674.
TSG’s ratio of aggregate indebtedness to net capital was 0.55 to 1 at December
31, 2007.
  27
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (21)
              Other
      Related Party Transactions
  The
Company entered into an engagement letter to place up to $7,000,000 principal
amount of debt securities on behalf of a corporation in which one of the
Company’s directors is a greater than 10% stockholder and is also the Chairman,
Chief Executive Officer and President of the corporation.  The
Company’s Chairman of the Board is a 10% or greater stockholder in the
corporation.  In addition, another of the Company’s directors also
serves on the board of the corporation.  The transaction was
consummated on or about September 12, 2006.  Under the engagement
letter, the Company was to receive a cash fee equal to 1% of the principal
amount of debt securities which it placed.  On October 13, 2006, the
Company received a non-refundable retainer of $25,000 from the corporation and
the cash fee of $70,000 from the completion of the
engagement.  Additionally, the Company may be reimbursed for legal
fees incurred and ancillary out of pocket expenses.
 
 The
Company entered into an engagement letter to place up to $10,000,000 principal
amount of debt securities on behalf of a company in which one of the Company’s
directors is a greater than 10% stockholder and is also the Chairman, Chief
Executive Officer and President of the company.  The Company’s
Chairman of the Board is a 10% or greater stockholders in the
company.  In addition, another of the Company’s former directors also
serves on the board of that company.  The transaction was consummated
on or about December 19, 2005.  As part of the purchase price, the
purchasers exchanged approximately $5,000,000 principal amount of existing
bridge notes, plus accrued interest, which were sold by the company on November
10, 2005, for which the Company also acted as placement agent.  Under
the engagement letter, the Company received a cash fee equal to 3% of the
principal amount of debt securities which it placed, and a ten-year warrant to
purchase common stock in the amount of 150,000 shares for each $2,000,000
principal amount of debt securities placed at an exercise price of $2.00 per
share.  On October 26, 2005, the Company received a non-refundable
retainer of $125,000 from the company.  In December 2005, the Company
received the cash fee of $300,000 upon completion of the
engagement.  Additionally, the Company may be reimbursed for legal
fees incurred and ancillary out of pocket expenses.
 
 On
October 15, 2004, the Company entered into a purchase agreement with a member of
the Company’s board of directors, and Seton Securities Group, Inc. (“Seton”), a
broker-dealer controlled by that director, whereby the director and Seton would
purchase the assets and operations of the Company’s New Jersey branch office by
December 31, 2004 for nominal consideration.  As part of the agreement
with the director, Seton entered into a sublease agreement for the New Jersey
office space for the remaining lease term.  The sublease agreement
will take effect upon the closing of the purchase agreement.  The
director exercised an option to extend the closing date to June 30, 2005 in
exchange for consideration of $10,000 payable to the
Company.  Additionally, the Company entered into a memorandum of
understanding whereby the Company would maintain a trading account on behalf of
Seton, and the net profits from the trading account would be paid to
Seton.  As of December 31, 2005, the Company had paid Seton
approximately $114,000 which represented the net profit on the trading
account.
 
 The
employees, officers and management of the Company may maintain personal accounts
with the Company. When the Company executes securities transactions on behalf of
its employees, officers and management, those transactions are executed at
current market prices, plus execution costs.  All officers of the
Company, one of which is a majority owner, routinely conduct such transactions
for their own accounts, and management of the Company deems the transactions to
be arms length transactions.  The majority owner of the Company also
makes many of the proprietary trading decisions for the Company, including
securities transactions between that individual and the
Company.
  28
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 (22)
              Quarterly
      Results (Unaudited)
  The
following tables set forth selected quarterly consolidated statements of
operations information for the years ended December 31, 2007 and
2006.
 
 2007
              
              First Quarter
              
              
              Second Quarter
              
              
              Third Quarter
              
              
              Fourth QuarterTotal
      revenue from continued operations
              
              $
              6,628,873
              
              
              
              4,716,502
              
              
              
              2,841,211
              
              
              
              3,479,155Net
      loss from continued operations available to common
      stockholders
              
              
              (193,063
              )
              
              
              (1,613,070
              )
              
              
              (1,983,081
              )
              
              
              (710,050
              )Net
      loss from discontinued operations available to common
      stockholders
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Total
      net loss available to common stockholders
              
              
              (193,063
              )
              
              
              (1,613,070
              )
              
              
              (1,983,081
              )
              
              
              (710,050
              )Basic
      loss from continued operations per share of common stock
              
              
              (0.04
              )
              
              
              (0.33
              )
              
              
              (0.41
              )
              
              
              (0.15
              )Basic
      loss from discontinued operations per share of common
stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Basic
      total loss per share of common stock
              
              
              (0.04
              )
              
              
              (0.33
              )
              
              
              (0.41
              )
              
              
              (0.15
              )Diluted
      loss from continued operations per share of common stock
              
              
              (0.04
              )
              
              
              (0.33
              )
              
              
              (0.41
              )
              
              
              (0.15
              )Diluted
      loss from discontinued operations per share of common
stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Diluted
      total loss per share of common stock
              
              
              (0.04
              )
              
              
              (0.33
              )
              
              
              (0.41
              )
              
              
              (0.15
              )
  29
 Index
  TEJAS
INCORPORATED AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 
 2006
              
              First Quarter
              
              
              Second Quarter
              
              
              Third Quarter
              
              
              Fourth QuarterTotal
      revenue from continued operations
              
              $
              11,809,894
              
              
              
              680,347
              
              
              
              (412,482
              )
              
              
              6,776,024Net
      income (loss) from continued operations available to common
      stockholders
              
              
              2,859,155
              
              
              
              (2,970,865
              )
              
              
              (5,134,710
              )
              
              
              (494,819
              )Net
      loss from discontinued operations available to common
      stockholders
              
              
              (22,544,204
              )
              
              
              (299,164
              )
              
              
              (14,870,304
              )
              
              
              --Total
      net loss available to common stockholders
              
              
              (19,685,049
              )
              
              
              (3,270,029
              )
              
              
              (20,005,014
              )
              
              
              (494,819
              )Basic
      earnings (loss) from continued operations per share of common
      stock
              
              
              0.36
              
              
              
              (0.37
              )
              
              
              (0.64
              )
              
              
              (0.10
              )Basic
      loss from discontinued operations per share of common
stock
              
              
              (2.86
              )
              
              
              (0.04
              )
              
              
              (1.84
              )
              
              
              --Basic
      total loss per share of common stock
              
              
              (2.50
              )
              
              
              (0.41
              )
              
              
              (2.48
              )
              
              
              (0.10
              )Diluted
      earnings (loss) from continued operations per share of common
      stock
              
              
              0.36
              
              
              
              (0.37
              )
              
              
              (0.64
              )
              
              
              (0.10
              )Diluted
      loss from discontinued operations per share of common
stock
              
              
              (2.86
              )
              
              
              (0.04
              )
              
              
              (1.84
              )
              
              
              --Diluted
      total loss per share of common stock
              
              
              (2.50
              )
              
              
              (0.41
              )
              
              
              (2.48
              )
              
              
              (0.10
              )
  30
  (a)
              Exhibits:
 
 ExhibitNumber
              
              Description of
      Exhibits3.1
              
              Certificate
      of Incorporation (Incorporated herein by reference to Exhibit 4.1 to the
      registrant’s Current Report on Form 8-K filed on May 2,
      2001).3.2
              
              Bylaws
      (Incorporated herein by reference to Exhibit 4.2 to the registrant’s
      Current Report on Form 8-K filed on May 2, 2001).3.3
              
              Certificate
      of Amendment to Certificate of Incorporation (Incorporated herein by
      reference to Exhibit 3.3 to the registrant’s Current Report on Form 8-K
      filed on June 25, 2001).3.4
              
              Certificate
      of Amendment to Certificate of Incorporation (Incorporated herein by
      reference to Exhibit 3.4 to the registrant’s Current Report on Form 8-K
      filed on June 20, 2002).3.5
              
              Certificate
      of Ownership and Merger Merging Tejas Incorporated into Westech Capital
      Corp. (Incorporated herein by reference to Exhibit 3.5 to the registrant’s
      Registration Statement on Form S-1, filed on December 22,
      2004).3.6
              
              Certificate
      of Amendment to Certificate of Incorporation (Incorporated herein by
      reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K
      filed on June 30, 2005).3.7
              
              Certificate
      of Designations for Series A Convertible Preferred Stock (Incorporated
      herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report
      on Form 10-Q for the quarter ended June 30, 2005).10.1†
              
              First
      Amended and Restated Westech Capital Corp. 1999 Stock Option Plan
      (Incorporated herein by reference to Exhibit 10.1 to the registrant’s
      Annual Report on Form 10-K for the year ended December 31,
      2002).10.2†
              
              Form
      of Incentive Stock Option Agreement (Incorporated herein by reference to
      Exhibit 10.3 to the registrant’s Registration Statement on Form 10-12(g))
      (File No. 000-29235).10.3†
              
              Form
      of Nonqualified Stock Option Agreement (Incorporated herein by reference
      to Exhibit 10.4 to the registrant’s Registration Statement on Form
      10-12(g)) (File No. 000-29235).10.4†
              
              Employment
      and Confidentiality Agreement, dated as of June 1, 2004, between Westech
      Capital Corp. and Kurt J. Rechner (Incorporated herein by reference to
      Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2004).10.5†
              
              Employment
      and Confidentiality Agreement, dated as of June 1, 2004, between Westech
      Capital Corp. and John F. Garber (Incorporated herein by reference to
      Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2004).10.6
              
              Agreement,
      dated December 3, 2001, with Correspondent Services Corporation
      (Incorporated herein by reference to Exhibit 10.9 to the registrant’s
      Annual Report on Form 10-K for the year ended December 31,
      2001).10.7†
              
              Employment
      and Confidentiality Agreement, dated as of June 1, 2004, between Westech
      Capital Corp. and Mark M. Salter (Incorporated herein by reference to
      Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2004).10.8
              
              Agreement,
      dated as of October 15, 2004, between Seton Securities Group, Inc.,
      Charles H. Mayer, Westech Capital Corp., and Tejas Securities Group, Inc.
      (Incorporated herein by reference to Exhibit 10.2 to the registrant’s
      Current Report on Form 8-K filed on November 9, 2004).10.9
              
              Agreement
      Regarding Contract between Blake Byram and TI Building Partnership, Ltd.
      (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K filed on February 18, 2005).10.10
              
              Real
      Estate Purchase and Sale Agreement, and the first and second amendments
      thereto, between Blake Byram and 8226 Bee Caves, Ltd. (Incorporated herein
      by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
      8-K filed on February 18, 2005).
  31
  Exhibit
      Number
              
              Description
      of Exhibits10.11
              
              Promissory
      Note, dated February 22, 2005, made by TI Building Partnership, Ltd. for
      the benefit of Community Credit Union (Incorporated herein by reference to
      Exhibit 10.16 to the registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2004).10.12†
              
              First
      Amendment to First Amended and Restated Stock Option Plan (Incorporated
      herein by reference to Exhibit 10.1 to the registrant’s Current Report on
      Form 8-K filed on November 9, 2004).10.13
              
              Piggy-back
      Registration Rights Agreement, dated as of July 7, 2004, by and between
      Westech Capital Corp. and Salter Family Partners, Ltd. (Incorporated
      herein by reference to Exhibit 10.1 to the registrant's Quarterly Report
      on Form 10-Q for the quarter ended June 30, 2004).10.14
              
              Assignment
      of Purchase and Sale Agreement between CNW2, Inc. and TI Building
      Partnership, Ltd. (Incorporated herein by reference to Exhibit 10.1
      to the registrant’s Current Report on Form 8-K filed on
      April 25, 2005).10.15
              
              Purchase
      and Sale Agreement, between Catalyst Development II, L.P. and CNW2, Inc.
      (Incorporated herein by reference to Exhibit 10.2 to the registrant’s
      Current Report on Form 8-K filed on April  25,
      2005).10.16
              
              Promissory
      Note, dated May 9, 2005, made by TI Building Partnership, Ltd. for
      the benefit of First United Bank (Incorporated herein by reference to
      Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q
      for the quarter ended March 31, 2005).10.17
              
              Non-Compete
      Agreement, dated as of July 1, 2005, by and between Tejas
      Incorporated and John Gorman (Incorporated herein by reference to
      Exhibit 10.8 to the registrant’s Current Report on Form 8-K
      filed on July 8, 2005).10.18
              
              Employment
      Agreement dated June 1, 2006 by and between Tejas Incorporated and Kurt E.
      Morales (Incorporated herein by reference to Exhibit 10.1 to the
      registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2006).10.19
              
              Purchase
      Agreement dated October 1, 2006 by and among Tejas Incorporated, Capital
      & Technology Advisors, Inc. and the persons and entities listed on the
      signature page thereto (Incorporated herein by reference to Exhibit 10.1
      to the registrant’s Current Report on Form 8-K filed on October 5,
      2006).21.1*
              
              Subsidiaries
      of the Registrant23.1*
              
              Consent
      of PMB Helin Donovan, LLP, Independent Registered Public Accounting
      Firm31.1*
              
              Certification
      of Chief Executive Officer under Securities Exchange Act Rules 13a-14 or
      15d-1431.2*
              
              Certification
      of Chief Financial Officer under Securities Exchange Act Rules 13a-14 or
      15d-1432.1*
              
              Certifications
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2*
              
              Certifications
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
 
 ____________
 
 *           Filed
herewith.
 
 †           Management
contract or compensatory plan or arrangement.




32