SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q


(Mark
one)





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




FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009




OR




 ̈
            TRANSITION REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934




Commission
File No. 000-30066




SANDERS
MORRIS HARRIS GROUP INC.


(Exact
name of registrant as specified in its charter)




Texas
                
                76-0583569(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification
      No.)600
      Travis, Suite 5800Houston,
      Texas
                
                77002(Address
      of principal executive offices)
                
                (Zip
      Code)




(713)
993-4610




(Registrant’s
telephone number, including area code)




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




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).  o Yes   ̈
No




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.




Large
      accelerated filer   ̈
            Accelerated
      filer  xNon-accelerated
      filer   ̈
            Smaller
      reporting company   ̈




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  ̈
Yes   x  No




As of November 6, 2009, the registrant
had 28,492,846 outstanding shares of common stock, par value $0.01 per
share.










SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES





INDEX





PagePART
      I.  FINANCIAL INFORMATIONItem
      1.
                        Financial
      Statements
                        2Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008
                        2Condensed
      Consolidated Statements of Operations for the Three and Nine MonthsEnded  September
      30, 2009 and 2008 (unaudited)
                        3Condensed
      Consolidated Statement of Changes in Equity for the Nine Months Ended
      September 30, 2009 (unaudited)
                        4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended September
      30, 2009 and 2008 (unaudited)
                        5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                        6Item
      2.
                        Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        22Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        33Item
      4.
                        Controls
      and Procedures
                        33PART
      II. OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings
                        34Item
      1A.
                        Risk
      Factors
                        34Item
      5.
                        Other
      Information
                        35Item
      6.
                        Exhibits
                        36


1


PART
I.   FINANCIAL INFORMATION





Item
1.  Financial
Statements





SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


As
of September 30, 2009 and December 31, 2008


(in
thousands, except share and per share amounts)





September
      30,
                                
                                
                                December
      31,2009
                                
                                
                                2008(unaudited)ASSETSCash
      and cash equivalents
                                
                                $
                                24,851
                                
                                
                                $
                                30,224Receivables,
      net of allowance of $2,886 and $1,470, respectivelyBroker-dealers
      and clearing organizations
                                
                                
                                1,506
                                
                                
                                
                                254Customers
                                
                                
                                25,926
                                
                                
                                
                                16,344Related
      parties
                                
                                
                                11,551
                                
                                
                                
                                8,417Other
                                
                                
                                81,407
                                
                                
                                
                                89,847Deposits
      with clearing organizations
                                
                                
                                1,563
                                
                                
                                
                                1,062Securities
      owned
                                
                                
                                41,278
                                
                                
                                
                                54,559Furniture,
      equipment, and leasehold improvements, net
                                
                                
                                17,577
                                
                                
                                
                                18,859Other
      assets and prepaid expenses
                                
                                
                                2,994
                                
                                
                                
                                2,261Goodwill,
      net
                                
                                
                                70,653
                                
                                
                                
                                63,078Other
      intangible assets, net
                                
                                
                                32,799
                                
                                
                                
                                12,565Total
      assets
                                
                                $
                                312,105
                                
                                
                                $
                                297,470LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued liabilities
                                
                                $
                                37,238
                                
                                
                                $
                                36,644Borrowings
                                
                                
                                22,024
                                
                                
                                
                                -Subordinated
      promissory note
                                
                                
                                10,000
                                
                                
                                
                                -Deferred
      tax liability, net
                                
                                
                                11,168
                                
                                
                                
                                14,532Securities
      sold, not yet purchased
                                
                                
                                5,498
                                
                                
                                
                                12,884Payable
      to broker-dealers and clearing organizations
                                
                                
                                22
                                
                                
                                
                                2,051Total
      liabilities
                                
                                
                                85,950
                                
                                
                                
                                66,111Commitments
      and contingenciesEquity:Preferred
      stock, $0.10 par value; 10,000,000 sharesauthorized;
      no shares issued and outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.01 par value; 100,000,000 sharesauthorized;
      29,545,380 and 29,207,962 shares issued,respectively
                                
                                
                                295
                                
                                
                                
                                292Additional
      paid-in capital
                                
                                
                                236,767
                                
                                
                                
                                234,578Accumulated
      deficit
                                
                                
                                (20,195
                                )
                                
                                
                                (5,895
                                )Treasury
      stock, at cost, 1,055,894 and 1,049,085 shares,
    respectively
                                
                                
                                (6,449
                                )
                                
                                
                                (6,421
                                )Total
      Sanders Morris Harris Group Inc. shareholders' equity
                                
                                
                                210,418
                                
                                
                                
                                222,554Noncontrolling
      interest
                                
                                
                                15,737
                                
                                
                                
                                8,805Total
      equity
                                
                                
                                226,155
                                
                                
                                
                                231,359Total
      liabilities and equity
                                
                                $
                                312,105
                                
                                
                                $
                                297,470





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


2





SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except per share amounts)


(unaudited)





Three
      Months Ended
                                  
                                  
                                  Nine
      Months EndedSeptember
      30,
                                  
                                  
                                  September
      30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Revenue:Investment
      advisory and related services
                                  
                                  $
                                  19,428
                                  
                                  
                                  $
                                  19,649
                                  
                                  
                                  $
                                  50,909
                                  
                                  
                                  $
                                  58,689Commissions
                                  
                                  
                                  13,139
                                  
                                  
                                  
                                  13,247
                                  
                                  
                                  
                                  37,202
                                  
                                  
                                  
                                  40,537Investment
      banking
                                  
                                  
                                  3,358
                                  
                                  
                                  
                                  3,971
                                  
                                  
                                  
                                  9,385
                                  
                                  
                                  
                                  10,538Principal
      transactions
                                  
                                  
                                  6,849
                                  
                                  
                                  
                                  5,194
                                  
                                  
                                  
                                  31,592
                                  
                                  
                                  
                                  15,978Interest
      and dividends
                                  
                                  
                                  2,505
                                  
                                  
                                  
                                  1,591
                                  
                                  
                                  
                                  7,902
                                  
                                  
                                  
                                  3,725Other
      income
                                  
                                  
                                  2,581
                                  
                                  
                                  
                                  2,362
                                  
                                  
                                  
                                  7,144
                                  
                                  
                                  
                                  9,346Total
      revenue
                                  
                                  
                                  47,860
                                  
                                  
                                  
                                  46,014
                                  
                                  
                                  
                                  144,134
                                  
                                  
                                  
                                  138,813Expenses:Employee
      compensation and benefits
                                  
                                  
                                  29,010
                                  
                                  
                                  
                                  29,084
                                  
                                  
                                  
                                  93,792
                                  
                                  
                                  
                                  80,492Floor
      brokerage, exchange, and clearance fees
                                  
                                  
                                  1,458
                                  
                                  
                                  
                                  1,567
                                  
                                  
                                  
                                  4,896
                                  
                                  
                                  
                                  4,297Communications
      and data processing
                                  
                                  
                                  3,037
                                  
                                  
                                  
                                  2,477
                                  
                                  
                                  
                                  8,607
                                  
                                  
                                  
                                  8,241Occupancy
                                  
                                  
                                  3,830
                                  
                                  
                                  
                                  3,375
                                  
                                  
                                  
                                  10,745
                                  
                                  
                                  
                                  9,236Interest
                                  
                                  
                                  1,263
                                  
                                  
                                  
                                  400
                                  
                                  
                                  
                                  2,083
                                  
                                  
                                  
                                  400Goodwill
      and other intangible assets impairment charges
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  14,928
                                  
                                  
                                  
                                  -Amortization
      of other intangible assets
                                  
                                  
                                  544
                                  
                                  
                                  
                                  165
                                  
                                  
                                  
                                  962
                                  
                                  
                                  
                                  568Other
      general and administrative
                                  
                                  
                                  7,107
                                  
                                  
                                  
                                  6,146
                                  
                                  
                                  
                                  20,168
                                  
                                  
                                  
                                  20,023Total
      expenses
                                  
                                  
                                  46,249
                                  
                                  
                                  
                                  43,214
                                  
                                  
                                  
                                  156,181
                                  
                                  
                                  
                                  123,257Income
      (loss) from continuing operations before equity in income oflimited partnerships and income taxes
                                  
                                  
                                  1,611
                                  
                                  
                                  
                                  2,800
                                  
                                  
                                  
                                  (12,047
                                  )
                                  
                                  
                                  15,556Equity
      in income of limited partnerships
                                  
                                  
                                  1,772
                                  
                                  
                                  
                                  43,285
                                  
                                  
                                  
                                  2,760
                                  
                                  
                                  
                                  46,556Income
      (loss) from continuing operations before income taxes
                                  
                                  
                                  3,383
                                  
                                  
                                  
                                  46,085
                                  
                                  
                                  
                                  (9,287
                                  )
                                  
                                  
                                  62,112Provision
      (benefit) for income taxes
                                  
                                  
                                  856
                                  
                                  
                                  
                                  17,829
                                  
                                  
                                  
                                  (4,335
                                  )
                                  
                                  
                                  21,152Income
      (loss) from continuing operations, net of income taxes
                                  
                                  
                                  2,527
                                  
                                  
                                  
                                  28,256
                                  
                                  
                                  
                                  (4,952
                                  )
                                  
                                  
                                  40,960Loss
      from discontinued operations, net of income taxes
                                  
                                  
                                  (355
                                  )
                                  
                                  
                                  (238
                                  )
                                  
                                  
                                  (2,043
                                  )
                                  
                                  
                                  (904
                                  )Net
      income (loss)
                                  
                                  
                                  2,172
                                  
                                  
                                  
                                  28,018
                                  
                                  
                                  
                                  (6,995
                                  )
                                  
                                  
                                  40,056Less:
      Net (income) loss attributable to the noncontrolling
      interest
                                  
                                  
                                  (1,329
                                  )
                                  
                                  
                                  942
                                  
                                  
                                  
                                  (3,473
                                  )
                                  
                                  
                                  (7,011
                                  )Net
      income (loss) attributable to Sanders Morris Harris Group
      Inc.
                                  
                                  $
                                  843
                                  
                                  
                                  $
                                  28,960
                                  
                                  
                                  $
                                  (10,468
                                  )
                                  
                                  $
                                  33,045Basic
      earnings (loss) per common share:Continuing
      operations
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  1.04
                                  
                                  
                                  $
                                  (0.31
                                  )
                                  
                                  $
                                  1.28Discontinued
      operations
                                  
                                  
                                  (0.01
                                  )
                                  
                                  
                                  (0.01
                                  )
                                  
                                  
                                  (0.07
                                  )
                                  
                                  
                                  (0.04
                                  )Net
      earnings (loss)
                                  
                                  $
                                  0.03
                                  
                                  
                                  $
                                  1.03
                                  
                                  
                                  $
                                  (0.38
                                  )
                                  
                                  $
                                  1.24Diluted
      earnings (loss) per common share:Continuing
      operations
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  1.04
                                  
                                  
                                  $
                                  (0.31
                                  )
                                  
                                  $
                                  1.27Discontinued
      operations
                                  
                                  
                                  (0.01
                                  )
                                  
                                  
                                  (0.01
                                  )
                                  
                                  
                                  (0.07
                                  )
                                  
                                  
                                  (0.04
                                  )Net
      earnings (loss)
                                  
                                  $
                                  0.03
                                  
                                  
                                  $
                                  1.03
                                  
                                  
                                  $
                                  (0.38
                                  )
                                  
                                  $
                                  1.23Weighted
      average common shares outstanding:Basic
                                  
                                  
                                  27,797
                                  
                                  
                                  
                                  28,033
                                  
                                  
                                  
                                  27,689
                                  
                                  
                                  
                                  26,583Diluted
                                  
                                  
                                  28,497
                                  
                                  
                                  
                                  28,192
                                  
                                  
                                  
                                  27,689
                                  
                                  
                                  
                                  26,764Amounts
      attributable to Sanders Morris Harris Group Inc. common shareholders:Income
      (loss) from continuing operations, net of income taxes
                                  
                                  $
                                  1,198
                                  
                                  
                                  $
                                  29,198
                                  
                                  
                                  $
                                  (8,425
                                  )
                                  
                                  $
                                  33,949Discontinued
      operations, net of income taxes
                                  
                                  
                                  (355
                                  )
                                  
                                  
                                  (238
                                  )
                                  
                                  
                                  (2,043
                                  )
                                  
                                  
                                  (904
                                  )Net
      income (loss)
                                  
                                  $
                                  843
                                  
                                  
                                  $
                                  28,960
                                  
                                  
                                  $
                                  (10,468
                                  )
                                  
                                  $
                                  33,045





The
accompanying notes are an integral part of these condensed consolidated
financial statements.




3





SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


For
the nine months ended September 30, 2009


(in
thousands, except share and per share amounts)


(unaudited)





Amounts
                                        
                                        
                                        SharesCommon
      stock:Balance,
      beginning of period
                                        
                                        $
                                        292
                                        
                                        
                                        
                                        29,207,962Stock
      issued pursuant to employee benefit plan
                                        
                                        
                                        3
                                        
                                        
                                        
                                        337,418Balance,
      end of period
                                        
                                        
                                        295
                                        
                                        
                                        
                                        29,545,380Additional
      paid-in capital:Balance,
      beginning of period
                                        
                                        
                                        234,578Stock
      issued pursuant to employee benefit plan; including tax
      benefit
                                        
                                        
                                        239Tax
      adjustment related to employee benefit plan
                                        
                                        
                                        (971
                                        )Stock-based
      compensation expense
                                        
                                        
                                        2,921Balance,
      end of period
                                        
                                        
                                        236,767Accumulated
      deficit:Balance,
      beginning of period
                                        
                                        
                                        (5,895
                                        )Cash
      dividends ($0.135 per share)
                                        
                                        
                                        (3,832
                                        )Net
      loss attributable to Sanders Morris Harris Group Inc.
                                        
                                        
                                        (10,468
                                        )Balance,
      end of period
                                        
                                        
                                        (20,195
                                        )Treasury
      stock:Balance,
      beginning of period
                                        
                                        
                                        (6,421
                                        )
                                        
                                        
                                        (1,049,085
                                        )Acquisition
      of treasury stock
                                        
                                        
                                        (28
                                        )
                                        
                                        
                                        (6,809
                                        )Balance,
      end of period
                                        
                                        
                                        (6,449
                                        )
                                        
                                        
                                        (1,055,894
                                        )Noncontrolling
      interest:Balance,
      beginning of period
                                        
                                        
                                        8,805Purchase
      of membership interest from noncontrolling interest
                                        
                                        
                                        7,398Contributions
                                        
                                        
                                        20Distributions
                                        
                                        
                                        (3,959
                                        )Net
      income attributable to the noncontrolling interest
                                        
                                        
                                        3,473Balance,
      end of period
                                        
                                        
                                        15,737Total
      equity and common shares outstanding
                                        
                                        $
                                        226,155
                                        
                                        
                                        
                                        28,489,486





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





Nine
      Months EndedSeptember
      30,2009
                                    
                                    
                                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                    
                                    $
                                    (6,995
                                    )
                                    
                                    $
                                    40,056Adjustments
      to reconcile net income (loss) to net cash provided byoperating
      activities:Realized
      gain on securities available for sale
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (205
                                    )Loss
      on sales of assets
                                    
                                    
                                    12
                                    
                                    
                                    
                                    79Depreciation
                                    
                                    
                                    3,280
                                    
                                    
                                    
                                    2,866Provision
      for bad debts
                                    
                                    
                                    127
                                    
                                    
                                    
                                    978Stock-based
      compensation expense
                                    
                                    
                                    2,921
                                    
                                    
                                    
                                    2,179Goodwill
      and other intangible assets impairment charges
                                    
                                    
                                    14,928
                                    
                                    
                                    
                                    -Amortization
      of other intangible assets
                                    
                                    
                                    962
                                    
                                    
                                    
                                    568Deferred
      income taxes
                                    
                                    
                                    (3,364
                                    )
                                    
                                    
                                    19,443Equity
      in income of limited partnerships
                                    
                                    
                                    (2,760
                                    )
                                    
                                    
                                    (46,556
                                    )Unrealized
      and realized loss on not readily marketablesecurities
      owned, net
                                    
                                    
                                    58
                                    
                                    
                                    
                                    4,836Not
      readily marketable securities owned received for paymentof
      investment banking fees
                                    
                                    
                                    (21
                                    )
                                    
                                    
                                    (581
                                    )Net
      change in:Receivables
                                    
                                    
                                    (4,238
                                    )
                                    
                                    
                                    820Deposits
      with clearing organizations
                                    
                                    
                                    (501
                                    )
                                    
                                    
                                    35Marketable
      securities owned
                                    
                                    
                                    9,156
                                    
                                    
                                    
                                    (1,404
                                    )Other
      assets and prepaid expenses
                                    
                                    
                                    (702
                                    )
                                    
                                    
                                    (393
                                    )Accounts
      payable and accrued liabilities
                                    
                                    
                                    (2,359
                                    )
                                    
                                    
                                    906Securities
      sold, not yet purchased
                                    
                                    
                                    (7,386
                                    )
                                    
                                    
                                    36Payable
      to broker-dealers and clearing organizations
                                    
                                    
                                    (2,029
                                    )
                                    
                                    
                                    (2,955
                                    )Net
      cash provided by operating activities
                                    
                                    
                                    1,089
                                    
                                    
                                    
                                    20,708CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                    
                                    
                                    (1,607
                                    )
                                    
                                    
                                    (7,203
                                    )Acquisitions,
      net of cash acquired of $210 and $126, respectively
                                    
                                    
                                    (25,324
                                    )
                                    
                                    
                                    (29,070
                                    )Purchases
      of not readily marketable securities owned
                                    
                                    
                                    (493
                                    )
                                    
                                    
                                    (882
                                    )Proceeds
      from sales of not readily marketable securities owned
                                    
                                    
                                    7,341
                                    
                                    
                                    
                                    11,020Proceeds
      from sales and maturities of securities available for sale
                                    
                                    
                                    -
                                    
                                    
                                    
                                    697Proceeds
      from sales of assets
                                    
                                    
                                    110
                                    
                                    
                                    
                                    266Net
      cash used in investing activities
                                    
                                    
                                    (19,973
                                    )
                                    
                                    
                                    (25,172
                                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchases
      of treasury stock
                                    
                                    
                                    (28
                                    )
                                    
                                    
                                    (1,162
                                    )Proceeds
      from shares issued pursuant to employee benefit plan
                                    
                                    
                                    225
                                    
                                    
                                    
                                    1,164Tax
      benefit of stock options exercised
                                    
                                    
                                    17
                                    
                                    
                                    
                                    364Tax
      adjustment related to employee benefit plan
                                    
                                    
                                    (971
                                    )
                                    
                                    
                                    -Proceeds
      from borrowings
                                    
                                    
                                    25,000
                                    
                                    
                                    
                                    250Repayment
      of borrowings
                                    
                                    
                                    (2,976
                                    )
                                    
                                    
                                    (450
                                    )Contributions
      by noncontrolling interest
                                    
                                    
                                    20
                                    
                                    
                                    
                                    -Distributions
      to noncontrolling interest
                                    
                                    
                                    (3,959
                                    )
                                    
                                    
                                    (13,791
                                    )Payments
      of cash dividends
                                    
                                    
                                    (3,817
                                    )
                                    
                                    
                                    (2,389
                                    )Net
      cash provided by (used in) financing activities
                                    
                                    
                                    13,511
                                    
                                    
                                    
                                    (16,014
                                    )Net
      decrease in cash and cash equivalents
                                    
                                    
                                    (5,373
                                    )
                                    
                                    
                                    (20,478
                                    )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                    
                                    
                                    30,224
                                    
                                    
                                    
                                    46,503CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                    
                                    $
                                    24,851
                                    
                                    
                                    $
                                    26,025





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


5


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            BASIS
      OF PRESENTATION





Nature
of Operations




Sanders
Morris Harris Group Inc. (“SMHG” or “the Company”) provides a broad range of
financial and other professional services, including wealth management
(including investment advice and management, financial planning, sports
representation and management), investment and merchant banking, and
institutional services (including institutional sales and trading, prime
brokerage services, and research).  The Company’s operating
subsidiaries include SMH Capital Inc. (formerly Sanders Morris Harris Inc.)
(“SMH”), SMH Capital Advisors, Inc. (“Capital Advisors”), The Edelman Financial
Center, LLC (“Edelman”), The Dickenson Group, LLC (“Dickenson”), The Rikoon
Group, LLC (“Rikoon”), Leonetti & Associates, LLC (“Leonetti”), Miller-Green
Financial Services, Inc. (“Miller-Green”), Kissinger Financial Services, a
division of SMH, (“Kissinger”) and Select Sports Group, Ltd.
(“SSG”).  The Company serves a diverse group of institutional,
corporate, and individual clients.





Principles
of Consolidation




The
unaudited condensed consolidated financial statements of the Company include the
accounts of its subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.





In
management's opinion, the unaudited condensed consolidated financial statements
include all adjustments necessary for a fair presentation of our consolidated
financial position at September 30, 2009 and December 31, 2008, our consolidated
results of operations for the three and nine months ended September 30, 2009 and
2008, our consolidated changes in equity for the nine months ended September 30,
2009, and our consolidated cash flows for the nine months ended September 30,
2009 and 2008.  All adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full
year.





These
financial statements and notes should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008.





Management’s
Estimates





The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of consolidated assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the consolidated financial statements and the amounts of revenue and expenses
during the reporting periods.  The most significant estimates used by
the Company relate to contingencies and the valuation of not readily marketable
securities, goodwill, and stock-based compensation awards.  Actual
results could differ from those estimates.





Fair
Values of Financial Instruments





The fair
values of cash and cash equivalents, receivables, accounts payable and accrued
liabilities, borrowings, and payables to broker-dealers approximate cost due to
the short period of time to maturity.  Securities owned and securities
sold, not yet purchased are carried at their fair values.


6





New
Authoritative Accounting Guidance





On July
1, 2009, the Accounting Standards Codification (“ASC”) became the Financial
Accounting Standards Board’s (“FASB”) officially recognized source of
authoritative U.S. generally accepted accounting principles (“GAAP”) applicable
to all non-governmental entities in the preparation of financial
statements.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants.  All guidance
contained in the ASC carries an equal level of authority.  All
non-grandfathered, non-SEC accounting literature not included in the ASC is
superseded and deemed non-authoritative.  The switch to the ASC
affects the way companies refer to U.S. GAAP in financial statements and
accounting policies.  Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic, Subtopic,
Section, and Paragraph structure.





FASB ASC Topic 320, Investments –
Debt and Equity Securities.New authoritative accounting
guidance under ASC Topic 320, Investments – Debt and Equity
Securities,(i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis.  Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses.  The amount
of the impairment related to other factors is recognized in other comprehensive
income.  The Company adopted the provisions of the new authoritative
accounting guidance under ASC Topic 320 for the interim period ending June 30,
2009.  Adoption of the new guidance did not have a material impact on
the Company’s consolidated financial statements.





FASB ASC Topic 805, Business
Combinations.  On January 1, 2009, new authoritative guidance
under ASC Topic 805, Business
Combinations,became applicable to the Company’s accounting for business
combinations closing on or after January 1, 2009.  ASC Topic 805
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. ASC Topic 805 requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities, and any non-controlling interest in the acquiree at fair value as
of the acquisition date. Contingent consideration is required to be recognized
and measured at fair value on the date of acquisition rather than at a later
date when the amount of that consideration may be determinable beyond a
reasonable doubt. This fair value approach replaces the cost-allocation process
required under previous accounting guidance whereby the cost of an acquisition
was allocated to the individual assets acquired and liabilities assumed based on
their estimated fair value. ASC Topic 805 requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the case under prior
accounting guidance. Assets acquired and liabilities assumed in a business
combination that arise from contingencies are to be recognized at fair value if
fair value can be reasonably estimated.  If fair value of such an
asset or liability cannot be reasonably estimated, the asset or liability would
generally be recognized in accordance with ASC Topic 450, Contingencies.Under
ASC Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, would have to be met in order to accrue for a restructuring
plan in purchase accounting. Pre-acquisition contingencies are to be recognized
at fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting
and, instead, that contingency would be subject to the probable and estimable
recognition criteria of ASC Topic 450, Contingencies.





FASB ASC Topic 810,
Consolidation.  New authoritative guidance under ASC Topic
810,Consolidation,
amended prior guidance to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  Under ASC Topic 810, a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as a component of
equity in the consolidated financial statements. Among other requirements, ASC
Topic 810 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest in subsidiaries. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest in subsidiaries.
The new authoritative accounting guidance under ASC Topic 810 was effective for
the Company on January 1, 2009.  Shareholders’ equity changed due
to the application of the new authoritative accounting
guidance.  Noncontrolling interest, formerly presented as minority
interests outside of shareholders’ equity, is now included in
equity.


7





Further
new authoritative accounting guidance under ASC Topic 810 amends prior guidance
to change how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated.  The determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance.  The new
authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements.  The new authoritative
accounting guidance under ASC Topic 810 will be effective January 1, 2010 and is
not expected to have a material impact on the Company’s consolidated financial
statements.





FASB ASC Topic 820, Fair Value
Measurements and Disclosures.  New authoritative accounting
guidance under ASC Topic 820, Fair Value
Measurements and Disclosures, affirms
that the objective of fair value when the market for an asset is not active is
the price that would be received to sell the asset in an orderly transaction,
and clarifies and includes additional factors for determining whether there has
been a significant decrease in market activity for an asset when the market for
that asset is not active.  ASC Topic 820 requires an entity to base
its conclusions about whether a transaction was not orderly on the weight of the
evidence.  The new accounting guidance amended prior guidance to
expand certain disclosure requirements.  The new authoritative
accounting guidance under ASC Topic 820 was effective for the Company for the
interim period ending June 30, 2009 and did not have a material impact on the
Company’s consolidated financial statements.





Further
new authoritative accounting guidance (Accounting Standards Update No. 2009-5)
under ASC Topic 820 provides guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available.  In such instances, a reporting
entity is required to measure fair value utilizing a valuation technique that
uses (i) the quoted price of the identical liability when traded as an asset,
(ii) quoted prices for similar liabilities or similar liabilities when traded as
assets, or (iii) another valuation technique that is consistent with the
existing principles of ASC Topic 820, such as an income approach or market
approach.  The new authoritative accounting guidance also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment or other inputs relating to
the existence of a restriction that prevents the transfer of the
liability.  This new authoritative accounting guidance under ASC Topic
820 will be effective for the Company on October 1, 2009 and is not expected to
have a material impact on the Company’s consolidated financial
statements.





FASB ASC Topic 825, Financial
Instruments.New authoritative accounting guidance under ASC
Topic 825, Financial
Instruments, requires an entity to provide disclosures about the fair
value of financial instruments in interim financial information and amends prior
guidance to require those disclosures in summarized financial information at
interim reporting periods.   The new authoritative accounting
guidance under ASC Topic 825 was effective for the Company for the interim
period ending June 30, 2009 and did not have a material impact on the Company’s
consolidated financial statements.





FASB ASC Topic 855, Subsequent
Events.  New authoritative accounting guidance under ASC Topic
855, Subsequent Events,
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued.  ASC Topic 855 defines (i) the period after
the balance sheet date during which a reporting entity’s management should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should
make about events or transactions that occurred after the balance sheet
date.  The new authoritative accounting guidance under ASC Topic 855
was effective for the Company for the interim period ending June 30, 2009 and
did not have a material impact on the Company’s consolidated financial
statements.


8


FASB ASC Topic 860, Transfers and
Servicing.  New authoritative accounting guidance under ASC
Topic 860, Transfers and
Servicing,amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial
assets.  The new authoritative accounting guidance eliminates the
concept of a “qualifying special-purpose entity” and changes the requirements
for derecognizing financial assets.  The new authoritative accounting
guidance also requires additional disclosures about all continuing involvements
with transferred financial assets including information about gains and losses
resulting from transfers during the period.  The new authoritative
accounting guidance under ASC Topic 860 will be effective January 1, 2010 and is
not expected to have a material impact on the Company’s consolidated financial
statements.





2.
            ACQUISITIONS





On April
1, 2008, the Company acquired 100% of Miller-Green for cash consideration of
$3.0 million.  At acquisition, Miller-Green, based in Houston, Texas,
managed approximately $400 million in assets.  The acquisition was
accounted for as a purchase and, accordingly, the financial information of
Miller-Green has been included in the Company’s consolidated financial
statements from April 1, 2008.  The consideration exceeded the fair
market value of identifiable net tangible assets by $3.0 million, which has been
recorded as other intangible assets.





On
February 29, 2008, the Company acquired a 50.1% membership interest in Leonetti
for consideration of $5.75 million paid in a combination of cash and shares of
the Company’s common stock.  The Company agreed to purchase additional
10% membership interests in March 2013, 2014, and 2015, payable in a combination
of cash and shares of the Company’s common stock.  The purchase price
for the additional membership interests will be based on a multiple of the net
income of Leonetti for the previous year.  At acquisition, Leonetti,
based in Buffalo Grove, Illinois, managed approximately $400 million in
assets.  The acquisition was accounted for as a purchase and,
accordingly, the financial information of Leonetti has been included in the
Company’s consolidated financial statements from February 29,
2008.  The consideration exceeded the fair market value of
identifiable net tangible assets by $6.1 million, $2.0 million of which has been
recorded as goodwill and $4.1 million of which has been recorded as other
intangible assets.





On May
24, 2007, the Company acquired a 75% interest in Rikoon for cash consideration
of $6.0 million of which $1.3 million was recorded as compensation
expense.  The Company agreed to purchase an additional 5% interest in
February 2011 for cash consideration ranging from a minimum of $3.0 million to a
maximum of $5.0 million based on the amount by which Rikoon’s average earnings
before interest, taxes, depreciation, and amortization (“EBITDA”) varies from
the threshold EBITDA specified in the purchase agreement.  At
acquisition, Rikoon, based in Santa Fe, New Mexico, managed approximately $400
million in assets.  The acquisition was accounted for as a purchase
and, accordingly, the financial information of Rikoon has been included in the
Company’s consolidated financial statements from May 24, 2007.  The
consideration exceeded the fair market value of identifiable net tangible assets
by $4.4 million, which has been recorded as other intangible
assets.





On May
10, 2005, the Company acquired a 51% interest in Edelman, one of the leading
financial planning firms in the country.  Edelman, based in Fairfax,
Virginia, manages approximately $3.6 billion in assets.  On May 12,
2008, the Company purchased an additional 25% membership interest in
Edelman.  The Company paid an amount determined based upon Edelman’s
2007 pretax income (the “Second Tranche Consideration”).  The Second
Tranche Consideration of $44.4 million, which was paid in a combination of cash
and the Company’s common stock, has been recorded as goodwill.


9





In
December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
LLC (“EFA”) to expand the Edelman financial platform into additional markets
outside the Washington, D.C. metropolitan area.  In exchange for a 10%
membership interest in EFA, we initially committed to loan EFA up to $20.0
million to cover its start-up expenses of which $10.0 million was advanced and
subsequently repaid.  On April 1, 2009, the Company acquired an additional
66% membership interest in EFA for an aggregate consideration of $25.5 million
in cash and a subordinated promissory note in the principal amount of $10.0
million.  Under the terms of the EFA acquisition agreement, the earlier
loan agreement was terminated.  The consideration exceeded the fair market
value of identifiable net tangible assets by $36.1 million, $21.4 million of
which has been recorded as goodwill, $22.3 million of which has been recorded as
other intangible assets, and $7.6 million of which has been recorded as
noncontrolling interest.  During the nine months ended September 30, 2009,
the Company recorded $938,000 of compensation expense and $666,000 of interest
costs associated with the EFA acquisition which is included in the accompanying
Condensed Consolidated Statements of Operations.  On August 24, 2009, EFA
was merged with and into another Edelman subsidiary, Edelman Financial Services,
LLC.





3.
            SECURITIES
      OWNED AND SECURITIES SOLD, NOT YET
PURCHASED





Securities
owned and securities sold, not yet purchased as of September 30, 2009 and
December 31, 2008 were as follows:





September 30, 2009
                        
                        
                        December 31, 2008Sold, Not Yet
                        
                        
                        
                        
                        
                        Sold, Not YetOwned
                        
                        
                        Purchased
                        
                        
                        Owned
                        
                        
                        Purchased(in thousands)Marketable:Corporate
      stocks and options
                        
                        $
                        11,818
                        
                        
                        $
                        5,498
                        
                        
                        $
                        21,877
                        
                        
                        $
                        12,803Corporate
      bond
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        81Total
      marketable
                        
                        
                        11,818
                        
                        
                        
                        5,498
                        
                        
                        
                        21,877
                        
                        
                        
                        12,884Not
      readily marketable:Limited
      partnerships
                        
                        
                        26,120
                        
                        
                        
                        -
                        
                        
                        
                        29,356
                        
                        
                        
                        -Warrants
                        
                        
                        2,661
                        
                        
                        
                        -
                        
                        
                        
                        2,316
                        
                        
                        
                        -Equities
      and options
                        
                        
                        679
                        
                        
                        
                        -
                        
                        
                        
                        1,010
                        
                        
                        
                        -Total
      not readily marketable
                        
                        
                        29,460
                        
                        
                        
                        -
                        
                        
                        
                        32,682
                        
                        
                        
                        -Total
                        
                        $
                        41,278
                        
                        
                        $
                        5,498
                        
                        
                        $
                        54,559
                        
                        
                        $
                        12,884





Securities
not readily marketable include investment securities (a) for which there is no
market on a securities exchange or no independent publicly quoted market, (b)
that cannot be publicly offered or sold unless registration has been effected
under the Securities Act of 1933 or other applicable securities acts, or (c)
that cannot be offered or sold because of other arrangements, restrictions, or
conditions applicable to the securities or to the company.  Not readily
marketable securities consist of investments in limited partnerships, equities,
options, and warrants. In accordance with FASB ASC Topic 323, Investments – Equity Method and
Joint Ventures, direct investments in limited partnerships are accounted
for using the equity method which approximates fair value.  Proprietary
investments in limited partnerships held by the Company’s broker-dealer
subsidiary are accounted for at fair value.





FASB ASC
Topic 820 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements).  The three levels of the fair
value hierarchy are as follows:





Level
      1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities;





Level
      2
            Quoted
      prices in markets that are not considered to be active or financial
      instruments for which all significant inputs are observable, either
      directly or indirectly;





Level
      3
            Prices
      or valuations that require inputs that are both significant to the fair
      value measurement and
unobservable.


10





A
description of the valuation methodologies used for securities measured at fair
value, as well as the general classification of such securities pursuant to the
valuation hierarchy, is set forth below.





In
general, fair value is based upon quoted market prices, where available. 
If such quoted market prices are not available, fair value is based upon
industry-standard pricing methodologies, models, or other valuation
methodologies that primarily use, as inputs, observable market-based
parameters.  Valuation adjustments may be made to ensure that securities
are recorded at fair value.  The Company’s valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values.





Level 1
consists of unrestricted publicly traded equity securities traded on an active
market whose values are based on quoted market prices.





Level 2
includes securities that are valued using industry-standard pricing
methodologies, models, or other valuation methodologies.  Level 2 inputs
are other than quoted market prices that are observable for the asset, either
directly or indirectly.  Level 2 inputs include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted
market prices that are observable for the asset, such as interest rates and
yield curves observable at commonly quoted intervals, volatilities, credit
risks, prepayment speeds, loss severities, and default rates; and inputs that
are derived principally from observable market data by correlation or other
means.  Securities in this category include restricted publicly traded
equity securities, publicly traded equity securities traded on an inactive
market, publicly traded debt securities, warrants whose underlying stock is
publicly traded on an active market, and options that are not publicly traded or
whose pricing is uncertain.





Level 3
includes securities whose fair value is estimated based on industry-standard
pricing methodologies and internally developed models utilizing significant
inputs not based on, nor corroborated by, readily available market
information.  This category primarily consists of investments in limited
partnerships and equity securities that are not publicly traded.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.





The
following table sets forth by level within the fair value hierarchy securities
owned and securities sold, not yet purchased as of September 30,
2009:





Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    Total(in
      thousands)Securities
      owned
                    
                    $
                    11,158
                    
                    
                    $
                    3,308
                    
                    
                    $
                    12,059
                    
                    
                    $
                    26,525Securities
      sold, not yet purchased
                    
                    
                    5,442
                    
                    
                    
                    56
                    
                    
                    
                    -
                    
                    
                    
                    5,498


11





The
following table sets forth a summary of changes in the fair value of the
Company’s level 3 securities owned for the three and nine months ended September
30, 2009:





Level 3 Securities OwnedThree Months Ended
                    
                    
                    Nine Months EndedSeptember 30, 2009
                    
                    
                    September 30, 2009(in thousands)Balance,
      beginning of period
                    
                    $
                    12,582
                    
                    
                    $
                    13,423Realized
      gains
                    
                    
                    -
                    
                    
                    
                    19Unrealized
      gains relating to securities still held at the reporting
    date
                    
                    
                    492
                    
                    
                    
                    359Purchases,
      issuances, and settlements
                    
                    
                    (1,015
                    )
                    
                    
                    (1,742
                    )Balance,
      end of period
                    
                    $
                    12,059
                    
                    
                    $
                    12,059





Net
unrealized gains (losses) for level 3 securities owned are a component of
“Principal transactions” and “Equity in income of limited partnerships” in the
Condensed Consolidated Statements of Operations as follows:




Three Months Ended
                                  
                                  
                                  Nine Months EndedSeptember 30, 2009
                                  
                                  
                                  September 30, 2009Equity in Income
                                  
                                  
                                  
                                  
                                  
                                  Equity in IncomePrincipal
                                  
                                  
                                  of Limited
                                  
                                  
                                  Principal
                                  
                                  
                                  of LimitedTransactions
                                  
                                  
                                  Partnerships
                                  
                                  
                                  Transactions
                                  
                                  
                                  Partnerships(in thousands)Unrealized
      gains (losses) relating to securities still held at the reporting
      date
                                  
                                  $
                                  136
                                  
                                  
                                  $
                                  356
                                  
                                  
                                  $
                                  (20
                                  )
                                  
                                  $
                                  379





At
September 30, 2009, the Company had $13.0 million and $1.8 million in securities
owned that are valued using the equity method, which approximates fair value,
and at cost basis, respectively.





Sale of Interests in Salient
Partners and Endowment Advisers





In August
2008, we entered into agreements with Salient Partners and Endowment Advisers to
repurchase the Company’s interests in such entities for a total of $95.3
million.  The terms of the agreements provide that Endowment Advisers will
pay the Company annually the greater of $12.0 million in priority to other
distributions, or 23.15% of total distributions, until the Company has received
a total of $86.0 million plus 6% per annum.  The Company received an
additional $9.3 million note for its 50% interest in Salient Partners, payable
with interest over a five-year period.  In May 2009, the principal amount
of the Salient note was reduced by $2.25 million to reflect an offset of certain
liabilities that the Company agreed to pay under the agreements.  In
connection with such transactions, the Company recorded a receivable in the
amount of $76.7 million representing the net present value of the expected
receipts which is included in “Other receivables” in the Condensed Consolidated
Balance Sheets.  The balance of this receivable was $70.0 million at
September 30, 2009.


12


4.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS, NET





Changes
in the carrying amount of goodwill and other intangible assets were as
follows:


Nine Months Ended September 30, 2009Amortizable Intangible Assets:
                        
                        
                        Total OtherCovenants Not
                        
                        
                        Customer
                        
                        
                        
                        
                        
                        IntangibleGoodwill
                        
                        
                        Trade Names
                        
                        
                        To Compete
                        
                        
                        Relationships
                        
                        
                        Subtotal
                        
                        
                        Assets(in thousands)Balance,
      beginning of period
                        
                        $
                        63,078
                        
                        
                        $
                        4,526
                        
                        
                        $
                        450
                        
                        
                        $
                        7,589
                        
                        
                        $
                        8,039
                        
                        
                        $
                        12,565Acquisition
      of EFA
                        
                        
                        21,365
                        
                        
                        
                        15,000
                        
                        
                        
                        4,000
                        
                        
                        
                        3,300
                        
                        
                        
                        7,300
                        
                        
                        
                        22,300Leonetti
      purchase price adjustment
                        
                        
                        34
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Impairment
      charges
                        
                        
                        (13,824
                        )
                        
                        
                        (1,104
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,104
                        )Amortization
      of other intangible assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (417
                        )
                        
                        
                        (545
                        )
                        
                        
                        (962
                        )
                        
                        
                        (962
                        )Balance,
      end of period
                        
                        $
                        70,653
                        
                        
                        $
                        18,422
                        
                        
                        $
                        4,033
                        
                        
                        $
                        10,344
                        
                        
                        $
                        14,377
                        
                        
                        $
                        32,799





All of
the Company’s goodwill and other intangible assets, net, are related to the
Wealth Management business segment.





The
goodwill impairment charges totaling $13.8 million reflect additional impairment
due to continued market deterioration during the first quarter of 2009. 
The losses reflect impairments at two reporting units: Edelman in the amount of
$13.0 million and Kissinger in the amount of $837,000.  The amount of the
impairment losses was determined based on the calculation process specified in
FASB ASC Topic 350, Intangibles – Goodwill and
Other, which compared carrying value to the estimated fair value of
assets and liabilities.  Factors considered in determining fair value
include, among other things, the Company’s market capitalization as determined
by quoted market prices for its common stock and the value of the Company’s
reporting units.  The Company uses several methods to value its reporting
units, including discounted cash flows, comparisons with valuations of public
companies in the same industry, and multiples of assets under
management.





Other
intangible assets consist primarily of customer relationships and trade names
acquired in purchase business combinations.  Other intangible assets
acquired that have indefinite lives (trade names) are not amortized but are
tested for impairment annually or if certain circumstances indicate a possible
impairment may exist.  Certain other intangible assets acquired (customer
relationships and covenants not to compete) are amortized on a straight line
basis over their estimated useful lives and tested for impairment if certain
circumstances indicate an impairment may exist.  During the first quarter
of 2009, the Company recognized a trade name impairment of $1.1
million.





Goodwill
and other intangible assets, net, are classified as level 3 within the fair
value hierarchy.





5.
            BORROWINGS





In May
2009, the Company borrowed $25.0 million under a credit agreement with a
bank, the proceeds of which were used to complete the EFA
acquisition.  The credit agreement matures on October 31, 2012 and bears
interest at the greater of the prime rate or 5%.  Principal of $595,000
plus interest is payable monthly.  The credit agreement is secured by
substantially all of the assets of the Company.  The credit agreement
contains various covenants customary for transactions of this type including the
requirement that the Company maintain minimum financial ratios, net worth,
liquid assets, and cash balances, as well as minimum assets under management,
and meet monthly, quarterly, and annual reporting requirements.  The credit
agreement also contains covenants that restrict the ability of the Company,
among other things, to incur indebtedness, pay dividends or distributions, make
capital expenditures and other restricted payments, including investments, and
consummate asset sales.  At September 30, 2009, the Company was in
compliance with all covenants.


13


6.
            INCOME
      TAXES





The
difference between the effective tax rate reflected in the income tax provision
(benefit) from continuing operations attributable to Sanders Morris Harris Group
Inc. and the statutory federal rate is analyzed as follows:





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(in thousands)Expected
      federal tax at statutory rate of 34%
                  
                  $
                  699
                  
                  
                  $
                  15,989
                  
                  
                  $
                  (4,338
                  )
                  
                  $
                  18,734State
      and other income taxes
                  
                  
                  157
                  
                  
                  
                  1,840
                  
                  
                  
                  3
                  
                  
                  
                  2,418Total
                  
                  $
                  856
                  
                  
                  $
                  17,829
                  
                  
                  $
                  (4,335
                  )
                  
                  $
                  21,152





The
Company files income tax returns in the U.S. federal jurisdiction.  The
Company is no longer subject to U.S. federal income tax examination by the
taxing authorities for years before 2004.  The Company files in several
state tax jurisdictions.  The Company is no longer subject to state income
tax examination by the taxing authorities for years before 2004 with the
exception of two jurisdictions which were voluntarily extended by the
Company.





7.
            ACCOUNTING
      FOR STOCK-BASED COMPENSATION PLANS





The
Company has two types of stock-based compensation awards:  (1) stock
options and (2) restricted common stock.





The
following table sets forth pertinent information regarding stock option
transactions for the nine months ended September 30, 2009:




WeightedNumber
              
              
              Averageof Shares
              
              
              Exercise PriceOutstanding
      at January 1, 2009
              
              
              660,307
              
              
              $
              9.56Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (42,500
              )
              
              
              4.59Outstanding
      at September 30, 2009
              
              
              617,807
              
              
              
              9.90Options
      exercisable at September 30, 2009
              
              
              601,141
              
              
              
              9.95Incentive
      award shares available for grant at September 30, 2009
              
              
              2,438,628




During
the nine months ended September 30, 2009 and 2008, 42,500 and 214,706 options
were exercised for which the Company received proceeds of $195,000 and $1.1
million, respectively.  The Company recognized pretax compensation expense
of $27,000 and $131,000 during the nine months ended September 30, 2009 and
2008, respectively, related to stock options.  The portion of stock-based
compensation expense related to stock options that was unrecognized at September
30, 2009 was $12,000 and is expected to be recognized over a weighted average
period of 0.25 years.


14





The
following table summarizes certain information related to restricted common
stock grants at September 30, 2009:





WeightedAverageNumber
      of
                  
                  
                  Grant
      DateShares
                  
                  
                  Fair ValueNonvested
      at January 1, 2009
                  
                  
                  683,116
                  
                  
                  $
                  11.06Nonvested
      at September 30, 2009
                  
                  
                  623,584
                  
                  
                  
                  7.76For
      the nine months ended September 30, 2009:Granted
                  
                  
                  314,038
                  
                  
                  
                  4.72Vested
                  
                  
                  354,450
                  
                  
                  
                  11.41Forfeited
                  
                  
                  19,120
                  
                  
                  
                  8.09





Employees
deferred compensation of $30,000 and $114,000 during the nine months ended
September 30, 2009 and 2008, respectively, that was used to purchase restricted
common stock.  The Company recognized pretax compensation expense of $2.9
million and $2.0 million during the nine months ended September 30, 2009 and
2008, respectively, related to its restricted common stock plan.  At
September 30, 2009, total unrecognized compensation cost, net of estimated
forfeitures, related to nonvested restricted stock was $3.3 million and is
expected to be recognized over the next 3.25 years.





8.
            TREASURY
      STOCK





On
November 6, 2007, the Company’s board of directors approved a program to
repurchase up to 1,000,000 shares of the Company’s common stock.  Under the
program, shares are repurchased in the open market or privately negotiated
transactions from time to time at prevailing market prices.  Such
repurchases are accounted for using the cost method.  The Company
repurchased 6,809 shares of its common stock at an average price of $4.16 per
share during the nine months ended September 30, 2009 related to this
program.


15


9.
            EARNINGS
      (LOSS) PER COMMON SHARE





Basic and
diluted earnings (loss) per common share computations for the periods indicated
were as follows:





Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(in thousands, except per share amounts)Income
      (loss) from continuing operations, net of income taxes
                  
                  $
                  1,198
                  
                  
                  $
                  29,198
                  
                  
                  $
                  (8,425
                  )
                  
                  $
                  33,949Loss
      from discontinued operations, net of income taxes
                  
                  
                  (355
                  )
                  
                  
                  (238
                  )
                  
                  
                  (2,043
                  )
                  
                  
                  (904
                  )Net
      earnings (loss) attributable to the Company
                  
                  $
                  843
                  
                  
                  $
                  28,960
                  
                  
                  $
                  (10,468
                  )
                  
                  $
                  33,045Basic
      earnings (loss) per common share:Continuing
      operations
                  
                  $
                  0.04
                  
                  
                  $
                  1.04
                  
                  
                  $
                  (0.31
                  )
                  
                  $
                  1.28Discontinued
      operations
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )
                  
                  
                  (0.07
                  )
                  
                  
                  (0.04
                  )Net
      earnings (loss)
                  
                  $
                  0.03
                  
                  
                  $
                  1.03
                  
                  
                  $
                  (0.38
                  )
                  
                  $
                  1.24Diluted
      earnings (loss) per common share:Continuing
      operations
                  
                  $
                  0.04
                  
                  
                  $
                  1.04
                  
                  
                  $
                  (0.31
                  )
                  
                  $
                  1.27Discontinued
      operations
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )
                  
                  
                  (0.07
                  )
                  
                  
                  (0.04
                  )Net
      earnings (loss)
                  
                  $
                  0.03
                  
                  
                  $
                  1.03
                  
                  
                  $
                  (0.38
                  )
                  
                  $
                  1.23Weighted
      average number of common shares outstanding:Basic
                  
                  
                  27,797
                  
                  
                  
                  28,033
                  
                  
                  
                  27,689
                  
                  
                  
                  26,583Potential
      dilutive effect of stock-based awards
                  
                  
                  700
                  
                  
                  
                  159
                  
                  
                  
                  -
                  
                  
                  
                  181Diluted
                  
                  
                  28,497
                  
                  
                  
                  28,192
                  
                  
                  
                  27,689
                  
                  
                  
                  26,764





Outstanding
stock options of 440,000 and 310,000 for the three months ended September 30,
2009 and 2008, respectively, and 448,807 and 310,000 for the nine months ended
September 30, 2009 and 2008, respectively, have not been included in diluted
earnings per common share because to do so would have been antidilutive for the
periods presented.


10.
              COMMITMENTS
      AND CONTINGENCIES





The
Company has issued letters of credit in the amounts of $420,000, $245,000,
$230,000, $144,000, and $92,000 to the owners of five of the offices that we
lease to secure payment of our lease obligations for those
facilities.





In
January 2009, the Company and SMH entered into a Contribution Agreement with Pan
Asia China Commerce Corp. (“PAC3”), Madison Williams Capital, LLC (formerly
Siwanoy Capital, LLC) (“Madison Williams”) and Madison Williams and Company, LLC
(“New BD”), pursuant to which (a) PAC3 agreed to subscribe for and purchase
a 40% Class A membership interest in Madison Williams in exchange for a
cash payment and note and (b) SMH agreed to contribute to New BD the
assets, properties, working capital, and rights related and/or pertaining to its
investment banking, institutional trading (including equity sales and fixed
income sales), New York trading, and research businesses (excluding The Juda
Group and the Concept Capital divisions) (the “Capital Markets Business”),
including a specified amount of working capital (as adjusted for any profits or
losses incurred in the Capital Markets Business between January 1, 2009,
and the date of closing) less (i) the value of the accounts receivable
contributed to Madison Williams, (ii) the value of the certain assets in
SMH’s New Orleans, Louisiana office, (iii) the value of certain money
security deposits and any advance payments, and (iv) the value of certain
securities to be mutually agreed upon by the parties in exchange for a 20%
Class A Membership Interest in Madison Williams, cash, and a note issued by
Madison Williams to the Company. Current members of management of the Capital
Markets Business will retain the remaining 40% membership interest in Madison
Williams. The transaction is expected to close following approval by the
Financial Industry Regulatory Authority (“FINRA”) of a new member application by
the New BD, which is anticipated to be in the fourth quarter of 2009. 
 For the nine months ended September 30, 2009, the Capital Markets Business
revenue was $18.8 million and expenses were $21.7 million.


16





On
November 9, 2009, the Company, SMH, PAC3, and Madison Williams entered into an
Amended and Restated Contribution Agreement with Fletcher Asset Management, Inc.
(“Fletcher”), with respect to the formation of the New BD. Pursuant to the
Amended and Restated Contribution Agreement, (a) PAC3’s interest in Madison
Williams was reduced to a 3.1% Class A membership interest and 28.0% Class B
membership interest, (b) SMH’s interest in Madison Williams was reduced to a
17.5% Class A Membership Interest, (c) Fletcher agreed to subscribe for and
purchase a 40.5% Class A membership interest in Madison Williams in exchange for
a cash contribution, and (d) the interest of management of Madison Williams was
reduced to a 6.5% Class B membership interest.  The Class A membership
interests have a distribution preference over the Class B membership interests
until a total of $8.5 of distributions to the Class A membership interest have
been made, and no distributions may be made to any class of Class B membership
interests until the SMH note for $8 million has been repaid.





The
Company has uncommitted financing arrangements with clearing brokers that
finance our customer accounts, certain broker-dealer balances, and firm trading
positions.  Although these customer accounts and broker-dealer balances are
not reflected on the consolidated balance sheet for financial reporting
purposes, the Company has generally agreed to indemnify these clearing brokers
for losses they may sustain in connection with the accounts, and therefore
retains risk on these accounts.  The Company is required to maintain
certain cash or securities on deposit with our clearing brokers.





In the
normal course of business, the Company enters into underwriting
commitments.  There were no firm underwriting commitments open at September
30, 2009.





Many
aspects of our business involve substantial risks of liability. In the normal
course of business, we have been and in the future may be named as defendant or
co-defendant in lawsuits and arbitration proceedings involving primarily claims
for damages.  We are also involved in a number of regulatory matters
arising out of the conduct of our business.  There can be no assurance that
these matters will not have a material adverse effect on our results of
operations in any future period and a significant judgment could have a material
adverse impact on our consolidated financial position, results of operations,
and cash flows. In addition to claims for damages and monetary sanctions that
may be made against us, we incur substantial costs in investigating and
defending claims and regulatory matters.





In May
2005, SMH acted as placement agent for a private placement of $50.0 million in
convertible preferred stock of Ronco Corporation, a company involved in direct
response marketing. Subsequent to the offering, Ronco experienced financial
difficulties and ultimately filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale
of substantially all of Ronco’s assets in August 2007, and the case was
converted to a liquidation under Chapter 7.





In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH alleging common law fraud, statutory fraud in a stock transaction,
violations of the Texas Securities Act, and negligent misrepresentation in
connection with the plaintiffs’ purchase of $2.0 million in Ronco convertible
preferred stock. On March 17, 2009, a third purchaser of Ronco convertible
preferred stock filed a complaint against SMH. The claims are similar to the
above referenced case. The third purchaser invested $1.9 million in Ronco
convertible preferred stock.  In addition, in July 2009, the Bankruptcy
Trustee filed a derivative action on behalf of the shareholders of Ronco against
two former directors of Ronco (who were employees of SMH) for negligently
authorizing the closing of the purchase of the assets of Ronco Marketing Corp.
in breach of their fiduciary duties of care and loyalty and against SMH for
negligent misrepresentation, breach of fiduciary duties, breach of contract, and
violation of the Texas Fraudulent Transfer Act. No amount of damages is alleged.
SMH believes it has valid defenses to all claims made by the plaintiffs. 
However, there is no assurance that SMH will successfully defend such
claims.





In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be.  Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved.


17





The
Company and its subsidiaries have obligations under operating leases that expire
through 2018 with initial noncancelable terms in excess of one
year.





11.
            BUSINESS
      SEGMENT INFORMATION





SMHG has
two operating segments, Wealth Management and Capital Markets, and one
non-operating segment, Corporate Support and Other. The business segments are
based upon factors such as the services provided and distribution channels
served. Certain services are provided to customers through more than one of our
business segments.





The
Wealth Management segment provides investment advisory, wealth and investment
management, and financial planning services to institutional and individual
clients. It earns an advisory fee based on such factors as the amount of assets
under management and the type of services provided. The Wealth Management
segment may also earn commission revenue from the sale of equity, fixed income,
mutual fund, and annuity products; and sales credits from the distribution of
investment banking issues. In addition, performance fees may be earned for
exceeding performance benchmarks for the investment portfolios in the limited
partnerships that we manage.  The Wealth Management segment also earns
revenue from net interest on customers’ margin loan and credit account balances
and sales credits from the distribution of investment banking
products.





The
Capital Markets segment generally provides corporate financing services to its
institutional client base.  These services are provided through three
divisions:  (i) investment banking, (ii) institutional brokerage, and (iii)
prime brokerage services.





·
            The
      Investment Banking division provides corporate securities underwriting,
      private financings, and financial advisory services. The Company
      participates in corporate securities distributions as a manager,
      co-manager, or member of an underwriting syndicate or of a selling group
      in public offerings managed by other underwriters. Fees earned for our
      role as an advisor, manager, or underwriter are included in the investment
      banking business.   Sales credits associated with the
      distribution of investment banking products are reported in the
      Institutional Brokerage division or the Wealth Management segment
      depending on the relevant distribution
  channel.





·
            The
      Institutional Brokerage division distributes equity and fixed income
      products through its distribution network to its institutional clients.
      Institutional revenue consists of commissions and principal credits earned
      on transactions in customer brokerage accounts, net interest on customers’
      margin loan and credit account balances, and sales credits from the
      distribution of investment banking
products.





·
            The
      Prime Brokerage Services division provides trade execution, clearing,
      custody, and other back-office services to hedge funds and other
      professional traders. Prime broker revenue consists of commissions and
      principal credits earned on equity and fixed income transactions, interest
      income from securities lending services to customers, and net interest on
      customers’ margin loan and credit account
  balances.





The
Corporate Support and Other segment includes realized and unrealized gains and
losses on the Company’s investment portfolios, and interest and dividends earned
on our cash and securities positions. Unallocated corporate revenue and expenses
are included in Corporate Support and Other.  Gains and losses from sports
representation and management services performed by SSG are included in
Corporate Support and Other.





18




The
following summarizes certain financial information of each reportable business
segment for the three and nine months ended September 30, 2009 and 2008,
respectively.  SMHG does not analyze asset information in all business
segments.





Three Months Ended
                      
                      
                      Nine Months EndedSeptember 30,
                      
                      
                      September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(in
      thousands)Revenue:Wealth
      Management
                      
                      $
                      26,359
                      
                      
                      $
                      26,328
                      
                      
                      $
                      72,098
                      
                      
                      $
                      80,137Capital
      Markets:Investment
      banking
                      
                      
                      2,087
                      
                      
                      
                      3,373
                      
                      
                      
                      6,090
                      
                      
                      
                      8,771Institutional
      brokerage
                      
                      
                      5,602
                      
                      
                      
                      5,039
                      
                      
                      
                      16,674
                      
                      
                      
                      13,777Prime
      brokerage services
                      
                      
                      12,566
                      
                      
                      
                      14,116
                      
                      
                      
                      46,929
                      
                      
                      
                      35,300Capital
      Markets Total
                      
                      
                      20,255
                      
                      
                      
                      22,528
                      
                      
                      
                      69,693
                      
                      
                      
                      57,848Corporate
      Support and Other
                      
                      
                      1,246
                      
                      
                      
                      (2,842
                      )
                      
                      
                      2,343
                      
                      
                      
                      828Total
                      
                      $
                      47,860
                      
                      
                      $
                      46,014
                      
                      
                      $
                      144,134
                      
                      
                      $
                      138,813Income
      (loss) from continuing operations before equity in income (loss) of
      limited partnerships and income taxes:Wealth
      Management
                      
                      $
                      7,069
                      
                      
                      $
                      9,872
                      
                      
                      $
                      18,669
                      
                      
                      $
                      28,744Capital
      Markets:Investment
      banking
                      
                      
                      (1,165
                      )
                      
                      
                      (1,033
                      )
                      
                      
                      (3,706
                      )
                      
                      
                      (3,663
                      )Institutional
      brokerage
                      
                      
                      1,002
                      
                      
                      
                      828
                      
                      
                      
                      2,200
                      
                      
                      
                      1,201Prime
      brokerage services
                      
                      
                      (416
                      )
                      
                      
                      1,303
                      
                      
                      
                      361
                      
                      
                      
                      2,750Capital
      Markets Total
                      
                      
                      (579
                      )
                      
                      
                      1,098
                      
                      
                      
                      (1,145
                      )
                      
                      
                      288Corporate
      Support and Other
                      
                      
                      (4,879
                      )
                      
                      
                      (8,170
                      )
                      
                      
                      (29,571
                      )
                      
                      
                      (13,476
                      )Total
                      
                      $
                      1,611
                      
                      
                      $
                      2,800
                      
                      
                      $
                      (12,047
                      )
                      
                      $
                      15,556Equity
      in income (loss) of limited partnerships:Wealth
      Management
                      
                      $
                      356
                      
                      
                      $
                      46,820
                      
                      
                      $
                      (799
                      )
                      
                      $
                      52,197Capital
      Markets:Investment
      banking
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Institutional
      brokerage
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Prime
      brokerage services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Capital
      Markets Total
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Corporate
      Support and Other
                      
                      
                      1,416
                      
                      
                      
                      (3,535
                      )
                      
                      
                      3,559
                      
                      
                      
                      (5,641
                      )Total
                      
                      $
                      1,772
                      
                      
                      $
                      43,285
                      
                      
                      $
                      2,760
                      
                      
                      $
                      46,556Income
      (loss) from continuing operations before income taxes:Wealth
      Management
                      
                      $
                      7,425
                      
                      
                      $
                      56,692
                      
                      
                      $
                      17,870
                      
                      
                      $
                      80,941Capital
      Markets:Investment
      banking
                      
                      
                      (1,165
                      )
                      
                      
                      (1,033
                      )
                      
                      
                      (3,706
                      )
                      
                      
                      (3,663
                      )Institutional
      brokerage
                      
                      
                      1,002
                      
                      
                      
                      828
                      
                      
                      
                      2,200
                      
                      
                      
                      1,201Prime
      brokerage services
                      
                      
                      (416
                      )
                      
                      
                      1,303
                      
                      
                      
                      361
                      
                      
                      
                      2,750Capital
      Markets Total
                      
                      
                      (579
                      )
                      
                      
                      1,098
                      
                      
                      
                      (1,145
                      )
                      
                      
                      288Corporate
      Support and Other
                      
                      
                      (3,463
                      )
                      
                      
                      (11,705
                      )
                      
                      
                      (26,012
                      )
                      
                      
                      (19,117
                      )Total
                      
                      $
                      3,383
                      
                      
                      $
                      46,085
                      
                      
                      $
                      (9,287
                      )
                      
                      $
                      62,112Net
      (income) loss attributable to the noncontrolling interest:Wealth
      Management
                      
                      $
                      (1,329
                      )
                      
                      $
                      942
                      
                      
                      $
                      (3,473
                      )
                      
                      $
                      (7,011
                      )Capital
      Markets:Investment
      banking
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Institutional
      brokerage
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Prime
      brokerage services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Capital
      Markets Total
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Corporate
      Support and Other
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      (1,329
                      )
                      
                      $
                      942
                      
                      
                      $
                      (3,473
                      )
                      
                      $
                      (7,011
                      )


19


12.
            SUPPLEMENTAL
      CASH FLOW INFORMATION





Nine Months Ended September 30,2009
                    
                    
                    2008(in
      thousands)Cash
      payment (refund) for income taxes, net
                    
                    $
                    (2,407
                    )
                    
                    $
                    2,056Cash
      paid for interest
                    
                    
                    903
                    
                    
                    
                    9Noncash
      investing activities:Acquisitions:Receivables
                    
                    
                    -
                    
                    
                    
                    10Goodwill
      and other intangible assets, net
                    
                    
                    10,000
                    
                    
                    
                    24,136Accounts
      payable and accrued liabilities
                    
                    
                    -
                    
                    
                    
                    (290
                    )Subordinated
      promissory note
                    
                    
                    (10,000
                    )
                    
                    
                    -Noncontrolling
      interest
                    
                    
                    -
                    
                    
                    
                    77Common
      stock
                    
                    
                    -
                    
                    
                    
                    (23,933
                    )Sale
      of not readily marketable securities:Receivables
                    
                    
                    -
                    
                    
                    
                    74,732Sale
      of limited partnerships
                    
                    
                    -
                    
                    
                    
                    (70,666
                    )Accounts
      payable and accrued liabilities
                    
                    
                    -
                    
                    
                    
                    (4,066
                    )Noncash
      financing activities:Dividends
      declared not yet paid
                    
                    
                    1,281
                    
                    
                    
                    1,265





13.
            RELATED
      PARTIES





The
Company had receivables from related parties totaling $11.6 million at September
30, 2009, primarily consisting of $4.8 million of advances to unconsolidated
related entities to fund operating expenses, $4.2 million of notes receivable
from employees and consultants representing loans made to induce the employees
and consultants to affiliate with the Company, and $1.8 million of management
fees receivable from the limited partnerships that the Company
manages.





14.
            DISCONTINUED
      OPERATIONS





During
the first quarter of 2009, the Company closed three retail
offices.  This decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs.  A summary of
selected financial information of discontinued operations is as follows for the
three and nine months ended September 30, 2009 and 2008.





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(in
      thousands)Operating
      activities:Revenue
                
                $
                7
                
                
                $
                947
                
                
                $
                303
                
                
                $
                2,873Expenses
                
                
                600
                
                
                
                1,279
                
                
                
                3,708
                
                
                
                4,340Loss
      from discontinued operations before income taxes
                
                
                (593
                )
                
                
                (332
                )
                
                
                (3,405
                )
                
                
                (1,467
                )Benefit
      for income taxes
                
                
                238
                
                
                
                94
                
                
                
                1,362
                
                
                
                563Loss
      from discontinued operations
                
                $
                (355
                )
                
                $
                (238
                )
                
                $
                (2,043
                )
                
                $
                (904
                )





Major
classes of assets and liabilities of the offices accounted for as discontinued
operations in the accompanying condensed consolidated balance sheets at
September 30, 2009 and December 31, 2008 were as follows:


20





September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(in
      thousands)Furniture,
      equipment, and leasehold improvements, net
                  
                  $
                  193
                  
                  
                  $
                  420Total
      assets of discontinued operations
                  
                  $
                  193
                  
                  
                  $
                  420Total
      liabilities of discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  -





15.
            SUBSEQUENT
      EVENTS





The
Company evaluated its September 30, 2009 condensed consolidated financial
statements for subsequent events through November 9, 2009, the date the
financial statements were issued.  The Company is not aware of any
subsequent events which would require recognition or disclosure in the condensed
consolidated financial statements.


21


Item
2.   Management’s Discussion and Analysis
of Financial Condition and Results of Operations





Special
Cautionary Notice Regarding Forward-Looking Statements





This
quarterly report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements may relate to such matters as anticipated financial
performance, future revenue or earnings, business prospects, projected ventures,
new products, anticipated market performance, and similar matters. We caution
you that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to (1) trading volume in the
securities markets; (2) volatility of the securities markets and interest rates;
(3) changes in regulatory requirements that could affect the demand for our
services or the cost of doing business; (4) general economic conditions, both
domestic and foreign, especially in the regions where we do business; (5)
changes in the rate of inflation and related impact on securities markets; (6)
competition from existing financial institutions and other new participants in
the securities markets; (7) legal developments affecting the litigation
experience of the securities industry; (8) successful implementation of
technology solutions; (9) changes in valuations of our trading and warrant
portfolios resulting from mark-to-market adjustments; (10) dependence on key
personnel; (11) demand for our services; and (12) litigation and securities law
liabilities. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2008.  The Company does not
undertake to publicly update or revise any forward-looking
statements.





The
following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and their related notes.





Overview





The
Company is a holding company that, through its subsidiaries and affiliates,
provides wealth management and capital markets services to a large and
diversified group of clients and customers, including individuals, corporations,
and financial institutions. A summary of these services follows:





Our Wealth Management segment
provides investment advisory, wealth and investment management, and financial
planning services to high net worth and mass affluent individuals and
institutions, including investment strategies and alternatives, tax efficient
estate and financial planning, trusts, and agent/fiduciary investment management
services, throughout their financial life cycle, as well as private client
brokerage services. In addition, we provide specialized asset management
products and services in specific investment styles to corporations and
institutions both through internal marketing efforts and externally through
formal sub-advisory relationships and other distribution arrangements with third
parties.





OurCapital Marketssegment
provides investment banking, institutional equity and fixed income brokerage,
and prime brokerage services to institutional clients.





Investment Banking includes
capital raising, public offerings, and private placements of equity and debt
securities, financial advisory services, including advice on mergers,
acquisitions and restructurings, and merchant banking services.





Institutional Brokerage
provides institutional equity and fixed income brokerage and institutional
research to a broad array of institutions throughout North America, Europe, and
Asia, including banks, retirement funds, mutual funds, endowments, investment
advisors, and insurance companies.





Prime Brokerage Services provides trade
execution, clearing, bookkeeping, reporting,  securities borrowing,
financing, research, and fund raising to hedge fund clients.


22


We are
exposed to volatility and trends in the general securities market and the
economy and we are currently facing difficult market and economic
conditions.  Due to the downturn in the market and the economic
recession that began during the second half of 2008, client assets declined
during the last half of 2008 and into the first quarter of
2009.  However, during the second quarter of 2009, the market began to
improve and client assets have recovered resulting in, among other things,
higher fee and commission revenue.  Client assets under management or
advisement were as follows:





Client Assets(1)(in millions)December
      31, 2007
                        
                        $
                        11,344March
      31, 2008
                        
                        
                        11,342June
      30, 2008
                        
                        
                        10,979September
      30, 2008
                        
                        
                        10,290December
      31, 2008
                        
                        
                        8,627March
      31, 2009
                        
                        
                        8,501June
      30, 2009
                        
                        
                        9,534September
      30, 2009
                        
                        
                        10,595


(1)Client
assets include the gross value of assets under
management directly or via outside managers and
assets held in brokerage accounts for clients by outside
clearing firms.





Fiscal
year 2008 and the first quarter of 2009 was a very challenging environment for
the capital markets given the unprecedented events on Wall Street that led to
increased uncertainty and turmoil in the United States economy and global
financial markets.  We made the necessary adjustments to our business
and adapted to the current environment.  We focused on the following
items:





§
            preserving
      capital and retaining key people in order to emerge as a strong player
      once market stability returns;





§
            reducing
      compensation and non-compensation expenses in order to operate on a
      positive cash basis;





§
            closing
      offices that have been
unprofitable;





§
            exiting
      business units that are subject to revenue and profit volatility;
      and





§
            acquiring
      wealth management businesses that enhance or complement our existing
      franchise value.





Components
of Revenue and Expenses





Revenue. Our revenue is
comprised primarily of (1) fees from asset-based advisory services, asset
management, and financial planning services, (2) commission revenue from wealth
advisory, prime and institutional brokerage transactions, (3) investment banking
revenue from corporate finance fees, merger and acquisition fees, and merchant
banking fees, and (4) principal transactions.  We also earn interest
on cash held and receive dividends from the equity and fixed income securities
held in our corporate capital accounts, earn fees through the sale of insurance
products, and have realized and unrealized gains (or losses) on securities in
our inventory account.


23


Expenses.Our expenses consist of
(1) compensation and benefits, (2) floor brokerage, exchange, and clearance
fees, and (3) other expenses. Compensation and benefits have both a variable
component, based on revenue production, and a fixed component. The variable
component includes institutional and retail sales commissions, bonuses,
overrides, and other incentives. Wealth advisory and institutional commissions
are based on competitive commission schedules. Employees of the investment
banking group and the research group receive a salary and discretionary bonuses
as compensation. The fixed component includes administrative and executive
salaries, payroll taxes, employee benefits, and temporary employee costs.
Compensation and benefits is our largest expense item and includes wages,
salaries, and benefits. During the third quarter of 2009, compensation and
benefits represented 62.7% of total expenses and 60.6% of total revenue,
compared to 67.3% of total expenses and 63.2% of total revenue during the third
quarter of 2008.  During the first nine months of 2009, compensation
and benefits represented 60.1% of total expenses and 65.1% of total revenue,
compared to 65.3% of total expenses and 58.0% of total revenue for the same
period in 2008.  For the three months ended September 30, 2009, the
decrease in compensation and benefits as a percentage of total revenue is
principally due to a decrease in revenue in our prime brokerage services
division which has a higher payout than our other business lines.  For
the nine months ended September 30, 2009, the increase in compensation and
benefits as a percentage of total revenue is principally due to an increase in
revenue in our prime brokerage services division. For the nine months ended
September 30, 2009, the decrease in compensation and benefits as a percentage of
expenses is principally due to $14.9 million of goodwill and other intangible
assets impairment charges recognized in the first quarter of 2009.





Floor
brokerage, exchange, and clearance fees include clearing and trade execution
costs associated with the retail, prime, and institutional brokerage business at
SMH. SMH clears its transactions through several clearing firms, including
Pershing, an affiliate of The Bank of New York Mellon, Goldman Sachs Execution
& Clearing, L.P., Ridge Clearing & Outsourcing Solutions, Inc., First
Clearing Corporation, and J.P. Morgan Clearing Corp.





Other
expenses include (1) communications and data processing expenses, such as
third-party systems, data, and software providers, (2) occupancy expenses, such
as rent and utility charges for facilities, (3) interest expense, (4) goodwill
and other intangible assets impairment charges, (5) amortization of other
intangible assets, and (6) other general and administrative
expenses.





Results
of Operations





Three
Months Ended September30, 2009 Compared to Three Months Ended September 30,
2008





Total
revenue was $47.9 million for the third quarter of 2009 compared to $46.0
million for the same quarter in 2008, an increase of $1.9 million, or 4.0%,
reflecting increases of $1.7 million in principal transactions revenue and
$914,000 in interest revenue partially offset by declines of $221,000 in revenue
from investment advisory and related services and $613,000 in investment banking
revenue.  Total expenses for the third quarter of 2009 increased $3.0
million, or 7.0%, to $46.2 million from $43.2 million in the same quarter of the
previous year reflecting increased communications and data processing costs,
interest expense, and other general and administrative
expenses.  Equity in income of limited partnerships decreased to $1.8
million for the third quarter of 2009 compared to $43.3 million for the third
quarter of 2008, reflecting the sale of our interests in Salient Partners, L.P.
and Endowment Advisers, L.P. in the third quarter of 2008.  Income
from continuing operations, net of income taxes, was $1.2 million, or $0.04 per
diluted common share, for the third quarter of 2009 compared to $29.2 million,
or $1.04 per diluted common share, for the third quarter of
2008.





Revenue
from investment advisory and related services decreased to $19.4 million in the
third quarter of 2009 from $19.6 million in the same quarter of 2008 as a result
of a decrease in client assets.  Commission revenue decreased to $13.1
million in the third quarter of 2009 from $13.2 million for the same period in
2008 as a result of a decrease in trading volume in the Wealth Management
segment.  Investment banking revenue decreased to $3.4 million during
the third quarter of 2009 from $4.0 million in the same period of 2008 due to a
decrease of $1.6 million in advisory fees earned partially offset by an increase
in management income.  Principal transactions revenue increased from
$5.2 million for the third quarter of 2008 to $6.8 million for the third quarter
of 2009 as the result of an increase of $1.7 million in the sale of fixed income
products.  Interest and dividend income increased to $2.5 million in
the third quarter of 2009 from $1.6 million in the same period last year as a
result of interest earned on notes receivable received in connection with the
sale of our interests in Salient Partners, L.P. and Endowment Advisers,
L.P.  Other income increased from $2.4 million during the third
quarter of 2008 to $2.6 million during the same period in 2009
reflecting an increase of $476,000 in hedge fund servicing revenue and
third-party marketing fees partially offset by a decrease of $170,000 in
insurance commissions.


24


During
the three months ended September 30, 2009, employee compensation and benefits
decreased to $29.0 million from $29.1 million in the same period last
year.  During the three months ended September 30, 2009, floor
brokerage, exchange, and clearance fees decreased to $1.5 million from $1.6
million in the same period last year due to a decrease in clearance fees in the
institutional brokerage division.  Communications and data processing
costs increased to $3.0 million in the third quarter of 2009 compared to $2.5
million in the same period last year due to higher clearing firm service fees
resulting from the increase in trading volume.  Occupancy costs
increased to $3.8 million in the third quarter of 2009 compared to $3.4 million
in the third quarter of 2008 due to the acquisition of an additional 66%
membership interest in EFA on April 1, 2009 and the expansion of the prime
brokerage division with the hiring of the principals of The Washington Research
Group in the first quarter of 2009.  Interest expense increased to
$1.3 million for the third quarter of 2009 compared to $400,000 in the third
quarter of 2008 due to (i) the imputed interest associated with an incentive
compensation payable resulting from the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P., (ii) the funding of a credit
facility during the second quarter of 2009, and (iii) costs associated with the
acquisition of the additional 66% membership interest in EFA.  Other
general and administrative expenses increased to $7.1 million during the third
quarter of 2009 from $6.1 million in the third quarter of last year due to an
increase of $1.1 million in advertising expense at Edelman.





Our
effective tax rate was 42.3% for the three months ended September 30, 2009
compared to 38.0% for the three months ended September 30, 2008.  The
effective tax rate exceeds the federal statutory income tax rate primarily as a
result of state income taxes and certain nondeductible expenses.





During
the first quarter of 2009, the Company closed three retail
offices.  This decision was made due to the offices’ inability to
achieve sufficient revenues to offset their costs.  As a result, we
recorded a net loss from discontinued operations, which consists of operating
losses, of $355,000 and $238,000 for the three months ended September 30, 2009
and 2008, respectively.





Results
by Segment





Wealth
Management





Three Months Ended September 30,2009
                    
                    
                    2008(in thousands)Revenue
                    
                    $
                    26,359
                    
                    
                    $
                    26,328Income
      from continuing operations before income taxes
                    
                    $
                    7,425
                    
                    
                    $
                    56,692





The
turmoil in the global financial markets over the past year has caused equity
prices to decline to levels not seen in many years.  That
market-driven value decline has carried over to our client
portfolios.  As the fees and commissions that we charge for managing
client assets is based, to a large degree, on the size of our client portfolios,
we have seen a significant drop in commissions revenue from the third quarter of
2008 to the comparable 2009 period.  On April 1, 2009, the Company
increased its ownership of EFA from 10% to 76% which required a change in our
method of accounting for EFA’s results to consolidation from the equity
method.  Revenue from wealth management increased to $26.4 million
from $26.3 million and income from continuing operations before income taxes
decreased to $7.4 million from $56.7 million.  Commission revenue
decreased to $2.9 million from $3.8 million reflecting a decline in shares
traded by the firm’s retail clients due to the uncertainty in the financial
markets.  Interest income increased to $2.0 million from $712,000 as a
result of interest earned on notes receivable received in connection with the
sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. on
August 29, 2008.  Total expenses increased to $19.3 million from $16.5
million due to higher employee compensation and occupancy costs associated with
the EFA acquisition.  Equity in income of limited partnerships
decreased to $356,000 from $46.8 million. The decrease in equity in income of
limited partnerships is attributable to the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P. in 2008.


25


Capital
Markets





InvestmentBanking





Three Months Ended September
      30,2009
                  
                  
                  2008(in
      thousands)Revenue
                  
                  $
                  2,087
                  
                  
                  $
                  3,373Loss
      from continuing operations before income taxes
                  
                  $
                  (1,165
                  )
                  
                  $
                  (1,033
                  )





Revenue
from investment banking decreased to $2.1 million from $3.4 million and loss
from continuing operations before income taxes increased to a loss of $1.2
million from a loss of $1.0 million.  The revenue decline is due to a
decrease of $1.6 million in advisory fees.  Total expenses decreased
to $3.3 million from $4.4 million due to a decrease of $812,000 in employee
compensation.





Institutional
Brokerage





Three Months Ended September 30,2009
                  
                  
                  2008(in thousands)Revenue
                  
                  $
                  5,602
                  
                  
                  $
                  5,039Income
      from continuing operations before income taxes
                  
                  $
                  1,002
                  
                  
                  $
                  828





Revenue
from institutional brokerage increased to $5.6 million from $5.0 million and
income from continuing operations before income taxes increased to $1.0 million
from $828,000.  Principal transaction revenue increased to $1.9
million from $1.3 million reflecting an increase of $1.1 million in revenue from
the sale of fixed income products.  Total expenses increased to $4.6
million from $4.2 million due to increased employee compensation related to the
higher revenue.





Prime Brokerage
Services





Three Months Ended September 30,2009
                      
                      
                      2008(in thousands)Revenue
                      
                      $
                      12,566
                      
                      
                      $
                      14,116Income
      (loss) from continuing operationsbefore income
      taxes
                      
                      $
                      (416
                      )
                      
                      $
                      1,303


26


Revenue
from prime brokerage services decreased to $12.6 million from $14.1 million and
income (loss) from continuing operations before income taxes decreased to a loss
of $416,000 from income of $1.3 million.  Principal transactions
revenue decreased to $3.9 million from $7.0 million reflecting a decrease of
$2.9 million in proprietary trading revenue offset by an increase in revenue
earned from the sale of fixed income products.  Total expenses
increased to $13.0 million from $12.8 million due to a $237,000 increase in
occupancy costs.





Corporate
Support and Other





Three Months Ended September 30,2009
                  
                  
                  2008(in thousands)Revenue
                  
                  $
                  1,246
                  
                  
                  $
                  (2,842
                  )Loss
      from continuing operations before income taxes
                  
                  $
                  (3,463
                  )
                  
                  $
                  (11,705
                  )





Revenue
from corporate support and other increased to $1.2 million from $(2.8) million
and the loss from continuing operations before income taxes decreased to $3.5
million from $11.7 million.  Revenue from principal transactions,
which consists of changes in the values of our investment portfolios, increased
to $696,000 from a loss of $3.5 million.  Total expenses increased to
$6.1 million from $5.3 million due to interest costs associated with the
Company’s credit facility that was initially funded in the second quarter of
2009.





Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008





Total
revenue was $144.1 million for the nine months ended September 30, 2009 compared
to $138.8 million for the same period in 2008, an increase of $5.3 million, or
3.8%, reflecting an increase in principal transactions and interest revenue
partially offset by a decrease in investment advisory and related services and
commission revenue.  Total expenses for the nine months ended
September 30, 2009 increased $32.9 million, or 26.7%, to $156.2 million from
$123.3 million in the same period of the previous year reflecting (i)
compensation and other costs associated with the higher revenue, (ii) $14.9
million in goodwill and other intangible assets impairment charges recognized in
the first quarter of 2009, and (iii) $1.4 million of compensation and interest
costs associated with the acquisition of an additional 66% membership interest
in EFA.  Equity in income of limited partnerships decreased to $2.8
million for the nine months ended September 30, 2009 compared to $46.6 million
for the same period in 2008, reflecting the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P. in the third quarter of
2008.  Income (loss) from continuing operations, net of income taxes,
was $(8.4) million, or $(0.31) per diluted common share, for the nine months
ended September 30, 2009 compared to $33.9 million, or $1.27 per diluted common
share, for the same period in 2008.





Revenue
from investment advisory and related services decreased to $50.9 million for the
nine months ended September 30, 2009 from $58.7 million in the same period in
2008 as a result of a decrease in client assets.  Commission revenue
decreased to $37.2 million for the nine months ended September 30, 2009 from
$40.5 million for the same period in 2008 as a result of a decrease in trading
volume in the Wealth Management segment.  Investment banking revenue
decreased to $9.4 million for the nine months ended September 30, 2009 from
$10.5 million in the same period in 2008 due to a decrease of $3.1 million in
advisory fees earned partially offset by an increase in sales credits received
in investment banking transactions.  Principal transactions revenue
increased from $16.0 million for the nine months ended September 30, 2008 to
$31.6 million for the same period in 2009 as the result of an increase in the
sale of fixed income products.  Interest and dividend income increased
to $7.9 million for the nine months ended September 30, 2009 from $3.7 million
in the same period last year as a result of interest earned on notes receivable
received in connection with the sale of our interests in Salient Partners, L.P.
and Endowment Advisers, L.P.  Other income decreased from $9.3 million
for the nine months ended September 30, 2008 to $7.1 million during the same
period in 2009 reflecting a decrease of $1.7 million in hedge fund servicing
revenue and third-party marketing fees.


27


During
the nine months ended September 30, 2009, employee compensation and benefits
increased to $93.8 million from $80.5 million in the same period last year due
to the revenue growth in the prime brokerage services
division.  During the nine months ended September 30, 2009, floor
brokerage, exchange, and clearance fees increased to $4.9 million from $4.3
million in the same period last year due to an increase of $677,000 in clearance
fees in the prime brokerage services division.  Communications and
data processing costs increased to $8.6 million for the nine months ended
September 30, 2009 from $8.2 million in the same period last year, primarily due
to higher trading system fees.  Occupancy costs were $10.7 million for
the nine months ended September 30, 2009 compared to $9.2 million in the same
period of 2008 due to the acquisition of an additional 66% membership interest
in EFA on April 1, 2009 and the acquisitions of Leonetti and Miller-Green during
the first nine months of 2008.  Interest expense was $2.1 million for
the nine months ended September 30, 2009 due to (i) $888,000 of imputed interest
associated with an incentive compensation payable resulting from the sale of our
interests in Salient Partners, L.P. and Endowment Advisers, L.P., (ii) $457,000
of interest related to the credit facility funded in 2009, and (iii) $666,000 of
interest associated with the acquisition of an additional 66% membership
interest in EFA on April 1, 2009.  The Company recognized goodwill and
other intangible assets impairment charges of $14.9 million for the nine months
ended September 30, 2009.  No such charge was recognized in the same
period in 2008.  Other general and administrative expenses increased
to $20.2 million for the nine months ended September 30, 2009 from $20.0 million
in the same period last year due to an increase of $1.6 million in advertising
expense at Edelman partially offset by decreases in outside sales commissions
and the provision for uncollectible accounts.





Our
effective tax rate was 35.2% for the nine months ended September 30, 2009
compared to 38.4% for the nine months ended September 30, 2008.  The
effective tax rate exceeds the federal statutory income tax rate primarily as a
result of state income taxes and certain nondeductible expenses.





During
the first quarter of 2009, the Company closed three retail
offices.  This decision was made due to the offices’ inability to
achieve sufficient revenues to offset their costs.  As a result, we
recorded a net loss from discontinued operations, which consists of operating
losses, of $2.0 million and $904,000 for the nine months ended September 30,
2009 and 2008, respectively.





Results
by Segment





Wealth
Management





Nine Months Ended September 30,2009
                  
                  
                  2008(in thousands)Revenue
                  
                  $
                  72,098
                  
                  
                  $
                  80,137Income
      from continuing operations before income taxes
                  
                  $
                  17,870
                  
                  
                  $
                  80,941





The
turmoil in the global financial markets over the past year has caused equity
prices to decline to levels not seen in many years.  That
market-driven value decline has carried over to our client
portfolios.  As the fees and commissions that we charge for managing
client assets is based, to a large degree, on the size of our client portfolios,
we have seen a significant drop in revenue from the nine months ended September
30, 2008 to the comparable 2009 period.  On April 1, 2009, the Company
increased its ownership of EFA from 10% to 76% which required a change in our
method of accounting for EFA’s results to consolidation from the equity
method.  Revenue from wealth management decreased to $72.1 million
from $80.1 million and income from continuing operations before income taxes
decreased to $17.9 million from $80.9 million.  Investment advisory
and related services revenue decreased to $50.8 million from $58.6 million as a
result of a decrease in assets under management or
advisement.  Commission revenue decreased to $8.5 million from $13.7
million reflecting a decline in shares traded by the firm’s retail clients due
to the uncertainty in the financial markets.  Interest income
increased to $6.2 million from $945,000 as a result of interest earned on notes
receivable received in connection with the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P. on August 29, 2008.  Total
expenses increased to $53.4 million from $51.4 million due to increases of $1.2
million in occupancy expense and $1.5 million in advertising expense offset by a
decrease of $633,000 in outside sales commissions.  Equity in income
(loss) of limited partnerships decreased to a loss of $799,000 from income of
$52.2 million. The decrease in equity in income (loss) of limited partnerships
is attributable to the sale of our interests in Salient Partners, L.P. and
Endowment Advisers, L.P. in 2008.


28


Capital
Markets





InvestmentBanking





Nine Months Ended September
    30,2009
                  
                  
                  2008(in
      thousands)Revenue
                  
                  $
                  6,090
                  
                  
                  $
                  8,771Loss
      from continuing operations before income taxes
                  
                  $
                  (3,706
                  )
                  
                  $
                  (3,663
                  )





Revenue
from investment banking decreased to $6.1 million from $8.8 million and loss
from continuing operations before income taxes remained constant at $3.7
million.  The revenue decrease is due to a decrease of $3.2 million in
advisory fees.  Total expenses decreased to $9.8 million from $12.4
million due to decreases of $1.9 million in employee compensation and $551,000
in the provision for uncollectible accounts.





Institutional
Brokerage





Nine Months Ended September 30,2009
                    
                    
                    2008(in thousands)Revenue
                    
                    $
                    16,674
                    
                    
                    $
                    13,777Income
      from continuing operations before income taxes
                    
                    $
                    2,200
                    
                    
                    $
                    1,201





Revenue
from institutional brokerage increased to $16.7 million from $13.8 million and
income from continuing operations before income taxes increased to $2.2 million
from $1.2 million.  Principal transaction revenue increased to $6.7
million from $2.8 million reflecting an increase of $4.0 million in revenue from
the sale of fixed income products.  Total expenses increased to $14.5
million from $12.6 million due to an increase of $3.3 million in employee
compensation related to the higher revenue offset by a decrease of $1.6 million
in corporate overhead allocation.


29


Prime Brokerage
Services





Nine Months Ended September 30,2009
                  
                  
                  2008(in thousands)Revenue
                  
                  $
                  46,929
                  
                  
                  $
                  35,300Income
      from continuing operations before income taxes
                  
                  $
                  361
                  
                  
                  $
                  2,750





Revenue
from prime brokerage services increased to $46.9 million from $35.3 million and
income from continuing operations before income taxes decreased to $361,000 from
$2.8 million.  Principal transactions revenue increased to $23.2
million from $13.0 million reflecting a $13.4 million increase in revenue earned
from the sale of fixed income products offset by a $1.9 million decrease in
proprietary trading revenue.  Total expenses increased to $46.6
million from $32.5 million reflecting a $12.7 million increase in compensation
and an increase of $677,000 in clearing costs related to the increased
revenue.


Corporate
Support and Other





Nine Months Ended September 30,2009
                  
                  
                  2008(in thousands)Revenue
                  
                  $
                  2,343
                  
                  
                  $
                  828Loss
      from continuing operations  before income taxes
                  
                  $
                  (26,012
                  )
                  
                  $
                  (19,117
                  )





Revenue
from corporate support and other increased to $2.3 million from $828,000 and the
loss from continuing operations before income taxes increased to $26.0 million
from $19.1 million.  Revenue from principal transactions, which
consists principally of changes in the values of our investment portfolios,
increased to a gain of $393,000 from a loss of $1.2 million.  Total
expenses increased to $31.9 million from $14.3 million due to $14.9 million of
goodwill and other intangible assets impairment charges recognized in
2009.  Also, compensation and interest costs of $1.6 million
associated with the acquisition of EFA and interest costs of $457,000 associated
with the Company’s credit facility were recorded in 2009.





Liquidity
and Capital Resources





The
Company’s funding needs consist of (1) funds necessary to maintain current
operations, (2) capital expenditure requirements, (3) debt repayment, and (4)
funds used for acquisitions.





We intend
to satisfy our funding needs with our own capital resources, consisting largely
of internally generated earnings and liquid assets, and with borrowings from
outside parties.  At September 30, 2009, we had $24.9 million in cash
and cash equivalents, which together with receivables from broker-dealers and
clearing organizations, deposits with clearing organizations, and marketable
securities owned represented 12.7% of our total assets at the end of the third
quarter.





Receivables
turnover, calculated as annualized revenue divided by average receivables, was
two for the nine months ended September 30, 2009 compared to three for the same
period in the prior year.  The decrease in the receivables turnover
was the result of an increase in receivables from notes receivable issued in
exchange for the sale of our interests in Salient Partners, L.P. and Endowment
Advisers, L.P.  The allowance for doubtful accounts as a percentage of
receivables was 2.3% at September 30, 2009 compared to 1.3% at December 31,
2008.  The increase in the allowance for doubtful accounts as a
percentage of receivables was the result of an increase in the allowance for
employee notes receivables from the three offices closed in the first quarter of
2009.


30


For the
nine months ended September 30, 2009, net cash provided by operations was $1.1
million versus $20.7 million during the same period in
2008.  Marketable securities owned decreased by $9.2 million during
the first nine months of 2009, securities sold, not yet purchased decreased by
$7.4 million and payables to broker-dealers and clearing organizations decreased
by $2.0 million.  The change in marketable securities owned,
securities sold, not yet purchased, and payables to broker-dealers and clearing
organizations is primarily due to the Company’s securities managed by third
party asset managers.  The Company’s portfolio includes both long and
short equity positions.  Our asset managers generally seek to generate
profits based on trading spreads, rather than through speculation on the
direction of the market and employ hedging strategies designed to insulate the
net value of our portfolios from fluctuations in the general level of interest
rates and equity price variances.  We finance a portion of our
positions through our clearing broker-dealers.





Not
readily marketable securities owned, primarily investments in limited
partnerships, were $29.5 million at September 30, 2009 compared to $32.7 million
at December 31, 2008.  This decrease is the result of net dispositions
of investment positions as well as changes in the values of our investment
portfolios.  Management believes its investment in limited
partnerships is a critical part of its capital market investing activities that
has historically generated favorable returns for the Company.  These
limited partnerships typically have a ten-year life.





Capital
expenditures for the first nine months of 2009 were $1.6 million, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for our growth.





SMH is
subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC
rule 15c3-1), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1 (and the rule of the “applicable” exchange also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed 10 to 1).  At September 30, 2009, SMH had
net capital, as defined, of $4.2 million, which was $3.3 million in excess of
its required net capital of $917,000.





In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be.  Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved.





Critical
Accounting Policies/Estimates





Goodwill.  Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a purchase business combination.  Goodwill is
reviewed for impairment at least annually in accordance with the provisions of
FASB ASC Topic 350, Intangibles – Goodwill and
Other.  ASC Topic 350 requires that goodwill be tested for
impairment between annual test dates if an event or changing circumstances
indicate that it is more likely than not that the fair value of the reporting
unit is below its carrying amount.  The goodwill impairment test is a
two-step test.  Under the first step, the fair value of the reporting
unit is compared with its carrying value (including goodwill and other
intangible assets).  If the fair value of the reporting unit is less
than its carrying value, an indication of goodwill impairment exists for the
reporting unit and the enterprise must perform step two of the impairment test
(measurement).  Under step two, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill.  The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB ASC Topic
805, Business
Combinations.  The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill.


31


Factors
considered in determining fair include, among other things, the Company’s market
capitalization as determined by quoted market prices for its common stock and
the value of the Company’s reporting units.  The Company uses several
methods to value its reporting units, including discounted cash flows,
comparisons with valuations of public companies in the same industry, and
multiples of assets under management.  If the fair value of the
reporting unit exceeds its carrying value, step two does not need to be
performed.





In
performing the first step of the goodwill impairment test, the estimated fair
values of the reporting units were developed using the methods listed
above.  When performing the discounted cash flow analysis, the Company
utilized observable market data to the extent available.  Future cash
flow projections are based primarily on actual results and, at April 30, 2009,
include negative future cash flows for one reporting unit.  This
reporting unit has no recorded goodwill.  Due to the downturn in the
market and the economic recession that began during the second half of 2008,
client assets have decreased resulting in, among other things, lower revenue at
our wealth management businesses.  As a result, growth projections
used in the April 30, 2008 cash flow projections have not been
realized.  For the February 28, 2009 and April 30, 2009 goodwill
analyses, the cash flow estimates reflect zero growth for all projected future
periods.  The discount rates utilized in this analysis ranged from 11%
to 20%.  The Company also calculates estimated fair values of the
reporting units utilizing multiples of earnings, book value, and, when
applicable, assets under management of the reporting unit.  The
estimated fair value using these techniques is compared with the carrying value
of the reporting unit to determine if there is an indication of
impairment.





The
Company performed an update of its April 30, 2008 review for goodwill impairment
as of February 28, 2009 due to deterioration in overall macroeconomic conditions
and the extended decline in the Company’s stock price.  This review
was performed using the methodology described above.  Future cash flow
projections were based primarily on actual results with budgeted cash flow
projections used for one reporting unit.  When performing the February
28, 2009 discounted cash flow analysis, no future negative cash flows were
projected.  This assessment resulted in the recognition of a goodwill
impairment charge of $13.8 million at two reporting units:  Edelman -
$13.0 million and Kissinger - $837,000.





The
Company performed its annual review for goodwill impairment as of April 30,
2009.  The first step of the April 30, 2009 goodwill impairment test
resulted in no indication of impairment.





Goodwill
is evaluated for impairment at the reporting unit level, which is defined as the
operating subsidiaries of the Company.  The Company has four reporting
units with recorded goodwill that were evaluated for impairment.  At
April 30, 2009, the estimated fair values of three of the four reporting units
were well in excess of the carrying values of these businesses resulting in no
impairment.  For one reporting unit, Leonetti, the excess was
significantly impacted due to a reduction in earnings at this reporting
unit.




With
the Company’s common stock price at extraordinary lows, management analyzed the
estimated fair values of the reporting units in relation to our market
capitalization.  The sum of the estimated fair values of the Company’s
reporting units was greater than the market value of the Company’s common
stock.  Based upon an analysis of historical acquisitions of financial
services companies similar to ours, we believe the excess of approximately 40%
represents a reasonable control premium in a hypothetical acquisition of the
Company.




Remaining
amounts of goodwill at September 30, 2009 were as follows:  Edelman -
$64.4 million, Kissinger - $2.4 million, Dickenson - $2.1 million, SMH Colorado
- $1.5 million, and Leonetti - $225,000.


32


Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Market
Risk





During
the nine months ended September 30, 2009, there have been no material changes to
the information contained in Part II, Item 7A of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008.





Our
financial services business is affected by general economic
conditions.  Our revenues relating to asset-based advisory services
and managed accounts are typically from fees based on the market value of assets
under management or advisement.





At
September 30, 2009, securities owned by the Company were $41.3 million,
including $11.8 million in marketable securities, $26.1 million representing the
Company’s investments in limited partnerships, and $3.4 million representing
other not readily marketable securities.





We do not
act as dealer, trader, or end-user of complex derivative contracts such as
swaps, collars, and caps.  However, SMH does act as a dealer and
trader of mortgage-derivative securities, called collateralized mortgage
obligations (CMOs or REMICs).  Mortgage-derivative securities
redistribute the risks associated with their underlying mortgage collateral by
redirecting cash flows according to specific formulas or algorithms to various
tranches or classes designed to meet specific investor objectives.





There are
market, credit and counterparty, and liquidity risks associated with our market
making, principal trading, merchant banking, arbitrage, and underlying
activities.  We may experience significant losses if the value of our
marketable security positions deteriorates.





Item 4.Controls and
Procedures





Our
management, including our Chief Executive Officer and Chief Financial Officer,
have conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as
of the end of the fiscal period covered by this report.  Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in ensuring
that the information required to be disclosed in the reports we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission (“SEC”) and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.  There have been no changes made in our internal controls
over financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


33


PART
II.   OTHER INFORMATION





Item
1.  Legal
Proceedings





Many
aspects of our business involve substantial risks of liability. In the normal
course of business, we have been and in the future may be named as defendant or
co-defendant in lawsuits and arbitration proceedings involving primarily claims
for damages. We are also involved in a number of regulatory matters arising out
of the conduct of our business. There can be no assurance that these matters
will not have a material adverse effect on our results of operations in any
future period and a significant judgment could have a material adverse impact on
our consolidated financial position, results of operations, and cash flows. In
addition to claims for damages and monetary sanctions that may be made against
us, we incur substantial costs in investigating and defending claims and
regulatory matters.





In May
2005, SMH acted as placement agent for a private placement of $50.0 million in
convertible preferred stock of Ronco Corporation, a company involved in direct
response marketing. Subsequent to the offering, Ronco experienced financial
difficulties and ultimately filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale
of substantially all of Ronco’s assets in August 2007, and the case was
converted to a liquidation under Chapter 7.





In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH, US
Special Opportunities Trust PLC and Renaissance US Growth Investment Trust
PLC, in the 193rd Judicial District Court, Dallas County, Texas, alleging
common law fraud, statutory fraud in a stock transaction, violations of the
Texas Securities Act, and negligent misrepresentation in connection with the
plaintiffs’ purchase of $2.0 million in Ronco convertible preferred stock. On
March 17, 2009, a third purchaser of Ronco convertible preferred stock filed a
complaint against SMH, Palisades Master Fund, L.P.
and PEF Advisors, LLC, in the 11th
Judicial District Court of Harris County, Texas.  The claims are
similar to the above referenced case.  Palisades Master Fund, L.P.
invested $1.9 million in Ronco convertible preferred stock. In addition, in July
2009, the Bankruptcy Trustee filed a derivative action on behalf of the
shareholders of Ronco against two former directors of Ronco (who were employees
of SMH) for negligently authorizing the closing of the purchase of the assets of
Ronco Marketing Corp. in breach of their fiduciary duties of care and loyalty
and against SMH for negligent misrepresentation, breach of fiduciary duties,
breach of contract, and violation of the Texas Fraudulent Transfer Act, Diane Weil, Solely in Her
Capacity as Trustee of Ronco Corporation and Ronco Marketing Corporation vs. A.
Emerson Martin II, Gregg Mockenhaupt, and Sanders Morris Harris, Inc., in
the 190th
Judicial District Court of Harris County, Texas. No amount of damages is
alleged. SMH has filed an answer and special exceptions in each of these cases
and believes it has valid defenses to all claims made by the
plaintiffs.  However, there is no assurance that the Company will
successfully defend such claims.





In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be.  Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved.





Item
1A.  Risk
Factors





There
have been no material changes in the Company’s risk factors from those disclosed
in the Annual Report on Form 10-K for the year ended December 31,
2008.


34


Item
5. Other
Information





None.


35


Item
6.  Exhibits





INDEX
TO EXHIBITS





ExhibitNumber
                
                Description2.1
                
                Reorganization
      and Purchase Agreement dated as of May 10, 2005, among Sanders Morris
      Harris Group Inc., The Edelman Financial Center, Inc., The Edelman
      Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1 to the
      Company’s Current Report on Form 8-K dated May 10, 2005 (File No.
      000-30066), and incorporated herein by reference).2.2
                
                Contribution
      Agreement dated as of April 28, 2003, by and between Salient Partners,
      L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas limited
      partnership, Salient Capital, L.P., a Texas limited partnership, Salient
      Partners GP, LLC, a Texas limited liability company, John A. Blaisdell,
      Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag
      Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc. (Filed
      as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007 (File No. 000-30066), and incorporated herein by
      reference).2.3
                
                Agreement
      to Retire Partnership Interest and Second Amendment to the Limited
      Partnership Agreement of Endowment Advisers, L.P. dated as of August 29,
      2008, among Sanders Morris Harris Group Inc. and Endowment Advisers, L.P.,
      The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC, and
      their respective partners and members (Filed as Exhibit 99.2 to the
      Company’s Current Report on Form 8-K dated August 29, 2008 (File No.
      000-30066), and incorporated herein by reference).2.4
                
                Letter
      agreement dated as of January 1, 2009, among Sanders Morris Harris Group
      Inc., Fredric M. Edelman, and Edward Moore.  (Filed as Exhibit
      99.2 to the Company’s Current Report on Form 8-K dated January 29, 2009
      (File No. 000-30066), and incorporated herein by
    reference).3.1
                
                Articles
      of Incorporation of the Company, as amended (Filed as Exhibit 3.1 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2001
      (File No. 000-30066), and incorporated herein by
    reference).3.2
                
                Amended
      and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended September 30, 2007
      (File No. 000-30066), and incorporated herein by
    reference).†10.01
                
                Sanders
      Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as Appendix
      A to the Definitive Proxy Statement on Schedule 14A of the Company dated
      May 3, 2002 (File No. 000-30066), and incorporated herein by
      reference).†10.02
                
                Sanders
      Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2001 (File No. 000-30066), and incorporated herein by
      reference).†10.03
                
                Form
      of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
      10.03 to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.04
                
                Form
      of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed as
      Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.05
                
                Employment
      Agreement dated as of May 10, 2005, between The Edelman Financial Center,
      LLC and Fredric M. Edelman.  (Filed as Exhibit 10.05 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).10.06
                
                Office
      Lease Agreement and related amendments dated September 25, 1996, between
      Texas Tower Limited and Sanders Morris Mundy Inc. (Filed as Exhibit 10.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2000 (File No. 000-30066), and incorporated herein by
      reference).10.07
                
                Eleventh
      Amendment to Lease Agreement dated as of December 21, 2006, between Texas
      Tower Limited and Sanders Morris Harris Inc. (Filed as Exhibit 10.06 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007 (File No. 000-30066), and incorporated herein by
      reference).


36





10.08
              
              Credit
      Agreement dated as of May 11, 2009, between Sanders Morris Harris Group
      Inc. and Prosperity Bank.  (Filed as Exhibit 10.08 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).10.09
              
              First
      Amendment to Credit Agreement dated as of June 23, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.09 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.10
              
              Second
      Amendment to Credit Agreement dated as of July 15, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).*10.11
              
              Third
      Amendment to Credit Agreement dated as of September 15, 2009, between
      Sanders Morris Harris Group Inc. and Prosperity Bank.*10.12
              
              Fourth Amendment
      to Credit Agreement dated as of September 30, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.*31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.*31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.*32.1
              
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*32.2
              
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.





*          Filed
herewith.


†          Management
contract or compensation plan or arrangement.


37


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





SANDERS
      MORRIS HARRIS GROUP INC.By:
              /s/ GEORGE L. BALLGeorge
      L. BallChief
      Executive OfficerBy:
              /s/ RICK BERRYRick
      BerryChief
      Financial Officer





Date:        November
9, 2009


38