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 MARCH 31, 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 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 filerxNon-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 May 7, 2009, the registrant had
28,163,395 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 March 31, 2009 (unaudited) and December
      31, 2008
                                              2Condensed
      Consolidated Statements of Operations for the Three Months Ended March 31,
      2009 and 2008 (unaudited)
                                              3Condensed
      Consolidated Statement of Changes in Equity for the Three Months Ended
      March 31, 2009 (unaudited)
                                              4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended March 31,
      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
                                              28Item
      4.
                                              Controls
      and Procedures
                                              28PART II.  
      OTHER
      INFORMATIONItem
      1.
                                              Legal
      Proceedings
                                              29Item
      2.
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                                              30Item
      5.
                                              Other
      Information
                                              30Item
      6.
                                              Exhibits
                                              31
 1
  PART
I.   FINANCIAL INFORMATION
 
 Item
1.  Financial
Statements
  SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 As
of March 31, 2009 and December 31, 2008
 (in
thousands, except share and per share amounts)
 
 March 31,
                    
                    
                    December 31,2009
                    
                    
                    2008(unaudited)ASSETSCash
      and cash equivalents
                    
                    $
                    17,924
                    
                    
                    $
                    30,224Receivables,
      net of allowance of $2,828 and $1,470, respectivelyBroker-dealers
      and clearing organizations
                    
                    
                    3,659
                    
                    
                    
                    254Customers
                    
                    
                    17,297
                    
                    
                    
                    16,344Related
      parties
                    
                    
                    11,910
                    
                    
                    
                    8,417Other
                    
                    
                    88,184
                    
                    
                    
                    89,847Deposits
      with clearing organizations
                    
                    
                    1,563
                    
                    
                    
                    1,062Securities
      owned
                    
                    
                    47,916
                    
                    
                    
                    54,559Furniture,
      equipment, and leasehold improvements, net
                    
                    
                    18,129
                    
                    
                    
                    18,859Other
      assets and prepaid expenses
                    
                    
                    2,543
                    
                    
                    
                    2,261Goodwill,
      net
                    
                    
                    49,287
                    
                    
                    
                    63,078Other
      intangible assets, net
                    
                    
                    11,253
                    
                    
                    
                    12,565Total
      assets
                    
                    $
                    269,665
                    
                    
                    $
                    297,470LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued liabilities
                    
                    $
                    33,841
                    
                    
                    $
                    36,644Deferred
      tax liability, net
                    
                    
                    9,588
                    
                    
                    
                    14,532Securities
      sold, not yet purchased
                    
                    
                    8,174
                    
                    
                    
                    12,884Payable
      to broker-dealers and clearing organizations
                    
                    
                    1,493
                    
                    
                    
                    2,051Total
      liabilities
                    
                    
                    53,096
                    
                    
                    
                    66,111Commitments
      and contingenciesEquity:Preferred
      stock, $0.10 par value; 10,000,000 shares authorized;  no shares
      issued and outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.01 par value; 100,000,000 shares authorized; 29,219,757 and
      29,207,962 shares issued, respectively
                    
                    
                    292
                    
                    
                    
                    292Additional
      paid-in capital
                    
                    
                    234,791
                    
                    
                    
                    234,578Accumulated
      deficit
                    
                    
                    (20,008
                    )
                    
                    
                    (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
                    
                    
                    208,626
                    
                    
                    
                    222,554Noncontrolling
      interest
                    
                    
                    7,943
                    
                    
                    
                    8,805Total
      equity
                    
                    
                    216,569
                    
                    
                    
                    231,359Total
      liabilities and equity
                    
                    $
                    269,665
                    
                    
                    $
                    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 EndedMarch 31,2009
                      
                      
                      2008Revenue:Investment
      advisory and related services
                      
                      $
                      14,190
                      
                      
                      $
                      18,734Commissions
                      
                      
                      11,677
                      
                      
                      
                      13,482Investment
      banking
                      
                      
                      1,909
                      
                      
                      
                      1,100Principal
      transactions
                      
                      
                      8,718
                      
                      
                      
                      2,602Interest
      and dividends
                      
                      
                      2,628
                      
                      
                      
                      1,146Other
      income
                      
                      
                      2,077
                      
                      
                      
                      3,588Total
      revenue
                      
                      
                      41,199
                      
                      
                      
                      40,652Expenses:Employee
      compensation and benefits
                      
                      
                      28,281
                      
                      
                      
                      25,326Floor
      brokerage, exchange, and clearance fees
                      
                      
                      1,798
                      
                      
                      
                      1,403Communications
      and data processing
                      
                      
                      2,647
                      
                      
                      
                      2,711Occupancy
                      
                      
                      3,477
                      
                      
                      
                      2,867Interest
                      
                      
                      180
                      
                      
                      
                      -Goodwill
      and other intangible assets impairment charges
                      
                      
                      14,928
                      
                      
                      
                      -Amortization
      of intangible assets
                      
                      
                      209
                      
                      
                      
                      169Other
      general and administrative
                      
                      
                      6,218
                      
                      
                      
                      6,464Total
      expenses
                      
                      
                      57,738
                      
                      
                      
                      38,940Income
      (loss) from continuing operations before equity in loss
      of  limited partnerships and income taxes
                      
                      
                      (16,539
                      )
                      
                      
                      1,712Equity
      in loss of limited partnerships
                      
                      
                      (498
                      )
                      
                      
                      (1,560
                      )Income
      (loss) from continuing operations before income taxes
                      
                      
                      (17,037
                      )
                      
                      
                      152Benefit
      for income taxes
                      
                      
                      (6,473
                      )
                      
                      
                      (1,022
                      )Income
      (loss) from continuing operations, net of income taxes
                      
                      
                      (10,564
                      )
                      
                      
                      1,174Loss
      from discontinued operations, net of tax of $831 and $232,
      respectively
                      
                      
                      (1,228
                      )
                      
                      
                      (393
                      )Net
      income (loss)
                      
                      
                      (11,792
                      )
                      
                      
                      781Less:  Net
      income attributable to the noncontrolling interest
                      
                      
                      (1,052
                      )
                      
                      
                      (2,888
                      )Net
      loss attributable to Sanders Morris Harris Group Inc.
                      
                      $
                      (12,844
                      )
                      
                      $
                      (2,107
                      )Basic
      loss per common share:Continuing
      operations
                      
                      $
                      (0.42
                      )
                      
                      $
                      (0.07
                      )Discontinued
      operations
                      
                      
                      (0.05
                      )
                      
                      
                      (0.01
                      )Net
      loss
                      
                      $
                      (0.47
                      )
                      
                      $
                      (0.08
                      )Diluted
      loss per common share:Continuing
      operations
                      
                      $
                      (0.42
                      )
                      
                      $
                      (0.07
                      )Discontinued
      operations
                      
                      
                      (0.05
                      )
                      
                      
                      (0.01
                      )Net
      loss
                      
                      $
                      (0.47
                      )
                      
                      $
                      (0.08
                      )Weighted
      average common shares outstanding:Basic
                      
                      
                      27,567
                      
                      
                      
                      24,940Diluted
                      
                      
                      27,567
                      
                      
                      
                      24,940Amounts
      attributable to Sanders Morris Harris Group Inc. commonshareholders:Loss
      from continuing operations, net of tax
                      
                      $
                      (11,616
                      )
                      
                      $
                      (1,714
                      )Discontinued
      operations, net of tax
                      
                      
                      (1,228
                      )
                      
                      
                      (393
                      )Net
      loss
                      
                      $
                      (12,844
                      )
                      
                      $
                      (2,107
                      )
 
 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 three months ended March 31, 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
                                      
                                      
                                      -
                                      
                                      
                                      
                                      11,795Balance,
      end of period
                                      
                                      
                                      292
                                      
                                      
                                      
                                      29,219,757Additional
      paid-in capital:Balance,
      beginning of period
                                      
                                      
                                      234,578Stock
      issued pursuant to employee benefit plan; including tax
      benefit
                                      
                                      
                                      10Tax
      adjustment related to employee benefit plan
                                      
                                      
                                      (486
                                      )Stock-based
      compensation expense
                                      
                                      
                                      689Balance,
      end of period
                                      
                                      
                                      234,791Accumulated
      deficit:Balance,
      beginning of period
                                      
                                      
                                      (5,895
                                      )Cash
      dividends ($0.045 per share)
                                      
                                      
                                      (1,269
                                      )Net
      loss attributable to Sanders Morris Harris Group Inc.
                                      
                                      
                                      (12,844
                                      )Balance,
      end of period
                                      
                                      
                                      (20,008
                                      )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
                                      
                                      
                                      8,805Contributions
                                      
                                      
                                      20Distributions
                                      
                                      
                                      (1,934
                                      )Net
      income attributable to the noncontrolling interest
                                      
                                      
                                      1,052Balance,
      end of period
                                      
                                      
                                      7,943Total
      equity and common shares outstanding
                                      
                                      $
                                      216,569
                                      
                                      
                                      
                                      28,163,863
 
 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)
 
 Three Months EndedMarch 31,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                  
                  $
                  (11,792
                  )
                  
                  $
                  781Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Loss
      on sales of assets
                  
                  
                  12
                  
                  
                  
                  89Depreciation
                  
                  
                  1,038
                  
                  
                  
                  946Provision
      for bad debts
                  
                  
                  24
                  
                  
                  
                  398Stock-based
      compensation expense
                  
                  
                  689
                  
                  
                  
                  676Goodwill
      and other intangible assets impairment charges
                  
                  
                  14,928
                  
                  
                  
                  -Amortization
      of intangible assets
                  
                  
                  209
                  
                  
                  
                  169Deferred
      income taxes
                  
                  
                  (4,944
                  )
                  
                  
                  (149
                  )Equity
      in loss of limited partnerships
                  
                  
                  498
                  
                  
                  
                  1,560Unrealized
      and realized loss on not readily marketable securities owned,
      net
                  
                  
                  723
                  
                  
                  
                  1,291Not
      readily marketable securities owned received for payment of investment
      banking fees
                  
                  
                  -
                  
                  
                  
                  (10
                  )Net
      change in:Receivables
                  
                  
                  (6,212
                  )
                  
                  
                  (2,776
                  )Deposits
      with clearing organizations
                  
                  
                  (501
                  )
                  
                  
                  -Marketable
      securities owned
                  
                  
                  3,244
                  
                  
                  
                  7,568Other
      assets and prepaid expenses
                  
                  
                  (282
                  )
                  
                  
                  (146
                  )Accounts
      payable and accrued liabilities
                  
                  
                  (2,803
                  )
                  
                  
                  (10,068
                  )Securities
      sold, not yet purchased
                  
                  
                  (4,710
                  )
                  
                  
                  (2,711
                  )Payable
      to broker-dealers and clearing organizations
                  
                  
                  (558
                  )
                  
                  
                  (2,207
                  )Net
      cash used in operating activities
                  
                  
                  (10,437
                  )
                  
                  
                  (4,589
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                  
                  
                  (396
                  )
                  
                  
                  (3,447
                  )Acquisitions,
      net of cash acquired of $0 and $126, respectively
                  
                  
                  (34
                  )
                  
                  
                  (3,874
                  )Purchases
      of not readily marketable securities owned
                  
                  
                  (209
                  )
                  
                  
                  (205
                  )Proceeds
      from sales of not readily marketable securities owned
                  
                  
                  2,387
                  
                  
                  
                  -Proceeds
      from sales and maturities of securities available for sale
                  
                  
                  -
                  
                  
                  
                  34Proceeds
      from sales of assets
                  
                  
                  76
                  
                  
                  
                  132Net
      cash provided by (used in) investing activities
                  
                  
                  1,824
                  
                  
                  
                  (7,360
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchases
      of treasury stock
                  
                  
                  (28
                  )
                  
                  
                  (1,162
                  )Proceeds
      from shares issued pursuant to employee benefit plan
                  
                  
                  10
                  
                  
                  
                  471Tax
      benefit of stock options exercised
                  
                  
                  -
                  
                  
                  
                  146Tax
      adjustment related to employee benefit plan
                  
                  
                  (486
                  )
                  
                  
                  -Proceeds
      from borrowings
                  
                  
                  -
                  
                  
                  
                  250Contributions
      by noncontrolling interest
                  
                  
                  20
                  
                  
                  
                  -Distributions
      to noncontrolling interest
                  
                  
                  (1,934
                  )
                  
                  
                  (6,018
                  )Payments
      of cash dividends
                  
                  
                  (1,269
                  )
                  
                  
                  (1,116
                  )Net
      cash used in financing activities
                  
                  
                  (3,687
                  )
                  
                  
                  (7,429
                  )Net
      decrease in cash and cash equivalents
                  
                  
                  (12,300
                  )
                  
                  
                  (19,378
                  )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  30,224
                  
                  
                  
                  46,503CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  17,924
                  
                  
                  $
                  27,125
 
 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 asset and 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”), 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 March 31, 2009 and December 31, 2008, our consolidated
results of operations for the three months ended March 31, 2009 and 2008, our
consolidated changes in equity for the three months ended March 31, 2009, and
our consolidated cash flows for the three months ended March 31, 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.  Actual results could differ from those
estimates.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (Revised
2007). SFAS No. 141R replaces SFAS No. 141, Business Combinations, and
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. SFAS No. 141R 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 SFAS No. 141 whereby the cost of an acquisition was
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair value. SFAS No. 141R 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 SFAS
No. 141. Under SFAS No. 141R, the requirements of SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, 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 SFAS No. 5, Accounting for Contingencies.
SFAS No. 141R is expected to have a significant impact on the Company’s
accounting for business combinations closing on or after January 1,
2009.
  6
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement
No. 51. SFAS No. 160 amends Accounting Research Bulletin
(“ARB”) No. 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 clarifies that 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, SFAS
No. 160 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. SFAS No. 160
was effective for the Company on January 1, 2009.  Shareholders’
equity changed due to the application of SFAS No. 160.  Noncontrolling
interest, formerly presented as minority interests outside of shareholders’
equity, is now included in equity.
 
 In April
2009, FASB Staff Position (“FSP”) No. FAS 157-4,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, was
issued.  FSP No. FAS 157-4 provides additional guidance for estimating
fair value in accordance with SFAS No. 157, Fair Value Measurements, when
volume and level of activity for the asset or liability have significantly
decreased.  FSP No. FAS 157-4 is effective for the Company for the
interim period ending June 30, 2009 and is not expected to have a material
impact on the Company’s consolidated financial statements.
 
 In April
2009, FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, was issued to amend the
other-than-temporary impairment guidance in U.S. generally accepted
accounting principles for debt securities making the guidance more
operational and improving the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. FSP No. FAS 115-2 and FAS 124-2 is effective for the Company for the
interim period ending June 30, 2009 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.
  7
 
 On
September 14, 2007, the Company acquired a 50.1% interest in Dickenson, an
insurance agency with four registered agents based in Solon,
Ohio.  The acquisition was accounted for as a purchase and,
accordingly, the financial information of Dickenson has been included in the
Company’s consolidated financial statements from September 14,
2007.  The consideration of $6.0 million, consisting of a combination
of cash and shares of the Company’s common stock, exceeded the fair market value
of identifiable net tangible assets by $6.0 million, $4.6 million of which has
been recorded as goodwill and $1.4 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 $3.0 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.
 
 On May 8,
2009, the Company was to purchase all of the remaining issued and outstanding
membership interests of Edelman for approximately $38.7 million payable in a
combination of cash and the Company’s common stock (the “Third Tranche
Consideration”).  On January 29, 2009, the Company entered into an
agreement (the “Agreement”) that made certain amendments to the May 10, 2005
purchase agreement.  Under the terms of the Agreement, the Company
will not be required to pay the Third Tranche Consideration provided it fulfills
the requirements of the Agreement.  See Note 10 – Commitments and
Contingencies.
  8
 
 3.
              SECURITIES
      OWNED AND SECURITIES SOLD, NOT YET
PURCHASED
 
 Securities
owned and securities sold, not yet purchased as of March 31, 2009 and December
31, 2008 were as follows:
 
 March 31, 2009
                      
                      
                      December 31, 2008Sold, Not Yet
                      
                      
                      
                      
                      
                      Sold, Not YetOwned
                      
                      
                      Purchased
                      
                      
                      Owned
                      
                      
                      Purchased(in
      thousands)Marketable:Corporate
      stocks and options
                      
                      $
                      15,111
                      
                      
                      $
                      8,093
                      
                      
                      $
                      21,877
                      
                      
                      $
                      12,803Corporate
      bond
                      
                      
                      2,848
                      
                      
                      
                      81
                      
                      
                      
                      -
                      
                      
                      
                      81Total
      marketable
                      
                      
                      17,959
                      
                      
                      
                      8,174
                      
                      
                      
                      21,877
                      
                      
                      
                      12,884Not
      readily marketable:Limited
      partnerships
                      
                      
                      27,091
                      
                      
                      
                      -
                      
                      
                      
                      29,356
                      
                      
                      
                      -Warrants
                      
                      
                      1,929
                      
                      
                      
                      -
                      
                      
                      
                      2,316
                      
                      
                      
                      -Equities
      and options
                      
                      
                      937
                      
                      
                      
                      -
                      
                      
                      
                      1,010
                      
                      
                      
                      -Total
      not readily marketable
                      
                      
                      29,957
                      
                      
                      
                      -
                      
                      
                      
                      32,682
                      
                      
                      
                      -Total
                      
                      $
                      47,916
                      
                      
                      $
                      8,174
                      
                      
                      $
                      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.  The investments in limited
partnerships are accounted for using the equity method, which approximates fair
value, and principally consist of Corporate Opportunities Fund, L.P., Corporate
Opportunities Fund (Institutional), L.P., Sanders Opportunity Fund, L.P.,
Sanders Opportunity Fund (Institutional), L.P., SMH Credit Opportunity Fund,
L.P. (formerly Tactical Opportunities High Yield Fund, L.P.), Life Sciences
Opportunity Fund, L.P., Life Sciences Opportunity Fund (Institutional), L.P.,
Life Sciences Opportunity Fund II, L.P., Life Sciences Opportunity Fund
(Institutional) II, L.P., 2003 Houston Energy Partners, L.P., 2005 Houston
Energy Partners, L.P., Concept Capital, LLC, Select Sports Group, Ltd., SMH
Private Equity Group I, L.P., SMH Private Equity Group II, L.P., and SMH
NuPhysicia, LLC.
 
 SFAS No.
157 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 under SFAS No. 157 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.
 
 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.
  9
 
 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 March 31, 2009:
 
 Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      Total(in
      thousands)Securities
      owned
                      
                      $
                      14,783
                      
                      
                      $
                      5,332
                      
                      
                      $
                      12,616
                      
                      
                      $
                      32,731Securities
      sold, not yet purchased
                      
                      
                      8,093
                      
                      
                      
                      81
                      
                      
                      
                      -
                      
                      
                      
                      8,174
  10
  The
following table sets forth a summary of changes in the fair value of the
Company’s level 3 securities owned for the three months ended March 31,
2009:
 
 Level
      3Securities Owned(in
      thousands)Balance,
      beginning of period
                          
                          $
                          13,423Realized
      gains
                          
                          
                          34Unrealized
      losses relating to securities still held at the reporting
    date
                          
                          
                          (193
                          )Purchases,
      issuances, andsettlements
                          
                          
                          (648
                          )Balance,
      end of period
                          
                          $
                          12,616
 
 Net
unrealized losses for level 3 securities owned are a component of “Principal
transactions” and “Equity in loss of limited partnerships” in the Condensed
Consolidated Statements of Operations as follows:
 
 Three Months EndedMarch 31, 2009Equity in LossPrincipal
                                
                                
                                of LimitedTransactions
                                
                                
                                Partnerships(in
      thousands)Unrealized
      losses relating to securities still held at the reporting
    date
                                
                                $
                                (120
                                )
                                
                                $
                                (73
                                )
 
 At March
31, 2009, the Company had $12.9 million and $2.3 million in securities owned
that are valued in accordance with EITF D-46, Accounting for Limited Partnership
Investments, and at cost basis, respectively.
 
 In August
2008, agreements were reached which provided for Salient Partners’ and Endowment
Advisers’ purchase of the Company’s interest 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.
 
 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.
  11
 
 4.
              GOODWILL
      AND OTHER INTANGIBLE ASSETS, NET
 
 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
SFAS No. 142, Goodwill and
Other Intangible Assets.  SFAS No. 142 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 SFAS No. 141R.  The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
 
 Factors
considered in determining fair value in accordance with SFAS No. 142 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.  The discount
rates utilized in these analyses ranged from 15% 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 its annual review for goodwill impairment as of April 30,
2008.  This review was updated to February 28, 2009 due to
deterioration in overall macroeconomic conditions and the extended decline in
the Company’s stock price.  The first step of the February goodwill
impairment test resulted in an indication of impairment at five of the Company’s
reporting units.  As such, the Company was required to perform step
two of the goodwill impairment test for these reporting units.  This
assessment resulted in the recognition of a goodwill impairment charge of $13.8
million during the quarter ended March 31, 2009.
 
 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 over their
estimated useful lives and tested for impairment if certain circumstances
indicate an impairment may exist.  During the quarter ended March 31,
2009, the Company recognized a trade name impairment of $1.1
million.
 
 A
deferred tax benefit of $5.3 million was recognized as a result of these
charges.
 
 The
following table sets forth by level within the fair value hierarchy goodwill and
other intangible assets, net, as of March 31, 2009:
 
 Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    Total(in
      thousands)Goodwill,
      net
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    49,287
                    
                    
                    $
                    49,287Other
      intangible assets, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,253
                    
                    
                    
                    11,253
  12
  
 5.
              BORROWINGS
 
 In May
2005, the Company entered into a $15.0 million revolving credit facility with a
bank.  In May 2008, this credit agreement was amended to decrease the
revolving credit facility to the lesser of $5.0 million or the loan value of
certain collateral pledged to secure the revolving credit
facility.  The line of credit expires on May 31, 2009, unless
extended.  Borrowings under the line of credit bear interest at LIBOR
plus 200 basis points.  Interest is payable quarterly on this line of
credit.  The credit facility is secured by a pledge of ownership
interests in three of the Company’s subsidiaries.  Debt covenants
require the Company to maintain certain debt to EBITDA and liquidity to funded
debt ratios, as well as minimum assets under management.  At March 31,
2009, the Company was in compliance with all covenants.  There was no
outstanding balance on the line of credit at March 31, 2009.  The
amount of available borrowings under the line of credit, which is reduced by
letters of credit issued by the Company, was $4.0 million at March 31,
2009.
 
 6.
              INCOME
      TAXES
 
 The
difference between the effective tax rate reflected in the income tax benefit
from continuing operations attributable to Sanders Morris Harris Group Inc. and
the statutory federal rate is analyzed as follows:
 
 Three Months EndedMarch 31,2009
                        
                        
                        2008(in
      thousands)Expected
      federal tax at statutory rate of 34%
                        
                        $
                        (6,150
                        )
                        
                        $
                        (930
                        )State
      and other income taxes
                        
                        
                        (323
                        )
                        
                        
                        (92
                        )Total
                        
                        $
                        (6,473
                        )
                        
                        $
                        (1,022
                        )
 
 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.
  13
  The
following table sets forth pertinent information regarding stock option
transactions for the three months ended March 31, 2009:
 
 WeightedNumber
                        
                        
                        Averageof Shares
                        
                        
                        Exercise PriceOutstanding
      at January 1, 2009
                        
                        
                        660,307
                        
                        
                        $
                        9.56Granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at March 31, 2009
                        
                        
                        660,307
                        
                        
                        
                        9.56Options
      exercisable at March 31, 2009
                        
                        
                        606,140
                        
                        
                        
                        9.25Incentive
      award shares available for grant at March 31, 2009
                        
                        
                        2,640,342
 
 During
the three months ended March 31, 2008, 89,394 options were exercised for which
the Company received proceeds of $433,000.  No options were exercised
during the three months ended March 31, 2009. The Company recognized pretax
compensation expense of $31,000 and $27,000 during the three months ended March
31, 2009 and 2008, respectively, related to stock options.  The
portion of stock-based compensation expense related to stock options that was
unrecognized at March 31, 2009 was $59,000 and is expected to be recognized over
a weighted average period of 0.57 years.
 
 The
following table summarizes certain information related to restricted common
stock grants at March 31, 2009:
 
 WeightedAverageNumber of
                    
                    
                    Grant DateShares
                    
                    
                    Fair ValueNonvested
      at January 1, 2009
                    
                    
                    683,116
                    
                    
                    $
                    11.06Nonvested
      at March 31, 2009
                    
                    
                    491,981
                    
                    
                    
                    11.27For
      the three months ended March 31, 2009:Granted
                    
                    
                    17,997
                    
                    
                    
                    4.13Vested
                    
                    
                    202,933
                    
                    
                    
                    10.01Forfeited
                    
                    
                    6,199
                    
                    
                    
                    8.85
 
 Employees
deferred compensation of $10,000 and $38,000 during the three months ended March
31, 2009 and 2008, respectively, that was used to purchase restricted common
stock.  The Company recognized pretax compensation expense of $658,000
and $649,000 during the three months ended March 31, 2009 and 2008,
respectively, related to its restricted common stock plan.  At March
31, 2009, total unrecognized compensation cost, net of estimated forfeitures,
related to nonvested restricted stock was $3.9 million and is expected to be
recognized over the next 3.75 years.
  14
  
 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 three months ended March 31, 2009
related to this program.
 
 9.
              LOSS
      PER COMMON SHARE
 
 Basic and
diluted loss per common share computations for the periods indicated were as
follows:
 
 Three Months Ended March
31,2009
                        
                        
                        2008(in
      thousands, except per share amounts)Loss
      from continuing operations
                        
                        $
                        (11,616
                        )
                        
                        $
                        (1,714
                        )Loss
      from discontinued operations, net of tax
                        
                        
                        (1,228
                        )
                        
                        
                        (393
                        )Net
      loss
                        
                        $
                        (12,844
                        )
                        
                        $
                        (2,107
                        )Basic
      loss per common share:Continuing
      operations
                        
                        $
                        (0.42
                        )
                        
                        $
                        (0.07
                        )Discontinued
      operations
                        
                        
                        (0.05
                        )
                        
                        
                        (0.01
                        )Net
      loss
                        
                        $
                        (0.47
                        )
                        
                        $
                        (0.08
                        )Diluted
      loss per common share:Continuing
      operations
                        
                        $
                        (0.42
                        )
                        
                        $
                        (0.07
                        )Discontinued
      operations
                        
                        
                        (0.05
                        )
                        
                        
                        (0.01
                        )Net
      loss
                        
                        $
                        (0.47
                        )
                        
                        $
                        (0.08
                        )Weighted
      average number of common shares outstanding:Basic
                        
                        
                        27,567
                        
                        
                        
                        24,940Diluted
                        
                        
                        27,567
                        
                        
                        
                        24,940
 
 Outstanding
stock options of 660,000 and 767,000 for the three months ended March 31, 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.  The Company has issued a letter of credit in the amount
of $100,000 to secure the payment of the deductible portion of the Company’s
workers compensation insurance policy.
 
 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.  The Company owns a
10% membership interest in EFA.  We committed to initially loan EFA up
to $20.0 million to cover its start-up expenses of which $10.0 million has been
advanced and subsequently repaid.  Mr. Edelman has guaranteed
repayment of the EFA obligation to the extent of funds that will be owed to him
by the Company in connection with the purchase of Edelman.  There was
no outstanding balance on the Company’s loan to EFA at March 31,
2009.  On January 29, 2009, the Company entered into an agreement (the
“Agreement”) whereby the Company will purchase an additional 66% of EFA for an
aggregate consideration of $25.0 million in cash and a subordinated promissory
note in the principal amount of $10.0 million.  Under the terms of the
Agreement, the Company will not be required to loan EFA the remaining $10.0
million provided it fulfills the requirements of the Agreement.
  15
 
 In
January 2009, the Company and SMH entered into a Contribution Agreement with Pan
Asia China Commerce Corp. (“PAC3”), Siwanoy Capital, LLC (“Siwanoy”) and Siwanoy
Securities, LLC (“New BD”), pursuant to which (a) PAC3 agreed to subscribe
for and purchase a 40% Class A membership interest in Siwanoy 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 Siwanoy, (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 Siwanoy, cash, and a note issued by Siwanoy to the
Company. Current members of management of the Capital Markets Business will
retain the remaining 40% membership interest in Siwanoy. The transaction is
expected to close following the filing with and approval by the Financial
Industry Regulatory Authority (“FINRA”) of a new member application by the New
BD, which is anticipated to be in the second quarter of 2009.
 
 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
March 31, 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 has been
converted to liquidation under Chapter 7.  It is unlikely that there
will be any distribution to its unsecured creditors or equity security
holders.  In 2007, SMH wrote off a $3.0 million subordinated working
capital loan that it made to Ronco in 2006.
  16
 
 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, Case No. 07-04837, 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. SMH has filed an answer and special
exceptions. SMH 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.  We expect this case to go to trial
in the third quarter of 2009.  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, Case No. 2009-16617, 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 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.
 
 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, Asset/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
Asset/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 Asset/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 Asset/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 segment or the Asset/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.
  17
 
 ·
              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 months ended March 31, 2009 and 2008,
respectively.  SMHG does not analyze asset information in all business
segments.
 
 Three
      Months EndedMarch 31,2009
                          
                          
                          2008(in
      thousands)Revenue:Asset/Wealth
      Management
                          
                          $
                          19,288
                          
                          
                          $
                          26,455Capital
      Markets:Investment
      banking
                          
                          
                          1,503
                          
                          
                          
                          656Institutional
      brokerage
                          
                          
                          5,146
                          
                          
                          
                          3,757Prime
      brokerage services
                          
                          
                          14,440
                          
                          
                          
                          10,520Capital
      Markets Total
                          
                          
                          21,089
                          
                          
                          
                          14,933Corporate
      Support and Other
                          
                          
                          822
                          
                          
                          
                          (736
                          )Total
                          
                          $
                          41,199
                          
                          
                          $
                          40,652Income
      (loss) from continuing operations before equity in income (loss) of
      limited partnerships and income taxes:Asset/Wealth
      Management
                          
                          $
                          3,725
                          
                          
                          $
                          9,407Capital
      Markets:Investment
      banking
                          
                          
                          (1,577
                          )
                          
                          
                          (3,172
                          )Institutional
      brokerage
                          
                          
                          346
                          
                          
                          
                          (9
                          )Prime
      brokerage services
                          
                          
                          327
                          
                          
                          
                          507Capital
      Markets Total
                          
                          
                          (904
                          )
                          
                          
                          (2,674
                          )Corporate
      Support and Other
                          
                          
                          (19,360
                          )
                          
                          
                          (5,021
                          )Total
                          
                          $
                          (16,539
                          )
                          
                          $
                          1,712Equity
      in income (loss) of limited partnerships:Asset/Wealth
      Management
                          
                          $
                          (74
                          )
                          
                          $
                          652Capital
      Markets:Investment
      banking
                          
                          
                          -
                          
                          
                          
                          -Institutional
      brokerage
                          
                          
                          -
                          
                          
                          
                          -Prime
      brokerage services
                          
                          
                          -
                          
                          
                          
                          -Capital
      Markets Total
                          
                          
                          -
                          
                          
                          
                          -Corporate
      Support and Other
                          
                          
                          (424
                          )
                          
                          
                          (2,212
                          )Total
                          
                          $
                          (498
                          )
                          
                          $
                          (1,560
                          )Income
      (loss) from continuing operations before income taxes:Asset/Wealth
      Management
                          
                          $
                          3,651
                          
                          
                          $
                          10,059Capital
      Markets:Investment
      banking
                          
                          
                          (1,577
                          )
                          
                          
                          (3,172
                          )Institutional
      brokerage
                          
                          
                          346
                          
                          
                          
                          (9
                          )Prime
      brokerage services
                          
                          
                          327
                          
                          
                          
                          507Capital
      Markets Total
                          
                          
                          (904
                          )
                          
                          
                          (2,674
                          )Corporate
      Support and Other
                          
                          
                          (19,784
                          )
                          
                          
                          (7,233
                          )Total
                          
                          $
                          (17,037
                          )
                          
                          $
                          152Net
      income attributable to the noncontrolling interest:Asset/Wealth
      Management
                          
                          $
                          (1,052
                          )
                          
                          $
                          (2,888
                          )Capital
      Markets:Investment
      banking
                          
                          
                          -
                          
                          
                          
                          -Institutional
      brokerage
                          
                          
                          -
                          
                          
                          
                          -Prime
      brokerage services
                          
                          
                          -
                          
                          
                          
                          -Capital
      Markets Total
                          
                          
                          -
                          
                          
                          
                          -Corporate
      Support and Other
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          (1,052
                          )
                          
                          $
                          (2,888
                          )
  19





12.
              SUPPLEMENTAL
      CASH FLOW INFORMATION





Three Months Ended March
31,2009
                  
                  
                  2008(in
      thousands)Cash
      payment (refund) for income taxes, net
                  
                  $
                  (19
                  )
                  
                  $
                  221Cash
      paid for interest
                  
                  
                  -
                  
                  
                  
                  4Noncash
      investing activities:Acquisitions:Receivables
                  
                  
                  -
                  
                  
                  
                  10Noncontrolling
      interest
                  
                  
                  -
                  
                  
                  
                  (68
                  )Common
      stock
                  
                  
                  -
                  
                  
                  
                  (1,750
                  )Noncash
      financing activities:Dividends
      declared not yet paid
                  
                  
                  1,267
                  
                  
                  
                  1,141





13.
              RELATED
      PARTIES





The
Company had receivables from related parties totaling $11.9 million at March 31,
2009, primarily consisting of $6.5 million of advances to unconsolidated related
entities to fund operating expenses, $3.9 million of notes receivable from
employees and consultants representing loans made to induce the employees and
consultants to affiliate with the Company, and $1.0 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 months ended March 31, 2009 and 2008.





Three Months Ended March 31,2009
                      
                      
                      2008(in thousands)Operating
      activities:Revenue
                      
                      $
                      281
                      
                      
                      $
                      773Expenses
                      
                      
                      2,340
                      
                      
                      
                      1,398Loss
      from discontinued operationsbefore
      income taxes
                      
                      
                      (2,059
                      )
                      
                      
                      (625
                      )Benefit
      for income taxes
                      
                      
                      831
                      
                      
                      
                      232Loss
      from discontinued operations
                      
                      $
                      (1,228
                      )
                      
                      $
                      (393
                      )


20


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





March 31,
                  
                  
                  December 31,2009
                  
                  
                  2008(in
      thousands)Furniture,
      equipment, and leasehold improvements, net
                  
                  $
                  221
                  
                  
                  $
                  420Total
      assets of discontinued operations
                  
                  $
                  221
                  
                  
                  $
                  420Total
      liabilities of discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  -


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 asset/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 Asset/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,
prime brokerage services, and proprietary trading 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.


22


Prime Brokerage Services provides trade
execution, clearing, bookkeeping, reporting, custodial, securities borrowing,
financing, research, and fund raising to hedge fund clients.  The
Company maintains proprietary trading accounts on behalf of individual
securities traders through this division.





We have
expanded both the range and depth of services offered to our clients through a
combination of acquisitions and internal expansion. This growth has necessitated
that we add additional personnel, as well as production-related incentive
compensation plans. We have also improved and expanded our infrastructure
including facilities, technology, and information services, to enable us to
better compete with other firms that offer services similar to
ours.





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





We
closely monitor our operating environment to enable us to respond promptly to
market cycles. In addition, we seek to lessen earnings volatility by controlling
expenses, increasing fee-based business, and developing new revenue sources.
Nonetheless, operating results of any specific period should not be considered
representative of future performance.





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.





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 first quarter of 2009, compensation and
benefits represented 49.0% of total expenses and 68.6% of total revenue,
compared to 65.0% of total expenses and 62.3% of total revenue during the first
quarter of 2008.  The decrease in compensation and benefits as a
percentage of expenses is principally due to $14.9 million of goodwill and other
intangible asset impairment charges recognized in the first quarter of
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 which has a higher payout than our other business
lines.





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., and
First Clearing Corporation.





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 intangible
assets, and (6) other general and administrative expenses.


23





Results
of Operations





Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





Total
revenue was $41.2 million for the first quarter of 2009 compared to $40.7
million for the same quarter in 2008, an increase of $547,000, or 1.3%,
primarily reflecting an increase in principal transactions revenue partially
offset by a decrease in investment advisory and related services and commissions
revenue.  Total expenses for the first quarter of 2009 increased $18.8
million, or 48.3%, to $57.7 million from $38.9 million in the same quarter of
the previous year principally due to $14.9 million in goodwill and other
intangible assets impairment charges recognized in the first quarter of
2009.  Equity in loss of limited partnerships decreased to $498,000
for the first quarter of 2009 compared to $1.6 million for the first quarter of
2008, primarily due to a 2008 decline in the value of the investment portfolio
of one of the limited partnerships that we manage.  Loss from
continuing operations, net of tax, was $11.6 million, or $0.42 per diluted
common share, for the first quarter of 2009 compared to $1.7 million, or $0.07
per diluted common share, for the first quarter of 2008.





Revenue
from investment advisory and related services decreased to $14.2 million in the
first quarter of 2009 from $18.7 million in the same quarter of 2008 as a result
of a decrease in assets under management or advisement.  Commission
revenue decreased to $11.7 million in the first quarter of 2009 from $13.5
million for the same period in 2008, primarily as a result of a decrease in
trading volume in the asset/wealth management segment.  Investment
banking revenue increased to $1.9 million during the first quarter of 2009 from
$1.1 million in the same period of 2008, principally due to increases in
advisory fees.  Principal transactions revenue increased from $2.6
million for the first quarter of 2008 to $8.7 million for the first quarter of
2009, primarily as the result of an increase in principal transactions revenue
from the sale of fixed income products.  Interest and dividend income
increased to $2.6 million in the first quarter of 2009 from $1.1 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 $3.6 million
during the first quarter of 2008 to $2.1 million during the same period in 2009
reflecting a decrease in hedge fund servicing revenue and third-party marketing
fees.





During
the three months ended March 31, 2009, employee compensation and benefits
increased to $28.3 million from $25.3 million in the same period last year due
to the revenue growth in the prime brokerage services
division.  During the three months ended March 31, 2009, floor
brokerage, exchange, and clearance fees increased to $1.8 million from $1.4
million in the same period last year due to an increase in clearance fees in the
prime brokerage services division.  Communications and data processing
costs decreased to $2.6 million in the first quarter of 2009 compared to $2.7
million in the same period last year.  Occupancy costs were $3.5
million in the first quarter of 2009 compared to $2.9 million in the first
quarter of 2008 due to the addition of Leonetti and
Miller-Green.  Interest expense was $180,000 for the first quarter of
2009 due to 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.  The Company recognized goodwill and other
intangible assets impairment charges of $14.9 million in first quarter of
2009.  No such charge was recognized in the first quarter of
2008.  Amortization of intangible assets increased to $209,000 for the
first quarter of 2009 compared to $169,000 for the first quarter of 2008 due to
the addition of Leonetti and Miller-Green.  Other general and
administrative expenses decreased to $6.2 million during the first quarter of
2009 from $6.5 million in the first quarter of last year primarily due to a
decrease in outside sales commissions.





Our
effective tax rate from continuing operations was 38.0% for the three months
ended March 31, 2009 compared to (672.4)% for the three months ended March 31,
2008.  The effective tax rate exceeds the federal statutory income tax
rate primarily as a result of state income taxes and certain nondeductible
expenses.  The effective tax rate for the three months ended March 31,
2008 was impacted by the Company’s adoption of SFAS No. 160 on January 1,
2009.


24





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 $1.2 million and $393,000 for the three months ended March 31, 2009
and 2008, respectively.





Results
by Segment





Asset/Wealth
Management





Three Months Ended March 31,2009
                  
                  
                  2008(in thousands)Revenue
                  
                  $
                  19,288
                  
                  
                  $
                  26,455Income
      from continuing operations before income taxes
                  
                  $
                  3,651
                  
                  
                  $
                  10,059





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 first quarter of 2008 to the
comparable 2009 period.  Revenue from asset/wealth management
decreased to $19.3 million from $26.5 million and income from continuing
operations before income taxes decreased to $3.7 million from $10.1
million.  Investment advisory and related services revenue decreased
to $14.2 million from $18.7 million as a result of a decrease in assets under
management or advisement.  Also contributing to this decline was the
sale of the Company’s interest in Endowment Advisers, L.P. in August 2008.
Commission revenue decreased to $2.9 million from $5.0 million.  Sales
credits from investment banking transactions decreased to $215,000 from
$321,000.  Total expenses decreased to $15.6 million from $17.0
million, primarily due to a decrease in employee compensation and benefits and
outside sales commissions.  Equity in income (loss) of limited
partnerships decreased to a loss of $74,000 from income of $652,000, principally
due to a decrease in the value of the investment portfolio of one of the limited
partnerships that we manage.  Net income attributable to the
noncontrolling interest in consolidated subsidiaries, which reduces the
Company’s pretax income, was $1.1 million for the first quarter of 2009 compared
to $2.9 million for the same period last year, principally due to lower earnings
at Edelman and the Company’s purchase of an additional 25% membership interest
in Edelman in May of 2008.





Capital
Markets





InvestmentBanking


Three Months Ended March 31,2009
                          
                          
                          2008(in
      thousands)Revenue
                          
                          $
                          1,503
                          
                          
                          $
                          656Loss
      from continuing operations before income taxes
                          
                          $
                          (1,577
                          )
                          
                          $
                          (3,172
                          )





Revenue
from investment banking increased to $1.5 million from $656,000 and loss from
continuing operations before income taxes decreased to a loss of $1.6 million
from a loss of $3.2 million.  The revenue increase is due to an
increase in advisory fees.  Total expenses decreased to $3.1 million
from $3.8 million.  The decrease in expenses is primarily attributable
to decreased employee compensation.


25


Institutional
Brokerage





Three Months Ended March 31,2009
                        
                        
                        2008(in
      thousands)Revenue
                        
                        $
                        5,146
                        
                        
                        $
                        3,757Income
      (loss) from continuing operations before income taxes
                        
                        $
                        346
                        
                        
                        $
                        (9
                        )





Revenue
from institutional brokerage increased to $5.1 million from $3.8 million and
income (loss) from continuing operations before income taxes increased to
$346,000 from $(9,000).  Principal transactionrevenue
increased to $2.6 million from $787,000 reflecting an increase in revenue from
the sale of fixed income products.  Total expenses increased to $4.8
million from $3.8 million, primarily due to increased employee compensation
related to the higher revenue.





Prime Brokerage
Services





Three Months Ended March
31,2009
                        
                        
                        2008(in
      thousands)Revenue
                        
                        $
                        14,440
                        
                        
                        $
                        10,520Income
      from continuing operations before income taxes
                        
                        $
                        327
                        
                        
                        $
                        507





Revenue
from prime brokerage services increased to $14.4 million from $10.5 million and
income from continuing operations before income taxes decreased to $327,000 from
$507,000.  Principal transactions revenue increased to $7.6 million
from $2.7 million reflecting an increase in revenue earned from the sale of
fixed income products and from an increase in proprietary trading
activities.  Total expenses increased to $14.1 million from $10.0
million reflecting increased compensation and outside sales commissions related
to the increased revenue.





Corporate
Support and Other





Three
      Months Ended March 31,2009
                        
                        
                        2008(in
      thousands)Revenue
                        
                        $
                        822
                        
                        
                        $
                        (736
                        )Loss
      from continuing operations before income taxes
                        
                        $
                        (19,784
                        )
                        
                        $
                        (7,233
                        )





Revenue
from corporate support and other increased to $822,000 from $(736,000) and the
loss from continuing operations before income taxes increased to $19.8 million
from $7.2 million.  Interest income increased to $2.5 million from
$571,000 reflecting interest earned on notes receivable received in connection
with the sale of our interests in Salient Partners, L.P. and Endowment Advisers,
L.P.  Revenue from principal transactions, which consists principally
of changes in the values of our investment portfolios, decreased to a loss of
$1.8 million from a loss of $1.4 million.  Total expenses increased to
$20.2 million from $4.3 million, primarily due to $14.9 million of goodwill and
other intangible assets impairment charges recognized in 2009.  Equity
in loss of limited partnerships decreased to a loss of $424,000 from a loss of
$2.2 million, primarily due to the 2008 decrease in the value of the investment
portfolio of one of the limited partnerships that we manage.





26




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 March 31, 2009, we had $17.9 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 15.2% of our total assets at the end of the first
quarter.





Receivables
turnover, calculated as annualized revenue divided by average receivables, was
one for the three months ended March 31, 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 March 31, 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.





For the
three months ended March 31, 2009, net cash used in operations was $10.4 million
versus $4.6 million during the same period in 2008.  Marketable
securities owned decreased by $3.2 million during the first three months of
2009, securities sold, not yet purchased decreased by $4.7 million, and payables
to broker-dealers and clearing organizations decreased by
$558,000.  The change in marketable securities owned, securities sold,
not yet purchased, and payables to broker-dealers and clearing organizations is
primarily due to the trading portfolios of our proprietary trading
operations.  The Company’s proprietary trading operations carry both
long and short equity securities.  These trading operations generally
seek to generate profits based on trading spreads, rather than through
speculation on the direction of the market.  We employ hedging
strategies designed to insulate the net value of our trading inventories from
fluctuations in the general level of interest rates and equity price
variances.  We finance a portion of our trading positions through our
clearing broker-dealers.





Not
readily marketable securities owned, primarily investments in limited
partnerships, were $30.0 million at March 31, 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 three months of 2009 were $396,000, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for our growth.





At March
31, 2009, SMH, our registered broker-dealer subsidiary, was in compliance with
the net capital requirements of the Securities and Exchange Commission's Uniform
Net Capital Rules and had capital in excess of the required
minimum.





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.


27


Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Market
Risk





During
the three months ended March 31, 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 March
31, 2009, securities owned by the Company were $47.9 million, including $18.0
million in marketable securities, $27.1 million representing the Company’s
investments in limited partnerships, and $2.8 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.


28


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 has been
converted to liquidation under Chapter 7.  In 2007, SMH wrote off a
$3.0 million subordinated working capital loan that it made to Ronco in
2006.





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, Case No. 07-04837, 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. SMH has filed an answer and special
exceptions. SMH 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.  We expect this case to go to trial
in the third quarter of 2009.  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, Case No. 2009-16617, 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 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.


29





Item
2.  Unregistered
Sales of Equity Securities and Use of Proceeds





Total number ofTotal
                    
                    
                    
                    
                    
                    shares purchased
                    
                    
                    Maximum number ofnumber of
                    
                    
                    Average
                    
                    
                    as part of publicly
                    
                    
                    shares that may yetshares
                    
                    
                    price paid
                    
                    
                    announced plans
                    
                    
                    be purchased underPeriod
                    
                    purchased
                    
                    
                    per share
                    
                    
                    or programs (1)
                    
                    
                    the plans or programsJanuary
      1 to January 31, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -February
      1 to February 28, 2009
                    
                    
                    4,819
                    
                    
                    
                    4.23
                    
                    
                    
                    4,819
                    
                    
                    
                    685,507March
      1 to March 31, 2009
                    
                    
                    1,990
                    
                    
                    
                    3.99
                    
                    
                    
                    1,990
                    
                    
                    
                    683,517Total
                    
                    
                    6,809
                    
                    
                    $
                    4.16
                    
                    
                    
                    6,809
                    
                    
                    
                    683,517





(1)
            The
      Company announced a share repurchase program on November 7, 2007 to
      purchase up to 1.0 million shares of  the Company's shares of
      common stock.





Item
5. Other
Information





None.


30


Item
6.  Exhibits





INDEX
TO EXHIBITS





ExhibitNumber
                
                Description3.1
                
                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 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
                
                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).10.06
                
                Eleventh
      Amendment to Lease Agreement dated as of December 21, 2006, between Texas
      Tower Limited and Sanders Morris Harris Inc. (Filed as Exhibit 10.6 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).10.07
                
                Credit
      Agreement dated as of May 9, 2005, between Sanders Morris Harris Group
      Inc. and JPMorgan Chase Bank, National Association (Filed as Exhibit 10.7
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2005 (File No. 000-30066), and incorporated herein by
      reference).10.08
                
                Agreement
      and Fifth Amendment to Credit Agreement and Amendment to Interest Rate
      Agreement dated as of May 31, 2008, among Sanders Morris Harris Group Inc.
      and JPMorgan Chase Bank, National Association.  (Filed as
      Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2008 (File No. 000-30066), and incorporated herein
      by reference).10.09
                
                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).10.10
                
                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).10.11
                
                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).10.12
                
                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).







31





*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.


32


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/ BEN T. MORRISBen
      T. MorrisChief
      Executive OfficerBy:
              /s/ RICK BERRYRick
      BerryChief
      Financial Officer





Date:     May
11, 2009


33