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
JUNE 30, 2012



OR



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



Commission File No. 000-30066



THE EDELMAN FINANCIAL GROUP INC.



(Exact name of registrant as specified in
its charter)



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



(713) 224-3100



(Registrant’s telephone number, including
area code)



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



Indicate by
check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). 	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 filer x        
|-------------------------- | ---------------------------
|Non-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 August 3, 2012, the registrant had 29,074,560 outstanding shares of common stock, par value $0.01
per share.











THE EDELMAN FINANCIAL GROUP INC. AND
SUBSIDIARIES



INDEX



|                              |          |                                                                            | Page
|----------------------------- | -------- | -------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION
|                              |          |                                                                            |     
|                              | Item 1.  | Financial Statements                                                       | 2   
|                              |          |                                                                            |     
|                              |          | Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and  |     
|                              |          | December 31, 2011                                                          | 2   
|                              |          |                                                                            |     
|                              |          | Condensed Consolidated Statements of Income for the Three and Six Months   |     
|                              |          | Ended June 30, 2012 and 2011 (unaudited)                                   | 3   
|                              |          |                                                                            |     
|                              |          | Condensed Consolidated Statement of Changes in Equity for the Six Months   |     
|                              |          | Ended June 30, 2012 (unaudited)                                            | 4   
|                              |          |                                                                            |     
|                              |          | Condensed Consolidated Statements of Cash Flows for the Six Months         |     
|                              |          | Ended June 30, 2012 and 2011 (unaudited)                                   | 5   
|                              |          |                                                                            |     
|                              |          | Notes to Condensed Consolidated Financial Statements (unaudited)           | 6   
|                              |          |                                                                            |     
|                              | Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of |     
|                              |          | Operations                                                                 | 29  
|                              |          |                                                                            |     
|                              | Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                 | 43  
|                              |          |                                                                            |     
|                              | Item 4.  | Controls and Procedures                                                    | 43  
|                              |          |                                                                            |     
|PART II. OTHER INFORMATION   
|                              |          |                                                                            |     
|                              | Item 1.  | Legal Proceedings                                                          | 44  
|                              |          |                                                                            |     
|                              | Item 1A. | Risk Factors                                                               | 45  
|                              |          |                                                                            |     
|                              | Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                | 46  
|                              |          |                                                                            |     
|                              | Item 5.  | Other Information                                                          | 47  
|                              |          |                                                                            |     
|                              | Item 6.  | Exhibits                                                                   | 48  





1







PART I. FINANCIAL INFORMATION



Item 1. Financial Statements





THE EDELMAN FINANCIAL GROUP
INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE
SHEETS

As of June 30, 2012 and December
31, 2011

(in thousands, except share and
per share amounts)



|                                                                      |  | June 30,    |         |   | December 31, |  
|--------------------------------------------------------------------- |  | ----------- | ------- | - | ------------ | -
|                                                                      |  | 2012        |         |   | 2011         |  
|                                                                      |  | (unaudited) |         |   |              |  
|                                                                      |  |             |         |   |              |  
|ASSETS                                                                |  |             |         |   |              |  
|Cash and cash equivalents                                             |  | $           | 35,836  |   |              | $
|Restricted cash                                                       |  |             | 990     |   |              |  
|Receivables from customers, net                                       |  |             | 31,384  |   |              |  
|Notes, loans, and other receivables, net                              |  |             | 63,379  |   |              |  
|Deposits with clearing organizations                                  |  |             | 1,301   |   |              |  
|Financial instruments, owned, at fair value                           |  |             | 27,989  |   |              |  
|Other investments                                                     |  |             | 1,696   |   |              |  
|Furniture, equipment, and leasehold improvements, net                 |  |             | 10,243  |   |              |  
|Other assets and prepaid expenses                                     |  |             | 4,541   |   |              |  
|Goodwill, net                                                         |  |             | 84,676  |   |              |  
|Other intangible assets, net                                          |  |             | 58,203  |   |              |  
|Total assets                                                          |  | $           | 320,238 |   |              | $
|                                                                      |  |             |         |   |              |  
|LIABILITIES AND EQUITY                                                |  |             |         |   |              |  
|Liabilities:                                                          |  |             |         |   |              |  
|Accounts payable and accrued liabilities                              |  | $           | 38,723  |   |              | $
|Borrowings                                                            |  |             | 16,173  |   |              |  
|Deferred tax liability, net                                           |  |             | 14,670  |   |              |  
|Total liabilities                                                     |  |             | 69,566  |   |              |  
|                                                                      |  |             |         |   |              |  
|Commitments and contingencies                                         |  |             |         |   |              |  
|                                                                      |  |             |         |   |              |  
|Equity:                                                               |  |             |         |   |              |  
|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; 31,219,775 and 30,752,128 shares issued,                  |  |             |         |   |              |  
|respectively                                                          |  |             | 312     |   |              |  
|Additional paid-in capital                                            |  |             | 241,867 |   |              |  
|Accumulated deficit                                                   |  |             | (10,764 | ) |              |  
|Treasury stock, at cost, 2,145,215 and 1,613,814 shares, respectively |  |             | (14,257 | ) |              |  
|Total The Edelman Financial Group Inc. shareholders' equity           |  |             | 217,158 |   |              |  
|Noncontrolling interest                                               |  |             | 33,514  |   |              |  
|Total equity                                                          |  |             | 250,672 |   |              |  
|Total liabilities and equity                                          |  | $           | 320,238 |   |              | $



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

2









|THE EDELMAN FINANCIAL GROUP INC. AND SUBSIDIARIES
|-------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME      
|(in thousands, except per share amounts)         
|(unaudited)                                      



|                                                              |  | Three Months Ended |        |   | Six Months Ended |  
|------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | -
|                                                              |  | June 30,           |        |   | June 30,         |  
|                                                              |  | 2012               |        |   | 2011             |  
|Revenue:                                                      |  |                    |        |   |                  |  
|Investment advisory and related services                      |  | $                  | 32,151 |   |                  | $
|Commissions                                                   |  |                    | 3,806  |   |                  |  
|Principal transactions                                        |  |                    | 3,822  |   |                  |  
|Investment banking                                            |  |                    | 1,760  |   |                  |  
|Interest and dividends                                        |  |                    | 1,945  |   |                  |  
|Other income                                                  |  |                    | 1,859  |   |                  |  
|Total revenue                                                 |  |                    | 45,343 |   |                  |  
|Expenses:                                                     |  |                    |        |   |                  |  
|Employee compensation and benefits                            |  |                    | 25,089 |   |                  |  
|Floor brokerage, exchange, and clearance fees                 |  |                    | 161    |   |                  |  
|Communications and data processing                            |  |                    | 2,610  |   |                  |  
|Occupancy                                                     |  |                    | 3,270  |   |                  |  
|Interest                                                      |  |                    | 386    |   |                  |  
|Amortization of other intangible assets                       |  |                    | 1,111  |   |                  |  
|Loss on note receivable held-for-sale                         |  |                    | -      |   |                  |  
|Other general and administrative                              |  |                    | 8,571  |   |                  |  
|Total expenses                                                |  |                    | 41,198 |   |                  |  
|Income from continuing operations before equity in income of  |  |                    |        |   |                  |  
|limited partnerships and income taxes                         |  |                    | 4,145  |   |                  |  
|Equity in income of limited partnerships                      |  |                    | 1,038  |   |                  |  
|Income from continuing operations before income taxes         |  |                    | 5,183  |   |                  |  
|Provision for income taxes                                    |  |                    | 1,472  |   |                  |  
|Income from continuing operations, net of income taxes        |  |                    | 3,711  |   |                  |  
|Loss from discontinued operations, net of income taxes of     |  |                    |        |   |                  |  
|$(655), $(287), $(688) and $(766), respectively               |  |                    | (1,580 | ) |                  |  
|Net income                                                    |  |                    | 2,131  |   |                  |  
|Less:  Net income attributable to the noncontrolling interest |  |                    | (1,919 | ) |                  |  
|Net income attributable to The Edelman Financial Group Inc.   |  | $                  | 212    |   |                  | $
|Basic earnings (loss) per common share:                       |  |                    |        |   |                  |  
|Continuing operations                                         |  | $                  | 0.06   |   |                  | $
|Discontinued operations                                       |  |                    | (0.05  | ) |                  |  
|Net earnings                                                  |  | $                  | 0.01   |   |                  | $
|Diluted earnings (loss) per common share:                     |  |                    |        |   |                  |  
|Continuing operations                                         |  | $                  | 0.06   |   |                  | $
|Discontinued operations                                       |  |                    | (0.05  | ) |                  |  
|Net earnings                                                  |  | $                  | 0.01   |   |                  | $
|Weighted average common shares outstanding:                   |  |                    |        |   |                  |  
|Basic                                                         |  |                    | 29,331 |   |                  |  
|Diluted                                                       |  |                    | 29,931 |   |                  |  
|Amounts attributable to The Edelman Financial Group Inc.      |  |                    |        |   |                  |  
|common shareholders:                                          |  |                    |        |   |                  |  
|Income from continuing operations, net of income taxes        |  | $                  | 1,792  |   |                  | $
|Loss from discontinued operations, net of income taxes        |  |                    | (1,580 | ) |                  |  
|Net income                                                    |  | $                  | 212    |   |                  | $



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





3









|THE EDELMAN FINANCIAL GROUP INC. AND SUBSIDIARIES    
|-----------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
|For the Six Months Ended June 30, 2012               
|(in thousands, except share and per share amounts)   
|(unaudited)                                          



|                                                                                   |  | Amounts |         |   | Shares | 
|---------------------------------------------------------------------------------- |  | ------- | ------- | - | ------ | 
|Common stock:                                                                      |  |         |         |   |        | 
|Balance, beginning of period                                                       |  | $       | 308     |   |        | 
|Stock issued pursuant to contingent earnout agreement                              |  |         | 2       |   |        | 
|Stock issued pursuant to stock-based compensation plans                            |  |         | 2       |   |        | 
|Balance, end of period                                                             |  |         | 312     |   |        | 
|Additional paid-in capital:                                                        |  |         |         |   |        | 
|Balance, beginning of period                                                       |  |         | 246,485 |   |        | 
|Warrant repurchase                                                                 |  |         | (8,000  | ) |        | 
|Stock issued pursuant to contingent earnout agreement                              |  |         | 1,498   |   |        | 
|Stock issued pursuant to stock-based compensation plans;
    including tax benefit |  |         | 1,559   |   |        | 
|Tax adjustment related to stock-based compensation plans                           |  |         | 84      |   |        | 
|Stock-based compensation expense                                                   |  |         | 241     |   |        | 
|Balance, end of period                                                             |  |         | 241,867 |   |        | 
|Accumulated deficit:                                                               |  |         |         |   |        | 
|Balance, beginning of period                                                       |  |         | (8,020  | ) |        | 
|Cash dividends ($0.10 per share)                                                   |  |         | (2,960  | ) |        | 
|Net income attributable to The Edelman Financial Group Inc.                        |  |         | 216     |   |        | 
|Balance, end of period                                                             |  |         | (10,764 | ) |        | 
|Treasury stock:                                                                    |  |         |         |   |        | 
|Balance, beginning of period                                                       |  |         | (9,674  | ) |        | 
|Acquisition of treasury stock                                                      |  |         | (4,583  | ) |        | 
|Balance, end of period                                                             |  |         | (14,257 | ) |        | 
|Noncontrolling interest:                                                           |  |         |         |   |        | 
|Balance, beginning of period                                                       |  |         | 32,254  |   |        | 
|Distributions                                                                      |  |         | (4,418  | ) |        | 
|Disposition of noncontrolling interest                                             |  |         | 1,458   |   |        | 
|Net income attributable to the noncontrolling interest                             |  |         | 4,220   |   |        | 
|Balance, end of period                                                             |  |         | 33,514  |   |        | 
|Total equity and common shares outstanding                                         |  | $       | 250,672 |   |        | 



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





4









|THE EDELMAN FINANCIAL GROUP INC. AND SUBSIDIARIES
|-------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
|(in thousands)                                   
|(unaudited)                                      





|                                                                                             |  | Six Months Ended |        
|-------------------------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                                             |  | June 30,         |        
|                                                                                             |  | 2012             |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |  |                  |        
|Net income                                                                                   |  | $                | 4,436  
|Adjustments to reconcile net income to net cash provided by operating activities:            |  |                  |        
|Loss on sale of assets                                                                       |  |                  | 2,022  
|Loss on note receivable held-for-sale                                                        |  |                  | -      
|Depreciation                                                                                 |  |                  | 2,098  
|Provision for bad debts                                                                      |  |                  | 224    
|Stock-based compensation expense                                                             |  |                  | 2,096  
|Amortization of other intangible assets                                                      |  |                  | 2,226  
|Deferred income taxes                                                                        |  |                  | 1,273  
|Equity in income of limited partnerships                                                     |  |                  | (1,953 
|Unrealized and realized gains on not readily marketable
    financial instruments owned, net |  |                  | 301    
|Net change in:                                                                               |  |                  |        
|Restricted cash                                                                              |  |                  | 156    
|Receivables from customers, net                                                              |  |                  | (2,837 
|Notes, loans, and other receivables, net                                                     |  |                  | 4,249  
|Deposits with clearing organizations                                                         |  |                  | -      
|Financial instruments, owned, at fair value                                                  |  |                  | (354   
|Other assets and prepaid expenses                                                            |  |                  | 255    
|Accounts payable and accrued liabilities                                                     |  |                  | (1,579 
|Securities sold, not yet purchased                                                           |  |                  | -      
|Net cash provided by operating activities                                                    |  |                  | 12,613 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |  |                  |        
|Capital expenditures                                                                         |  |                  | (1,931 
|Internally developed software expenditures                                                   |  |                  | (467   
|Contingent consideration payment                                                             |  |                  | (3,000 
|Notes receivable issued                                                                      |  |                  | (100   
|Purchases of not readily marketable financial instruments, owned                             |  |                  | (140   
|Proceeds from sales of not readily marketable financial instruments, owned                   |  |                  | 1,535  
|Proceeds from sale of assets                                                                 |  |                  | 50     
|Net cash (used in) provided by
    investing     activities                                  |  |                  | (4,053 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |  |                  |        
|Purchases of treasury stock                                                                  |  |                  | (54    
|Proceeds from shares issued pursuant to stock-based compensation plans                       |  |                  | 1,561  
|Tax adjustment related to stock-based compensation plans                                     |  |                  | 84     
|Repurchase of warrants                                                                       |  |                  | (8,000 
|Repayment of borrowings                                                                      |  |                  | (2,941 
|Merger transaction costs                                                                     |  |                  | (4,624 
|Distributions to noncontrolling interest                                                     |  |                  | (4,418 
|Payments of cash dividends                                                                   |  |                  | (2,937 
|Net cash used in financing activities                                                        |  |                  | (21,329
|Net decrease in cash and cash equivalents                                                    |  |                  | (12,769
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                             |  |                  | 48,605 
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   |  | $                | 35,836 



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





5







THE EDELMAN FINANCIAL GROUP INC. AND
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(unaudited)



| | 1. | BASIS OF PRESENTATION
| | -- | ---------------------



Nature of Operations



The Edelman Financial
Group Inc. (“TEFG” or “the Company”), formerly, Sanders Morris Harris Group Inc., provides wealth management
services, including investment advice, investment management and financial planning. The Company’s operating subsidiaries
include Sanders Morris Harris Inc. (formerly SMH Capital Inc.) (“SMH”), SMH Capital Advisors, Inc. (“SMH Capital
Advisors”), The Edelman Financial Center, LLC and its subsidiaries (“Edelman”), The Dickenson Group, LLC
(“Dickenson”), The Rikoon Group, LLC (“Rikoon”), Leonetti & Associates, LLC (“Leonetti”),
Miller-Green Financial Services, Inc. (“Miller-Green”), Kissinger Financial Services, a division of SMH, (“Kissinger”),
Investor Financial Solutions, LLC (“IFS”), Global Financial Services, LLC (“GFS BD”) and GFS Advisors,
LLC (“GFS IA” and together with GFS BD, “Global”). The Company serves a diverse group of clients primarily
in North America.



Pending Proposed Merger Transaction



On April 16,
2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Summer Holdings II, Inc.
(“Parent”) and Summer Merger Sub, Inc., (“Merger Sub”) pursuant to which Merger Sub will merge with
and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub
were formed by Lee Equity Partners, LLC. Pursuant to the Merger Agreement, shareholders will be paid $8.85 per share of TEFG
common stock. The proposed transaction is expected to close in the third quarter of 2012.



For terms of the Merger
Agreement, including circumstances under which the Merger Agreement can be terminated and the ramifications of such a termination,
as well as other terms and conditions, refer to the Merger Agreement filed as Exhibit 2.1 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 16, 2012.



The merger is currently
expected to close in the third quarter of this year, and is subject to customary closing conditions as well as approval and adoption
of the Merger Agreement by the Company’s shareholders (including approval by a majority of the outstanding unaffiliated shares
of common stock, which excludes any shares of common stock held by Parent and Merger Sub). If completed, the merger will result
in the Company becoming a privately-held company, and its shares of common stock will no longer be listed on any public market.
No assurance can be given that the merger will be completed.



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. We adopted accounting changes described in ASC 810, Consolidation
as of January 1, 2010, which require that the party who has the power to direct the activities of a variable interest entity (“VIE”)
that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity
or a right to receive benefits from the entity that could potentially be significant to the entity consolidate the VIE.



The Company
concluded that it was a primary beneficiary of two VIEs at January 1, 2010. The Company had a 50% direct ownership, with a subsequent
purchase of an additional 0.5% in the fourth quarter of 2010, in one of these entities, and a 65% direct ownership in the other.
These entities are professional sports agencies that assist professional athletes with contract negotiation, marketing, and public
relations. The Company provided significant financial support, which it was not contractually obligated to do, beginning on January
1, 2010, to assist these entities to continue operating as going concerns and also became significantly more involved with the
day-to-day operations of managing the businesses. The Company concluded that it has the power to direct the activities that significantly
impact these entities’ economic performance and has the obligation to absorb the significant losses and receive benefits
related to these entities due to its increased support. During the second quarter of 2012, the professional sports agencies were
sold, and therefore, deconsolidated.



6







There were four VIEs
identified by management in prior periods in which the Company does not have the power to direct the activities of these entities,
therefore, they remain nonconsolidated VIEs as of June 30, 2012. One of the nonconsolidated VIEs had previously been consolidated
due to financial support provided by the Company. However, the Company does not have the power to direct the activities of the
entity that most significantly impacts the entity’s economic performance. The Company has deconsolidated and accounted for
this limited partnership investment at fair value since January 1, 2010. This investment is now reported on the Condensed
Consolidated Balance Sheets within “Financial instruments, owned, at fair value,” with the change in fair value included
in “Equity in income of limited partnerships” on the Condensed Consolidated Statements of Income. The fair value of
this investment is $17.7 million at June 30, 2012, which is also the Company’s maximum exposure to loss from this nonconsolidated
VIE.



Another nonconsolidated
VIE is accounted for as a fair value method investment held by SMH for certain equity shares that were converted to equity from
a note receivable during the second quarter of 2012, in the amount of $1.1 million, and is recorded as “Financial instruments,
owned, at fair value” on the Condensed Consolidated Balance Sheets as of June 30, 2012. The nonconsolidated VIE is also accounted
for as a cost method investment held by TEFG, in the amount of $900,000, and is recorded as “Other investments” on
the Condensed Consolidated Balance Sheets as of June 30, 2012. The Company has no requirement to provide additional funding to
this entity, and $2.0 million is the Company’s maximum loss exposure as of June 30, 2012.



Concept Capital Holdings,
LLC (“CCH”) and Concept Capital Administration, LLC (“CCAdmin”) were additional nonconsolidated VIEs through
December 31, 2011, which were former divisions of the Company that were previously consolidated, but as a result of the spin-off
transactions in 2010 and 2011, the new entities formed due to the spin-off were not consolidated. Management does not have the
power to direct the activities of CCH or CCAdmin. The Company does not intend to provide additional financial support in the future
to CCH or CCAdmin. On December 31, 2011, the remaining profits and member interests in CCH and CCAdmin of $1.0 million were sold
back to the parent of CCH and CCAdmin for $25,000. The two notes receivable issued by CCH as part of the spin-off transactions
were exchanged for one note receivable with minimum principal payments due beginning January 1, 2014. The Company’s maximum
exposure to loss for CCH and CCAdmin is the value of the remaining note receivable with a total balance, net of discount, of $5.0
million, including accrued interest as of June 30, 2012.



As of April 1,
2012, a consolidated private investment limited partnership management company was deconsolidated, due to a loss of control
of the management company from a SMH employee termination that was a managing director of the management company. The
investment in the management company held by SMH was subsequently accounted for at fair value within “Financial
instruments, owned, at fair value” on the Condensed Consolidated Balance Sheets as of June 30, 2012.



In management's opinion,
the unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of our Condensed
Consolidated Balance Sheets at June 30, 2012, and December 31, 2011, our Condensed Consolidated Statements of Income for the three
and six months ended June 30, 2012 and 2011, our Condensed Consolidated Statement of Changes in Equity for the six months ended
June 30, 2012, and our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011. 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, 2011.

7







Out-of-Period Adjustments



During the preparation
of our condensed consolidated financial statements for the period ended June 30, 2012, we identified several errors in our tax
provision methodologies and calculations that related to periods prior to 2012. These errors primarily impacted the deferred tax
assets and liabilities balances and the taxes payable/receivable balances. The Company assessed the impact of these errors on its
prior interim and annual consolidated financial statements and concluded that these errors were not material to any recently issued
consolidated financial statements.



As a result, we corrected
these errors in our condensed consolidated financial statements during the preparation of our second quarter 2012 Form 10Q by adjusting
the December 31, 2011 balances as follows:



|                                                            |  | December 31, 2011 |        
|----------------------------------------------------------- |  | ----------------- | -------
|                                                            |  | As Reported       |        
|                                                            |  |                   |        
|ASSETS                                                      |  |                   |        
|Notes, loans, and other receivables, net                    |  | $                 | 68,960 
|Total assets                                                |  |                   | 343,107
|                                                            |  |                   |        
|LIABILITIES AND EQUITY                                      |  |                   |        
|Accounts payable and accrued liabilities                    |  |                   | 42,644 
|Deferred tax liability, net                                 |  |                   | 25,335 
|Total liabilities                                           |  |                   | 87,093 
|                                                            |  |                   |        
|Additional paid in capital                                  |  |                   | 246,218
|Accumulated deficit                                         |  |                   | (13,092
|                                                            |  |                   |        
|Total The Edelman Financial Group Inc. shareholders' equity |  |                   | 223,760
|Total equity                                                |  |                   | 256,014
|Total liabilities and equity                                |  |                   | 343,107



All amounts in this
report on Form 10Q affected by the revision adjustment reflect such amounts as revised.







In addition, as a result
of the process discussed above, we identified a component of our adjustment that relates to the provision for income taxes for
the year ended December 31, 2011 amounting to $368,000. The Company concluded that this amount was not material to the financial
statements for the year ended December 31, 2011.   This adjustment resulted from a discrete event that occurred in the
fourth quarter of 2011 and will be corrected through an adjustment to that quarter.  Since the Condensed Consolidated Statements
of Income included in this Form 10Q are for the three and six months ended June 30, 2011, this adjustment is not reflected herein.



Management’s Estimates



The preparation of
the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of consolidated assets and liabilities and the disclosure of contingent
assets and liabilities at the dates of the consolidated financial statements and the amounts of revenue and expenses during the
reporting periods. The most significant estimates used by the Company relate to contingencies, the valuation of financial instruments,
owned, at fair value, goodwill, collectability of receivables, and stock-based compensation awards. Actual results could differ
from those estimates.



Fair Values of Financial Instruments



The fair values of
cash and cash equivalents, restricted cash, receivables from customers, deposits with clearing organizations, other assets and
prepaid expenses, and accounts payable and accrued liabilities approximate cost due to the short period of time to maturity. Financial
instruments, owned, at fair value are carried at their fair values. The carrying amount of our borrowings approximates fair value
because the interest rate is variable and, accordingly, approximates current market rates.



Receivables from Customers and Notes, Loans, and Other Receivables



Receivables from customers
and notes, loans, and other receivables (“receivables”) are stated at their net realizable value.  Interest
income is recognized using the effective interest method over the life of the related receivable.  If a receivable is
noninterest-bearing or carries an unreasonable rate of interest and is not due within one year, the Company will impute interest
at an appropriate market rate for comparable instruments and record a corresponding discount.



Interest on interest-bearing
notes receivable is calculated using the interest method specified by the note agreement. Origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the contractual
life of the note receivable.



We offer transition
pay, principally in the form of upfront notes receivable (“broker notes”), to financial advisors and certain key revenue
producers as part of our Company’s overall growth strategy.  These broker notes are generally forgiven by a charge
to “Employee compensation and benefits” over a one to six year period if the individual satisfies certain conditions,
usually based on continued employment and certain performance standards.  If the individual leaves before the term of
the broker note expires or fails to meet certain performance standards, the individual is required to repay the balance.  In
determining the allowance for doubtful accounts from former employees, management considers the facts and circumstances surrounding
each receivable, including the amount of the unforgiven balance, the reasons for the terminated employment relationship, and the
former employee’s overall financial position.



8







Management monitors
receivables for any collectability issues.  The Company does not typically require collateral.  Receivables
are considered past due when payment is not received in accordance with the contractual terms on the invoice or agreement and
are generally 90 days past due.  The accrual of interest on receivables is discontinued when, in management’s
opinion, the borrower may be unable to meet payments as they become due.  When the interest accrual is discontinued,
all uncollected accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are
received in excess of the remaining past-due principal balance.  Receivables are returned to accrual status when payments
are brought current and, in management’s judgment, the receivable will continue to pay as agreed.  An allowance
for doubtful accounts is established based on reviews of individual customer accounts, recent loss experience, current economic
conditions, and other pertinent factors.  Accounts deemed uncollectible are charged to the allowance.



New Authoritative Accounting Guidance



ASU No. 2012-02, Testing Indefinite-Lived
Intangible Assets for Impairment (Topic 350) – Intangibles – Goodwill and Other, ASU 2012-02 permits entities
to perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50 percent) that
an indefinite-lived intangible asset is impaired. Based on the results of the qualitative assessment, if the entity determines
that it is more likely than not that the asset is impaired it would then perform the impairment test; otherwise, no further impairment
test would be required. The amended guidance is effective for annual and interim indefinite-lived intangible asset impairment
tests performed for fiscal periods beginning after September 15, 2012. All entities have the option to early adopt the amended
guidance. We did not adopt this new guidance in 2012, since we had already completed our annual impairment testing under the prior
guidance. We do not expect our adoption of this new guidance to have an impact on our financial position or results of operations.



| | 2. | ACQUISITIONS AND DISPOSITIONS
| | -- | -----------------------------



Acquisitions



On January 1, 2010,
the Company completed the acquisition of a 51% interest in IFS, a wealth management firm based in Huntington Beach, California
for consideration of $1.1 million, $750,000 of which was payable at acquisition with the remainder, subject to adjustment based
on gross revenue of IFS during the three months ended June 30, 2011, and was paid in the amount of $355,000 in July 2011. 
The remeasurement calculation was based on revenue of IFS for the measurement period, which is the three months ended June 30,
2011.



On December 31, 2010,
the Company acquired a 48.7% capital interest and 50.1% profits interest in GFS BD and a 50.1% capital and profits interest in
GFS IA, wealth management firms, pursuant to the terms of a Purchase Agreement dated as of November 26, 2010, among the Company
and the prior owners of Global.  The acquisition was conducted in an arm’s length transaction to expand the Company’s
high net worth business.



The initial consideration
for the Global purchase was $18.0 million, of which $15.0 million was paid in cash and $3.0 million was paid in shares of TEFG
common stock, with a fair value on acquisition date of $2.4 million, including a discount for a twelve month lock-up period on
the stock issued.  The initial consideration is subject to upward adjustment by a maximum amount of $4.5 million based
on Global achieving adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) in 2011 and/or
2012 in excess of $5.0 million, and further upward adjustment based on the compounded annual growth rate (“CAGR”) of
Global’s EBITDA achieved in 2012, 2013, and 2014, for a maximum of $9.6 million if the top tier thresholds are achieved.  The
earnout consideration, based on EBITDA, was earned in 2011 for the maximum amount of $4.5 million, which was paid during March
2012, of which $3.0 million was paid in cash and $1.5 million was paid in the Company’s stock. The fair value of the remaining
future consideration based on the CAGR of Global’s EBITDA is $3.9 million at June 30, 2012, and is recorded as a liability
in the Company’s Condensed Consolidated Balance Sheets.  Payments, if any, on the estimated remaining earnout are
due in 2013 and 2014. The total fair value of consideration was $25.3 million, which exceeded the fair value of the net assets
acquired.

9









|Consideration paid:                                   |  |   |        
|----------------------------------------------------- |  | - | -------
|Cash consideration                                    |  | $ | 15,000 
|Equity consideration                                  |  |   | 2,399  
|Earnout and CAGR future consideration                 |  |   | 7,928  
|Total consideration paid                              |  | $ | 25,327 
|                                                      |  |   |        
|Recognized assets and liabilities:                    |  |   |        
|Cash and cash equivalents                             |  | $ | 844    
|Receivables from customers, net                       |  |   | 1,017  
|Deposits with clearing organizations                  |  |   | 1,000  
|Furniture, equipment, and leasehold improvements, net |  |   | 347    
|Other intangible assets, net                          |  |   | 32,331 
|Accounts payable and accrued liabilities              |  |   | (1,788 
|Total identifiable net assets                         |  | $ | 33,751 
|                                                      |  |   |        
|Goodwill                                              |  | $ | 10,812 
|                                                      |  |   |        
|Noncontrolling interest                               |  | $ | (19,236





The valuation techniques
used to measure the fair value of the noncontrolling interest included the income and market-guideline public company approaches. 
Discounts for lack of control and marketability were applied to determine fair value.



In addition to the
net assets acquired, an indemnification asset was recognized as of December 31, 2010 for the indemnification of TEFG for uncertain
tax liability payments that resulted from tax years before 2010. An asset in the amount of $282,000 was recorded, in the same amount
of the corresponding uncertain tax liability recorded by Global as of December 31, 2010, and is included in “Notes, loans,
and other receivables, net.” The estimated uncertain tax position liability was subsequently reduced to $76,000 during the
second quarter of 2012, along with the offsetting indemnification asset.



Goodwill, including
$1.4 million for assembled workforce, represents the value expected from the synergies and economies of scale created from
combining Global’s broker-dealer and advisory businesses with our full-service firm.   All of the goodwill associated
with the Global acquisition is expected to be deductible for tax purposes.   The Global acquisition was accounted
for using the acquisition method and, accordingly, the financial information of Global has been included in the Company’s
condensed consolidated financial statements since December 31, 2010.



Dispositions



During the second
quarter of 2011, management made the decision to sell its interest in the professional sports agencies. The sale of Select
Sports Group, Ltd. (“SSG”) was completed on June 15, 2012, with a net gain on sale of $13,000, which is included
in “Loss from discontinued operations, net of income taxes” on the Condensed Consolidated Statements of Income.
As consideration for the sale of SSG, the terms of the Equity Purchase Agreement provide that the Company will receive 12.5%
of consolidated cash receipts of SSG for each of the calendar years beginning on or after January 1, 2014 and ending on or
before December 31, 2021 up to a maximum of $300,000 per year. The fair value of this note receivable is $1.2 million as of
the date of the sale, and is included in “Notes, loans, and other receivables, net” on the Condensed Consolidated
Balance Sheets as of June 30, 2012. 10 Sports Group L.P. (“10 Sports”) was not part of the sale of SSG, but was
closed during the second quarter of 2012 and deconsolidated with a loss of $993,000, which is included in “Loss from
discontinued operations, net of income taxes” on the Condensed Consolidated Statements of Income. The results of
operations for SSG and 10 Sports have been included in “Loss from discontinued operations, net of income taxes”
on the Condensed Consolidated Statements of Income for all periods presented.



10







Due to the dispositions that have occurred between December 31, 2009 and the second quarter of 2012, the
need for corporate lease space has become less; therefore, management entered into an agreement with the building lease management
company of the corporate office in Houston, Texas to terminate a portion of the corporate lease space with no termination fees.
Management determined the portion of the deferred rent balance that related to the lease space that was terminated on one floor
of the building and recognized a gain on the deferred rent credit for the lease termination in the amount of $563,000 for the three
and six months ended June 30, 2012. In addition, management wrote off the leasehold improvements that related to the terminated
lease space and sold the furniture that was in the leased area for $50,000, with a net loss on fixed assets of $1.0 million for
the three and six months ended June 30, 2012. The gain on the deferred rent credit is included in “Other income” and
the net loss on fixed assets is included in “Other general and administrative” expenses on the Condensed Consolidated
Statements of Income.



| | 3. | FINANCIAL INSTRUMENTS, OWNED, AT FAIR VALUE
| | -- | -------------------------------------------



The following table
sets forth by level within the fair value hierarchy financial instruments, owned, at fair value as of June 30, 2012:





|                                    |  | Level 1        |       |  | Level 2 |   |     | Level 3 |  |   | Total  | 
|----------------------------------- |  | -------------- | ----- |  | ------- | - | --- | ------- |  | - | ------ | 
|                                    |  | (in thousands) |      
|Investments at fair value:          |  |                |       |  |         |   |     |         |  |   |        | 
|Corporate stocks and options        |  | $              | 3,390 |  |         | $ | -   |         |  | $ | 1,695  | 
|Corporate bonds                     |  |                | -     |  |         |   | 262 |         |  |   | -      | 
|Limited partnerships-consolidated   |  |                |       |  |         |   |     |         |  |   |        | 
|management companies                |  |                | -     |  |         |   | -   |         |  |   | 1,376  | 
|Limited partnerships-other          |  |                | -     |  |         |   | -   |         |  |   | 21,258 | 
|Warrants                            |  |                | -     |  |         |   | 8   |         |  |   | -      | 
|Total financial instruments, owned, |  |                |       |  |         |   |     |         |  |   |        | 
|at fair value                       |  | $              | 3,390 |  |         | $ | 270 |         |  | $ | 24,329 | 





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





| | Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;                             
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |         |                                                                                                                                                                       
| | Level 2 | Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;
| |         |                                                                                                                                                                       
| | Level 3 | Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.                                                    



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



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

11







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.



Level 3 investments
consist of investments in limited partnerships, stocks, options, and warrants. The Company is restricted from exiting their investments
in limited partnerships-consolidated management companies (“private investment limited partnerships”) prior to dissolution
of the partnership; however, limited partners can sell their interest in the private investment limited partnerships to qualified
investors. The Company does not intend to exit the private investment limited partnerships until dissolution. The Company expects
to receive its interests in the private investment limited partnerships over the remaining one to ten year life of the private
investment limited partnerships. There were no unfunded commitments in the private investment limited partnerships as of June 30,
2012. In accordance with FASB ASC Topic 323, Investments – Equity Method and Joint Ventures, direct
investments in limited partnerships are accounted for using the equity method which approximates fair value. Proprietary investments
in limited partnerships held by the Company’s broker-dealer subsidiary are accounted for at fair value. Investments in limited
partnerships – other principally consists of investments in PTC Houston Management, L.P. (“PTC”).



The consolidated management
companies’ investments in limited partnerships principally consist of ownership in the following private investment partnerships:  Corporate
Opportunities Fund, L.P., Corporate Opportunities Fund (Institutional), L.P., Sanders Opportunity Fund, L.P., Sanders Opportunity
Fund (Institutional), 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., SMH Private Equity Group I, L.P., SMH Private
Equity Group II, L.P., and SMH Zilliant, LLC.   Carried interest is included within these investment values that
are recorded at net asset value, which approximates fair value. Carried interest is recognized based on the fair value of the carried
interest after all capital has been returned to the investors, and is subject to clawback provisions within the limited partnership
agreements. Additional amounts not included within net asset value are amounts held in escrow that have not been received by the
consolidated management companies of the limited partnerships in the amount of $252,000 as of June 30, 2012. Amounts held in escrow
upon the sale of an investment are recognized as an investment gain upon receipt.



12







The following table
sets forth a summary of changes in the fair value of the Company’s Level 3 financial instruments, owned for the six months
ended June 30, 2012:





|                             |  | Limited Partnerships |       |   |              |   |        |          |  |   |            |   |  |       |      
|---------------------------- |  | -------------------- | ----- | - | ------------ | - | ------ | -------- |  | - | ---------- | - |  | ----- | -----
|                             |  | Consolidated         |       |   | Limited      |   |        |          |  |   |            |   |  |       |      
|                             |  | Management           |       |   | Partnerships |   |        |          |  |   | Stocks and |   |  |       |      
|                             |  | Companies            |       |   | Other        |   |        | Warrants |  |   | Options    |   |  | Total |      
|                             |  | (in thousands)       |      
|                             |  |                      |       |   |              |   |        |          |  |   |            |   |  |       |      
|Balance, beginning of period |  | $                    | 1,037 |   |              | $ | 21,618 |          |  | $ | 301        |   |  | $     | 197  
|Unrealized gains (losses)    |  |                      | 361   |   |              |   | 1,097  |          |  |   | (235       | ) |  |       | (36  
|Realized gains               |  |                      | -     |   |              |   | -      |          |  |   | 213        |   |  |       | -    
|Purchases                    |  |                      | -     |   |              |   | -      |          |  |   | -          |   |  |       | 1,105
|Sales                        |  |                      | -     |   |              |   | -      |          |  |   | (279       | ) |  |       | 279  
|Distributions                |  |                      | (22   | ) |              |   | (1,307 | )        |  |   | -          |   |  |       | -    
|Transfers                    |  |                      | -     |   |              |   | (150   | )        |  |   | -          |   |  |       | 150  
|Balance, end of period       |  | $                    | 1,376 |   |              | $ | 21,258 |          |  | $ | -          |   |  | $     | 1,695



The change in unrealized
appreciation related to financial instruments, owned at June 30, 2012, was $1.4 million.



The following table
sets forth a summary of changes in the fair value of the Company’s Level 3 financial instruments, owned for the six months
ended June 30, 2011:





|                             |  | Limited Partnerships |       |   |              |   |        |          |  |   |            |   |  |      |     |  |       |  
|---------------------------- |  | -------------------- | ----- | - | ------------ | - | ------ | -------- |  | - | ---------- | - |  | ---- | --- |  | ----- | -
|                             |  | Consolidated         |       |   | Limited      |   |        |          |  |   |            |   |  |      |     |  |       |  
|                             |  | Management           |       |   | Partnerships |   |        |          |  |   | Stocks and |   |  |      |     |  |       |  
|                             |  | Companies            |       |   | Other        |   |        | Warrants |  |   | Options    |   |  | Bond |     |  | Total |  
|                             |  | (in thousands)       |      
|                             |  |                      |       |   |              |   |        |          |  |   |            |   |  |      |     |  |       |  
|Balance, beginning of period |  | $                    | 4,459 |   |              | $ | 19,686 |          |  | $ | 11         |   |  | $    | 142 |  |       | $
|Unrealized gains (losses)    |  |                      | 2,541 |   |              |   | 6,478  |          |  |   | (7         | ) |  |      | 562 |  |       |  
|Realized loss                |  |                      | -     |   |              |   | -      |          |  |   | -          |   |  |      | -   |  |       |  
|Purchases                    |  |                      | -     |   |              |   | (1,200 | )        |  |   | -          |   |  |      | -   |  |       |  
|Sales                        |  |                      | -     |   |              |   | -      |          |  |   | -          |   |  |      | -   |  |       |  
|Distributions                |  |                      | (964  | ) |              |   | (3,724 | )        |  |   | -          |   |  |      | -   |  |       |  
|Transfers                    |  |                      | -     |   |              |   | -      |          |  |   | (4         | ) |  |      | 4   |  |       |  
|Balance, end of period       |  | $                    | 6,036 |   |              | $ | 21,240 |          |  | $ | -          |   |  | $    | 708 |  |       | $



Transfers between
levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which
generally coincides with the Company’s quarterly valuation process. There were no significant transfers into or out of Level
3 of the fair value hierarchy during the six months ended June 30, 2012 and 2011.





13











Unrealized gains (losses)
for Level 3 financial instruments, owned are a component of “Principal transactions” and “Equity in income of
limited partnerships” in the Condensed Consolidated Statements of Income as follows:



|                          |  | Three Months Ended |                |   | Three Months Ended |  
|------------------------- |  | ------------------ | -------------- | - | ------------------ | -
|                          |  | June 30, 2012      |                |   | June 30, 2011      |  
|                          |  |                    |                |   | Equity in Income   |  
|                          |  | Principal          |                |   | of Limited         |  
|                          |  | Transactions       |                |   | Partnerships       |  
|                          |  |                    | (in thousands) |   |                    |  
|                          |  |                    |                |   |                    |  
|Unrealized gains (losses) |  | $                  | (28            | ) |                    | $



|                          |  | Six Months Ended |                |  | Six Months Ended |  
|------------------------- |  | ---------------- | -------------- |  | ---------------- | -
|                          |  | June 30, 2012    |                |  | June 30, 2011    |  
|                          |  |                  |                |  | Equity in Income |  
|                          |  | Principal        |                |  | of Limited       |  
|                          |  | Transactions     |                |  | Partnerships     |  
|                          |  |                  | (in thousands) |  |                  |  
|                          |  |                  |                |  |                  |  
|Unrealized gains (losses) |  | $                | 500            |  |                  | $



The following table sets forth the significant unobservable
inputs of the Level 3 fair value instruments as of June 30, 2012:





|                                                             |                   |                      | Fair Value at June 30, 2012 |                      | Valuation
Technique(s)                        |                                               | Unobservable Input                 |                | Range (Weighted Average)   
|------------------------------------------------------------ | ----------------- | -------------------- | --------------------------- | -------------------- | --------------------------------------------- | --------------------------------------------- | ---------------------------------- | -------------- | ---------------------------
|                                                             |                   |                      | (in thousands)              |                      |                                               |                                               |                                    |                |                            
|                                                             |                   |                      |                             |                      |                                               |                                               |                                    |                |                            
|Limited partnerships - consolidated management companies     | $           1,376 |                      | Net asset value             |                      | Per share value of net assets and liabilities | (a)                                           | Not applicable                    
|                                                             |                   |                      |                             |                      |                                               |                                               |                                   
|Limited partnerships other - private investment partnerships | $           3,567 |                      | Net asset value             |                      | Per share value of net assets and liabilities | (a)                                           | Not applicable                    
|                                                             |                   |                      |                             |                      |                                               |                                               |                                   
|Limited partnerships other                                   |                   | $         17,691     |                             | Discounted cash flow |                                               | Hurdle rate for income distributions          |                                    | 8.0%          
|                                                             |                   |                      |                             |                      |                                               |                                               | Discount for lack of marketability | (b)            | 12.5%                      
|                                                             |                   |                      |                             |                      |                                               |                                               | Control premium                    | (b)            | 12.5%                      
|                                                             |                   |                      |                             |                      |                                               |                                               |                                    |                |                            
|                                                             |                   |                      |                             |                      | Unsolicited firm offers                       |                                               | Offer price                        |                | $
    11,779     - $ 16,711
|                                                             |                   |                      |                             |                      |                                               |                                               |                                    |                |                            
|Stocks and options (c)                                       |                   | $         
    1,695 |                             | Net asset value      |                                               | Per share value of net assets and liabilities | (a)                                | Not applicable
|                                                             |                   |                      |                             |                      |                                               |                                               |                                    |                |                            
|                                                             |                   |                      |                             |                      | Unsolicited firm offer                        |                                               | Offer price                        |                | $                   199    
|                                                             |                   |                      |                             |                      |                                               |                                               |                                    |                |                            
|                                                             |                   |                      |                             |                      | Recent round of financing                     |                                               | Offer price                        |                | $                1,005     





|(a) | Represents net asset value per share that approximates fair value of an investment in a limited partnership, including fair value of carried interest in the limited partnership.                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Represents amounts used when the reporting entity has determined that market participants would take into account these premiums and discounts when pricing investments.                                                 
|(c) | The options held have similar qualities to an investment in carried interest of a private investment partnership; therefore, management estimates fair value of the option at net asset value of the limited partnership.





14







The significant unobservable inputs used
in the fair value of the reporting entity’s per share net asset value and discounted cash flow inputs, such as discounts
and hurdle rates. Significant increases (decreases) in net asset values would result in a significantly higher (lower) fair value
measurement. Significant increases (decreases) in hurdle rates and discounts would result in a significantly lower (higher) fair
value measurement.



At June 30, 2012,
the Company had $796,000 and $900,000 in other investments that are valued using the equity method and cost basis, respectively.
The fair value of these investments has not been estimated since there are no events or changes in circumstances that may have
a significant adverse effect on the fair value, and it is not practicable to estimate the fair value of these investments.





| | 4. | RECEIVABLES FROM CUSTOMERS AND NOTES, LOANS, AND OTHER RECEIVABLES, NET
| | -- | -----------------------------------------------------------------------





|                                                 |  | June 30,       |        |   | December 31, |  
|------------------------------------------------ |  | -------------- | ------ | - | ------------ | -
|                                                 |  | 2012           |        |   | 2011         |  
|                                                 |  | (in thousands) |       
|                                                 |  |                |        |   |              |  
|Receivables from customers                       |  | $              | 31,666 |   |              | $
|Allowances for bad debts                         |  |                | (282   | ) |              |  
|Receivables from customers, net                  |  | $              | 31,384 |   |              | $
|                                                 |  |                |        |   |              |  
|Notes Receivable:                                |  |                |        |   |              |  
|Nonaffiliates                                    |  | $              | 8,419  |   |              | $
|Employees and executives                         |  |                | 1,338  |   |              |  
|Other affiliates                                 |  |                | 350    |   |              |  
|Receivables from affiliated limited partnerships |  |                | 549    |   |              |  
|Receivables from other affiliates                |  |                | 1,598  |   |              |  
|Receivable from Endowment Advisers               |  |                | 52,204 |   |              |  
|Current tax receivable                           |  |                | -      |   |              |  
|Allowances for bad debts                         |  |                | (1,079 | ) |              |  
|Notes, loans, and other receivables, net         |  | $              | 63,379 |   |              | $



In August 2008, we
entered into agreements with Salient Partners, L.P. (“Salient Partners”) and Endowment Advisers, L.P. (“Endowment
Advisers”) to sell or retire the Company’s interests in such entities for a total of $95.3 million. The terms of the
agreements provide that Endowment Advisers will pay the Company annually the greater of $12.0 million in priority to other distributions,
or 23.15% of total distributions, until the Company has received a total of $86.0 million plus 6% per annum. The Company received
an additional $9.3 million note for its 50% interest in Salient Partners, payable with interest over a five-year period. In May
2009, the principal amount of the Salient Partners note was reduced by $2.25 million to reflect an offset of certain liabilities
that the Company agreed to pay under the agreements. In connection with such transactions, the Company recorded receivables in
the amount of $76.7 million representing the net present value of the expected receipts using a weighted average imputed interest
rate of 11.8%. The Salient note is included in “Notes Receivable: Nonaffiliates” in the above table.



An additional note
that is also included in “Notes Receivable: Nonaffiliates” is the note received as consideration for the sale of SSG
on June 15, 2012, in which the Company will receive 12.5% of consolidated cash receipts of SSG for each of the calendar years beginning
on or after January 1, 2014 and ending on or before December 31, 2021 up to a maximum of $300,000 per year. The fair value of this
note receivable is $1.2 million as of the date of the sale. From the closing date of the note up until the fourth anniversary,
the purchaser has the right, but not the obligation, to make a one-time payment, in the amount of $1.5 million, minus any payments
that have been made on the note, in complete satisfaction of the purchase price of SSG.

15







Notes receivable from
nonaffiliates that consist of uncollateralized promissory notes from unrelated companies bear interest at various rates up to 12%
and are payable on demand.



Notes receivable from
employees and executives primarily consist of noninterest bearing loans provided to certain executives and employees of the Company
to induce the employees and executives to affiliate with the Company.  The notes typically are forgiven over a one to
six year period and have tiered maturities from 2012 through 2016 and are structured to be incentives for the employees to remain
at the Company.  As each maturity date is reached, a portion of the notes is forgiven if the employee remains employed
by the Company.  If employment is terminated, the remaining unforgiven balance is due and payable by the former employee.  Such
forgiveness is recorded as “Employee compensation and benefits” on the Condensed Consolidated Statements of Income.



CCH issued two
uncollateralized notes during 2010, in connection with the disposition of the Concept division of SMH.  Discounts
on the amounts funded in 2011 were recorded in the amount of $255,000 for each quarter, during the first and second quarters
of 2011, based on the difference in market interest rates at the date of issuance and the stated rate of interest on the
notes. The discounts were recorded as a loss on contribution of the Concept division’s assets, as part of the
disposition and are included in “Loss on discontinued operations, net of income taxes” in the Condensed
Consolidated Statements of Income.  The two notes issued in 2010 were exchanged for one note that bears a fixed
interest rate at the applicable federal rate for instruments with a term of over ten years provided under Section 1274(d) of
the Internal Revenue Code of 1986 on the closing date of December 31, 2011, in the amount of $5.9 million. Principal on the
note is due monthly, beginning January 1, 2014, and interest is due monthly beginning on February 1, 2012. A discount on the
note received in 2011 was recorded in the amount of $970,000 on December 31, 2011. The discount on the note issued in 2011
will be amortized monthly over the life of the loan. The amortization of the discount is recorded in “Interest
and dividends” on the Condensed Consolidated Statements of Income during the six months ended June 30, 2012 in the
amount of $45,000.



At December 31, 2010,
notes receivable from other affiliates primarily consisted of an $8.0 million uncollateralized note issued by Madison Williams
Capital LLC (“Madison”) to the Company in connection with the spin-off of the capital markets division to Madison
in 2009. This note bore interest at 6% and the principal balance was due in full on the maturity date of December 9, 2019.
During the second quarter of 2011, management determined that the note would be sold to a third-party for less than the face value
of the note. Management evaluated a transaction to sell or contribute the note to a partnership and the interest accrued with
a balance of $8.8 million as of June 30, 2011, for half of the principal and accrued interest balances. The note and accrued interest
were reclassified to held-for-sale as of June 30, 2011, and recorded at the lower of cost or fair value less cost to sell. A $4.4
million loss on the note receivable held-for-sale was recorded during the three months ended June 30, 2011. The note receivable
was also placed on nonaccrual status as of June 30, 2011, due to the deterioration of the credit quality of the receivable during
the second quarter of 2011.



In
mid-August 2011, the proposed transaction to sell the Madison receivable terminated. Madison was recapitalized, including
receiving additional funding from a third-party investor in the form of debt to increase the viability of
Madison. At the time of the recapitalization, the Madison note was forgiven in a troubled debt restructuring since the loan
could not be sold in the initial proposed transaction from the second quarter. In exchange for forgiveness of the Madison
note, the Company received newly-issued preferred Series D membership units in Madison Williams and Company, LLC, the parent
of Madison, with a value of $4.0 million. The remaining balance of the Madison note and accrued interest classified as
held-for-sale as of June 30, 2011, in the amount of $4.4 million, was written off and the Series D units were recorded at
$4.0 million, resulting in a loss on troubled debt restructuring of $375,000, included within “Equity in income (loss)
of limited partnerships” in the third quarter of 2011.

16







On
September 27, 2011, Madison notified the Financial Industry Regulatory Authority (“FINRA”) and the investors in
Madison of a net capital violation. Based on Madison’s balance sheet as of September 30, 2011, there were not
sufficient assets available to pay their debts and other working capital needs. Therefore, the Company wrote off the value of
the Series D preferred units received from the troubled debt restructuring of $4.0 million, within “Equity in income
(loss) from limited partnerships” during the three months ended September 30, 2011. In addition to the write-down of
the Series D units to $0, the Company also wrote down $2.5 million of Series A units that represent the remaining interests
in Madison from the spin-off of Madison in 2009 during the three months ended September 30, 2011. A related party receivable
from Madison to SMH for a sublease and other expenses that were billed to Madison was also written off in the third quarter
of 2011, in the amount of $1.4 million within “Other general and administrative” expenses on the Condensed
Consolidated Statements of Income. Madison filed a voluntary petition under Chapter 7 of the Bankruptcy Code on December 29,
2011, and ceased operations. There were no remaining receivables or other expected losses, investments in, or funding
commitments to Madison as of December 31, 2011.



The Company has one
note receivable on nonaccrual status in the amount of $233,000 as of June 30, 2012, and is fully reserved due to nonpayment on
the note.   Accounts over 90 days past due are monitored at least quarterly by management.





| | 5. | GOODWILL AND OTHER INTANGIBLE ASSETS, NET
| | -- | -----------------------------------------



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







|                                               |  | Six
    Months Ended June 30, 2012 (in thousands) |       
|---------------------------------------------- |  | ------------------------------------------------- | ------
|                                               |  |                                                   |       
|                                               |  |                                                   |       
|                                               |  |                                                   |       
|                                               |  |                                                   |       
|                                               |  | Goodwill                                          |       
|Balance, beginning of period                   |  | $84,676                                           |       
|Internally developed software-internal
    use |  |                                                   | -     
|Amortization of other intangible
    assets    |  |                                                   | -     
|Balance, end of period                         |  | $                                                 | 84,676





Other intangible assets
consist primarily of customer relationships and trade names acquired in business combinations. Other intangible assets acquired
that have indefinite lives (trade names) are not amortized but are tested for impairment annually, as of April 30, or if certain
circumstances indicate a possible impairment may exist. Certain other intangible assets acquired (customer relationships and covenants
not to compete) are amortized on a straight line basis over their estimated useful lives and tested for impairment if certain circumstances
indicate an impairment may exist. Other intangible assets are tested for impairment by comparing expected future cash flows to
the carrying amount of the intangible assets.



As of June 30, 2012,
the remaining weighted-average amortization period was 2.16 years for covenants not to compete, 9.78 years for customer relationships,
and 2.50 years for internally developed software included in the table above.



The following
table shows estimated future amortization expense related to these intangible assets :





|For the Years Ending December 31,
|---------------------------------
|(in thousands)                   
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 







17







| | 6. | BORROWINGS
| | -- | ----------



In May 2009,
the Company borrowed $25.0 million under a credit agreement with a bank.  The maturity date was October 31, 2012,
and included interest at the greater of the prime rate or 5%.  Principal of $1.8 million plus interest was
payable quarterly.  The credit agreement was amended and restated on December 31, 2010 to extend the maturity
date to December 31, 2014, with the same loan commitment of $25.0 million and the same interest rate of the greater of prime
rate or 5%.  Principal of $1.5 million plus interest is due quarterly.  Interest expense on the credit
agreement was $208,000 and $275,000 for the three months ended June 30, 2012 and 2011, and $434,000 and $579,000 for the six
 months ended June 30, 2012 and 2011, and is included in “Interest” expense on the Condensed Consolidated
Statements of Income. The additional proceeds of the loan of $11.9 million were used to complete the Global acquisition at
December 31, 2010.  The credit agreement is secured by substantially all of the assets of the Company, other than
the assets of SMH and GFS BD.  The credit agreement contains various covenants customary for transactions of this
type including the requirement that the Company maintain minimum financial ratios, net worth, liquid assets, and cash
balances, as well as minimum assets under management, and meet monthly, quarterly, and annual reporting
requirements.  The credit agreement also contains covenants that restrict the ability of the Company, among other
things, to incur indebtedness, pay dividends or distributions, make capital expenditures and other restricted payments,
including investments, and consummate asset sales.  At June 30, 2012, the Company was in compliance with all
covenants.



| | 7. | INCOME TAXES
| | -- | ------------



The difference between
the effective tax rate reflected in the income tax provision from continuing operations attributable to the Company and the statutory
federal rate for the three and six months ended June 30, 2012 and 2011 is attributable to state income tax expense offset by the
favorable impact of noncontrolling interest. The Company reported effective tax rates from continuing operations of 28.4% and 27.9%
for the three months ended June 20, 2012 and 2011, and 26.2% and 27.6% for the six months ended June 30, 2012 and 2011.



The Company reported
income tax benefit attributable to discontinued operations of $655,000 and $287,000 for the three months ended June 30, 2012 and
2011, and $688,000 and $766,000 for the six months ended June 30, 2012 and 2011.



| | 8. | ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
| | -- | ---------------------------------------------



The Company has three
types of stock-based compensation awards: (1) stock options, (2) restricted common stock and (3) restricted stock units.



The following table
sets forth pertinent information regarding stock option transactions for the six months ended June 30, 2012:





|                                                                |  |               |           |  | Weighted           |  
|--------------------------------------------------------------- |  | ------------- | --------- |  | ------------------ | -
|                                                                |  | Number        |           |  | Average            |  
|                                                                |  | of
    Shares |           |  | Exercise
    Price |  
|                                                                |  |               |           |  |                    |  
|Outstanding at January
    1, 2012                              |  |               | 235,000   |  |                    | $
|Granted                                                         |  |               | -         |  |                    |  
|Exercised                                                       |  |               | -         |  |                    |  
|Cancelled/Forfeited                                             |  |               | -         |  |                    |  
|Outstanding at June 30, 2012                                    |  |               | 235,000   |  |                    |  
|                                                                |  |               |           |  |                    |  
|Options exercisable at June
    30, 2012                        |  |               | 235,000   |  |                    |  
|                                                                |  |               |           |  |                    |  
|Incentive
    award shares available for grant at June 30, 2012 |  |               | 2,194,339 |  |                    | $





18







There were no options
exercised during the six months ended June 30, 2012. During the six months ended June 30, 2011, 30,000 options were exercised for
which the Company received proceeds of $170,000. The Company did not recognize pretax compensation expense during the six months
ended June 30, 2012 and 2011, related to stock options as all of the options are fully vested. There was no unrecognized stock-based
compensation expense related to stock options at June 30, 2012 and 2011.



The following table
summarizes certain information related to restricted common stock grants at June 30, 2012:









|                                        |  |           |         |  | Weighted   |  
|--------------------------------------- |  | --------- | ------- |  | ---------- | -
|                                        |  |           |         |  | Average    |  
|                                        |  | Number of |         |  | Grant Date |  
|                                        |  | Shares    |         |  | Fair Value |  
|                                        |  |           |         |  |            |  
|Nonvested at January 1, 2012            |  |           | 110,054 |  |            | $
|                                        |  |           |         |  |            |  
|Nonvested at June 30, 2012              |  |           | 51,670  |  |            |  
|                                        |  |           |         |  |            |  
|For the six months ended June 30, 2012: |  |           |         |  |            |  
|                                        |  |           |         |  |            |  
|Granted                                 |  |           | -       |  |            |  
|                                        |  |           |         |  |            |  
|Vested                                  |  |           | 58,384  |  |            |  
|                                        |  |           |         |  |            |  
|Forfeited                               |  |           | -       |  |            |  



The Company recognized
pretax compensation expense of $241,000 and $415,000 during the six months ended June 30, 2012 and 2011, related to its restricted
common stock plan. At June 30, 2012, total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted
stock was $396,000 and is expected to be recognized over the next 3.50 years.



In 2010, 2011, and
2012, new executive and key manager incentive stock unit sub plans were adopted under the Long-term Incentive Plan, effective January
1, 2010, 2011, and 2012, respectively. In calculating the value of an award, the value of each restricted stock unit is equal to
the closing price of a share of stock on the date of grant. A participant in the plan has no rights as
a stockholder of the Company, no dividend rights and no voting rights with respect to the restricted stock units. No adjustments
will be made to any outstanding awards for cash dividends paid on shares during the performance period in which they are earned.
Awards vest and become non-forfeitable over a three-year period.



Upon the vesting date,
or payment date of the restricted stock unit awards, at the Company’s option they can be paid in either (a) a lump sum cash
payment equal in the aggregate to the fair market value of a share on the payment date multiplied by the number of such restricted
stock units that become non-forfeitable upon that payment date or (b) by the Company delivering to the participant a number of
common shares equal to the number of restricted stock units that become non-forfeitable upon that payment date.

19







The following table
summarizes certain information related to restricted stock unit grants at June 30, 2012:











|                                          |  |           |         |  | Weighted   |  
|----------------------------------------- |  | --------- | ------- |  | ---------- | -
|                                          |  |           |         |  | Average    |  
|                                          |  | Number of |         |  | Grant Date |  
|                                          |  | Units     |         |  | Fair Value |  
|                                          |  |           |         |  |            |  
|Nonvested at January 1, 2012              |  |           | 322,992 |  |            | $
|                                          |  |           |         |  |            |  
|Nonvested at June 30, 2012                |  |           | 599,177 |  |            |  
|                                          |  |           |         |  |            |  
|For the six months ended June 30, 2012:   |  |           |         |  |            |  
|                                          |  |           |         |  |            |  
|Granted (Restricted stock units)          |  |           | 514,914 |  |            |  
|                                          |  |           |         |  |            |  
|Vested (Units converted to common shares) |  |           | 236,416 |  |            |  
|                                          |  |           |         |  |            |  
|Forfeited                                 |  |           | 2,313   |  |            |  



We determined that
the service inception date precedes the grant date for restricted stock units granted as part of the incentive stock unit plans,
and, as such, the compensation expense associated with these awards is accrued over the one-year period prior to the grant date.
The Company recognized pretax compensation expense of $1.9 million and $1.4 million during the six months ended June 30, 2012 and
2011, respectively, related to its restricted stock unit plans. At June 30, 2012, total unrecognized compensation cost, related
to nonvested restricted stock units was $4.3 million for the 2010, 2011, and 2012 executive and manager incentive stock unit plans,
and is expected to be recognized over the next 3.75 years.



Substantially all
employees are eligible to participate in The Edelman Financial Group Inc. 401(k) defined contribution plan. The Company made contributions
of $563,000 and $534,000 to this plan during the six months ended June 30, 2012 and 2011.



| | 9. | 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.
On May 27, 2010, the Company’s board of directors approved the repurchase of up to another 1,000,000 shares of the Company’s
common stock, subject to a maximum expenditure of $2.5 million under the credit agreement. 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. In April 2011, a waiver from the bank was obtained to approve the repurchase of $2.5 million of treasury
shares. The Company repurchased 8,153 shares of its common stock at an average price of $6.57 per share during the six months ended
June 30, 2012, related to this program.



TEFG shares
previously held by SMH in a market maker account that were previously included in “Financial instruments, owned, at fair
value” on the Condensed Consolidated Balance Sheets were distributed by SMH to TEFG during the second quarter of 2012.
On May 1, 2012, SMH distributed 316,202 shares of TEFG common stock to TEFG with a fair value
of $2.7 million. Further, on June 7, 2012, SMH distributed 207,046 shares of TEFG common stock to TEFG with a fair value of $1.8 million. As a result, on a consolidated basis, the shares were reclassified from
“Financial instruments, owned, at fair value” to “Treasury stock, at cost” on the Condensed
Consolidated Balance Sheets as of June 30, 2012.





20







| | 10. | EARNINGS (LOSS) PER COMMON SHARE
| | --- | --------------------------------



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







|                                                       |  | Three Months Ended June 30,              |        |   | Six Months Ended June 30, |  
|------------------------------------------------------ |  | ---------------------------------------- | ------ | - | ------------------------- | -
|                                                       |  | 2012                                     |        |   | 2011                      |  
|                                                       |  | (in thousands, except per share amounts) |       
|                                                       |  |                                          |       
|Income from continuing operations, net of income taxes |  | $                                        | 1,792  |   |                           | $
|Loss from discontinued operations, net of income taxes |  |                                          | (1,580 | ) |                           |  
|Net income attributable to the Company                 |  | $                                        | 212    |   |                           | $
|Basic earnings (loss) per common share:                |  |                                          |        |   |                           |  
|Continuing operations                                  |  | $                                        | 0.06   |   |                           | $
|Discontinued operations                                |  |                                          | (0.05  | ) |                           |  
|Net earnings                                           |  | $                                        | 0.01   |   |                           | $
|Diluted earnings (loss) per common share:              |  |                                          |        |   |                           |  
|Continuing operations                                  |  | $                                        | 0.06   |   |                           | $
|Discontinued operations                                |  |                                          | (0.05  | ) |                           |  
|Net earnings                                           |  | $                                        | 0.01   |   |                           | $
|Weighted average number of common shares outstanding:  |  |                                          |        |   |                           |  
|Basic                                                  |  |                                          | 29,331 |   |                           |  
|Potential dilutive effect of stock-based awards        |  |                                          | 600    |   |                           |  
|Diluted                                                |  |                                          | 29,931 |   |                           |  





Outstanding
stock options of 215,000 and 285,000 for the three months ended June 30, 2012 and 2011, and 235,000 and 305,000 for the six
months ended June 30, 2012 and 2011, have not been included in diluted earnings per common share because to do
so would have been anti-dilutive for the periods presented. Warrants outstanding at June 30, 2011 to purchase shares of
common stock in an aggregate value of up to $7.5 million at an exercise price of $5.75 per common share have been included in
diluted earnings per common share for the three and six months ended June 30, 2011. These warrants were repurchased by the
Company for $8.0 million on March 1, 2012; therefore, they are included in diluted earnings per common share for the six
months ended June 30, 2012, but not in diluted earnings per common share for the three months ended June 30, 2012.



Participating restricted
common stock is included in the basic and diluted shares. Restricted stock units are nonparticipating; therefore, they are only
included in the diluted weighted average number of common shares for the three and six months ended June 30, 2012 and 2011.



| | 11. | COMMITMENTS AND CONTINGENCIES
| | --- | -----------------------------



The Company has issued
letters of credit in the amounts of $250,000, $245,000, $230,000, and $130,000 to the owners of four of the offices that we lease
to secure payment of our lease obligations for those facilities.



The Company
and its subsidiaries have obligations under operating leases that expire through 2021 with initial noncancelable terms in excess
of one year. During the second quarter of 2012, the landlord of the corporate office, entered into the Twelfth Amendment to the
Lease Agreement (“Lease Agreement”) with the Company to terminate a portion of the corporate office space that currently
expires on January 31, 2018. The terms of the Lease Agreement provide that the Company guarantee the future rental payments, not
to exceed $298,000, should the tenant of the leased space that was previously subject to a sub-lease with TEFG defaults on their
lease obligation to the TEFG corporate landlord. The guaranty amount is subject to monthly reductions during the term of the guaranty
on a dollar-for-dollar basis, by the aggregate amount of base rent and any additional rent paid by the tenant pursuant to the
tenant’s lease agreement. The guaranty entered into by the Company and the corporate office landlord expires on the earlier
of July 31, 2013 or the date that all guaranteed obligations are paid in full.





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 Condensed Consolidated Balance
Sheets 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.



21







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 a defendant in lawsuits and arbitration proceedings involving claims for damages, relating to our activities as a broker-dealer
or investment adviser, as an employer, and as a result of other business activities. We are also involved in regulatory investigations
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 may incur substantial costs in investigating and defending claims and regulatory matters.



The Company is a
defendant in certain litigation incidental to its securities and underwriting business. The Company accounts for litigation losses
in accordance with FASB ASC No. 450, Contingencies. Under ASC No. 450, loss contingency provisions
are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum
loss contingency amount is recorded. These estimates are often initially developed substantially earlier than the ultimate loss
is known, and the estimates are refined each accounting period as additional information becomes known. Accordingly, the Company
is often initially unable to develop a best estimate of loss, and therefore the minimum amount, which could be zero, is recorded.
As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best
estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower
amount when events result in an expectation of a more favorable outcome than previously expected. A contingent liability of $637,000
has been recorded at June 30, 2012 for these proceedings and exposures. These reserves represent management’s best estimate
of probable loss, as defined by FASB ASC Topic No. 450, Contingencies.



In July
2008, the Dallas regional office of the FINRA conducted a routine examination of the Company’s broker-dealer activities.  The
Company received an examination report on December 31, 2008, which identified a number of deficiencies in the Company’s operations.  
On October 5, 2010, the Company received a “Wells letter” notification from FINRA, which stated that the staff of FINRA
had made a preliminary determination to recommend that disciplinary action be brought against the Company and two former employees
based on alleged violations of certain federal securities laws and FINRA rules based on certain of the deficiencies identified
in the 2008 examination. The Company and the former employees have executed an Acceptance Waiver and Consent (“AWC”)
with the Dallas regional office of FINRA to resolve the matter. While the AWC must be formally accepted by FINRA, we believe that
it will and that it will not have any material impact on the Company.



In May 2009, SMH guaranteed
the debt of TEFG in connection with TEFG entering into a credit facility. In December 2010, SMH became aware that under the SEC
net capital rules, SMH was required to treat any debt guaranteed by SMH as indebtedness of SMH for purposes of calculating SMH’s
net capital and that any assets of SMH pledged as collateral were ineligible assets for purposes of determining SMH’s net
capital. After consulting with FINRA and the SEC, SMH concluded that it had violated the net capital rules from May 10, 2009 to
December 2, 2010. As required by applicable FINRA and SEC rules, SMH reported this violation to the SEC and FINRA in accordance
with FINRA Rule 17a-11 on December 2, 2010. This matter will be resolved by the AWC referred to in the preceding paragraph.



The FINRA regional
office in Chicago conducted a review of the option activities at SMH’s Cleveland/Beachwood office that resulted in various
customer complaints being filed pertaining to certain registered representatives option strategies. This matter will be resolved
by the AWC referred to above.



On December
28, 2011, Hite Hedge Asset Management, LLC (“Hite”) and two of its hedge funds filed a FINRA arbitration
proceeding against SMH and one of its registered representatives (FINRA Case No. 11-04815), alleging that SMH’s actions
in charging approximately $940,000 in fees to locate “hard to borrow” securities against Hite’s
accounts constituted a breach of SMH’s agreement not to charge location fees, common law fraud, false and deceptive
trade practice under Chapter 93A of the Massachusetts General Laws, a breach of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder, a breach of SMH’s and its representative’s responsibility for good faith and
fair dealing and obligation to observe high standards of commercial honor and just and equitable principals of trade under
FINRA conduct rules, and a violation of sales practice obligations under FINRA and SEC rules with respect to short
sale transactions. Hite requests reimbursement of the fees, punitive damages, and legal fees and costs. While SMH believes it
has meritorious defenses to the allegations and intends to vigorously defend against the allegations, the ultimate resolution
of the matter, which is expected to occur in the fourth quarter of 2012, could result in a loss in excess of the amount
accrued.



22







On June 14,
2012, a former customer filed a FINRA arbitration proceeding against SMH, with respect to her brokerage accounts with SMH.
The customer alleges losses in her accounts as a result of over concentration in risky investments, use of risky options
strategy, negligence, and breach of fiduciary duty by her brokers and failure to supervise by SMH. The customer alleges
losses of at least $2.0 million. SMH is unable to reasonably estimate the amount of any loss with respect to this matter.
While SMH believes it has meritorious defenses to the allegations and intends to vigorously defend against the allegations,
the ultimate resolution of the matter, which is expected to occur within one year, could result in a loss of $2.0 million in
excess of the amount accrued.



Merger Litigation



On April 20, 2012,
a putative class action lawsuit was filed in the District Court in Harris County, Texas purportedly on behalf of a class of shareholders
of the Company or alternatively, derivatively on behalf of the Company, docketed as Lax v. Ball et al., Case No. 2012-23137
(the “Lax Complaint”). The Lax Complaint names as defendants the Company, all of the Company’s directors and
Parent and Merger Sub. The Lax Complaint seeks certification of a class of the Company’s shareholders and alleges, inter
alia, that the members of the Board breached fiduciary duties owed to the Company’s shareholders by failing to engage in
a fair sales process in connection with the proposed transaction, by agreeing to an inadequate price, and by agreeing to certain
deal protection provisions, among other claims and that Lee Equity Partners, LLC (“Lee Equity”), Parent, and Merger
Sub aided and abetted the alleged breach of fiduciary duties. The Lax Complaint seeks, among other relief, an injunction prohibiting
the transactions contemplated by the merger agreement, rescission in the event such transactions are consummated, compensatory
damages, and attorneys’ fees and costs of the action. On June 6, 2012, a first amended complaint was filed. The amended
complaint seeks the same relief and asserts the same claims as the Lax Complaint.



On May 22, 2012,
a shareholder derivative action lawsuit was filed in the District Court in Harris County, Texas and on May 23, 2012, a first amended
complaint to the shareholder derivative action lawsuit was filed purportedly on behalf of a class of shareholders of the Company,
docketed as Shams v. Ball et al., Case No. 2012-29785 (the “Shams Complaint” and together with the Lax Complaint,
as amended, the “Complaints”). The Shams Complaint names as defendants the Company, the Company’s directors,
Lee Equity, Parent, and Merger Sub. The Shams Complaint alleges, inter alia, that the members of the Board breached fiduciary
duties owed to the Company’s shareholders by engaging in self-dealing and obtaining financial benefits for themselves that
were not shared by other shareholders, by agreeing to an inadequate price, and by agreeing to certain deal protection provisions,
among other claims and that Lee Equity, Parent, and Merger Sub aided and abetted the alleged breach of fiduciary duties. The Shams
Complaint seeks, among other relief, an injunction prohibiting the transactions contemplated by the merger agreement, rescission
in the event such transactions are consummated and attorneys’ fees and costs of the action.



The Company believes
the Complaints are without merit and that it has valid defenses to all claims raised by the plaintiffs in the Complaints. The Company
intends to defend itself vigorously against these actions.



| | 12. | BUSINESS SEGMENT INFORMATION
| | --- | ----------------------------



The Company has two
operating segments, Mass Affluent and Other Wealth Management 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.





23







The Mass Affluent
segment consists of the Edelman entities that provide investment advisory services, wealth and investment management, and financial
planning services to individual clients. The Mass Affluent segment also includes certain intercompany revenues and related expenses
for various Edelman investment products used by clients of subsidiaries within the Other Wealth Management segment. The revenue
and related commission expense is recorded within the Mass Affluent segment and eliminated within the Other Wealth Management segment.
The Mass Affluent segment primarily earns advisory fee revenue based on the amount of client assets under management.



The Other Wealth Management
segment includes the branch offices of SMH and GFS BD—full service broker-dealers serving the investment management needs
of high net worth investors in North America—as well as affiliated wealth managers and registered investment advisors (RIAs)
wholly or partially owned by the Company. The Other Wealth Management businesses earn commission revenue from the sale of equity,
fixed income, mutual fund, and annuity products and advisory fees based on the amount of client assets under management. In addition,
performance fees may be earned for exceeding performance benchmarks for the investment portfolios in the limited partnerships that
we manage. The Other Wealth Management segment also earns revenue from net interest on customers’ margin loan and credit
account balances and sales credits from the distribution of syndicate products.



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 the Corporate
Support and Other segment.



The following summarizes
certain financial information of each reportable business segment for the three and six months ended June 30, 2012 and 2011, respectively.
TEFG does not analyze asset information in all business segments.



24









|                                                                     |  | Three Months Ended |        |   | Six Months Ended |  
|-------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | -
|                                                                     |  | June 30,           |        |   | June 30,         |  
|                                                                     |  | 2012               |        |   | 2011             |  
|                                                                     |  | (in thousands)     |        |   | (in thousands)   |  
|Revenue:                                                             |  |                    |        |   |                  |  
|Mass Affluent                                                        |  | $                  | 25,983 |   |                  | $
|Other Wealth Management                                              |  |                    | 16,147 |   |                  |  
|Wealth Management Total                                              |  |                    | 42,130 |   |                  |  
|Corporate Support and Other                                          |  |                    | 3,213  |   |                  |  
|Total                                                                |  | $                  | 45,343 |   |                  | $
|Income (loss) from continuing operations before equity in
    income |  |                    |        |   |                  |  
|of limited partnerships and income taxes:                            |  |                    |        |   |                  |  
|Mass Affluent                                                        |  | $                  | 6,423  |   |                  | $
|Other Wealth Management                                              |  |                    | 5,508  |   |                  |  
|Wealth Management Total                                              |  |                    | 11,931 |   |                  |  
|Corporate Support and Other                                          |  |                    | (7,786 | ) |                  |  
|Total                                                                |  | $                  | 4,145  |   |                  | $
|Equity in income (loss) of limited partnerships:                     |  |                    |        |   |                  |  
|Mass Affluent                                                        |  | $                  | -      |   |                  | $
|Other Wealth Management                                              |  |                    | (207   | ) |                  |  
|Wealth Management Total                                              |  |                    | (207   | ) |                  |  
|Corporate Support and Other                                          |  |                    | 1,245  |   |                  |  
|Total                                                                |  | $                  | 1,038  |   |                  | $
|Income (loss) from continuing operations before income taxes:        |  |                    |        |   |                  |  
|Mass Affluent                                                        |  | $                  | 6,423  |   |                  | $
|Other Wealth Management                                              |  |                    | 5,301  |   |                  |  
|Wealth Management Total                                              |  |                    | 11,724 |   |                  |  
|Corporate Support and Other                                          |  |                    | (6,541 | ) |                  |  
|Total                                                                |  | $                  | 5,183  |   |                  | $
|Net (income) loss attributable to the noncontrolling interest:       |  |                    |        |   |                  |  
|Mass Affluent                                                        |  | $                  | (1,531 | ) |                  | $
|Other Wealth Management                                              |  |                    | (858   | ) |                  |  
|Wealth Management Total                                              |  |                    | (2,389 | ) |                  |  
|Corporate Support and Other                                          |  |                    | 470    |   |                  |  
|Total                                                                |  | $                  | (1,919 | ) |                  | $





25









| | 13. | SUPPLEMENTAL CASH FLOW INFORMATION
| | --- | ----------------------------------







|                                                       |  | Six Months Ended June 30, |       
|------------------------------------------------------ |  | ------------------------- | ------
|                                                       |  | 2012                      |       
|                                                       |  | (in thousands)            |       
|                                                       |  |                           |       
|Cash paid for income taxes, net                        |  | $                         | 935   
|Cash paid for interest                                 |  |                           | 264   
|                                                       |  |                           |       
|Noncash operating activities:                          |  |                           |       
|Notes, loans, and other receivables, net               |  |                           | 1,447 
|Financial instruments, owned, at fair value            |  |                           | (3,524
|Accounts payable and accrued liabilities               |  |                           | (2,452
|                                                       |  |                           |       
|Noncash investing activities:                          |  |                           |       
|Notes, loans, and other receivables, net               |  |                           | 1,003 
|Receivables from customers, net                        |  |                           | (769  
|Furniture, equipment, and leasehold improvements, net  |  |                           | (231  
|Other assets and prepaid expenses                      |  |                           | (13   
|Accounts payable and accrued liabilities               |  |                           | 489   
|Noncontrolling interest                                |  |                           | (1,460
|                                                       |  |                           |       
|Noncash financing activities:                          |  |                           |       
|Treasury stock                                         |  |                           | 4,529 
|Stock issued pursuant to contingent earnout agreement  |  |                           | 1,500 
|Increase (decrease) in dividends declared not yet paid |  |                           | 23    



| | 14. | RELATED PARTY TRANSACTIONS
| | --- | --------------------------



During 2001, SMH formed
PTC to secure financing for a new proton beam therapy cancer treatment center to be constructed in Houston.    SMH’s
investment in PTC was recorded at $17.7 million as of June 30, 2012.    SMH recorded an unrealized gain from
the increase in the fair value of its investment in PTC of $993,000 and $6.1 million during the three months ended June 30, 2012
and 2011. SMH recorded an unrealized gain from the increase in the fair value of its investment in PTC of $1.3 million and $6.9
million during the six months ended June 30, 2012 and 2011. In addition, PTC has distributed $1.2 million and $3.0 million in cash
to the Company during the six months ended June 30, 2012 and 2011. The unrealized gains and distributions are included in “Equity
in income of limited partnerships” on the Condensed Consolidated Statements of Income. The increase in fair value of the
investment for the three months ended June 30, 2011 is based primarily on two potential exit transactions, as well as the use of
an income and market approach in accordance with ASC 820, Fair Value Measurementas of June 30, 2011.



The Company and SMH
own controlling interests in several limited liability companies that act as the general partners in several private investment
limited partnerships. The private investment limited partnerships pay management fees to the general partners. Certain officers
of SMH serve on the boards of directors of entities in which the partnerships invest.  In addition, SMH has served, and
may in the future serve, as the placement agent advisor, offering manager, or underwriter for companies in which the partnerships
invest.  Management fees paid by the management companies of the private investment limited partnerships are included
in “Investment advisory and related services” on the Condensed Consolidated Statements of Income.
See “Note 3 – Financial Instruments, Owned, at Fair Value.” The management fees paid were $563,000 and
$698,000 for the three months ended June 30, 2012 and 2011, and $1.1 million and $1.4 million for the six months ended June 30,
2012 and 2011.



See “Note 4
– Receivables from Customers and Notes, Loans, and Other Receivables, Net” for related party notes receivable.



26







At December 31, 2011, SMH owned 563,200 shares of TEFG common stock with a market value of $3.7 million. The shares are included
in “Financial instruments, owned, at fair value” on the Condensed Consolidated Balance Sheets and valued under Level
1 of the fair value hierarchy as of December 31, 2011. As discussed in “Note 9 - Treasury Stock”, the remaining
TEFG shares owned by SMH were distributed by SMH to TEFG during the second quarter of 2012 and reclassified from “Financial
instruments, owned, at fair value” to “Treasury stock, at cost” on the Condensed Consolidated Balance Sheets as
of June 30, 2012.





| | 15. | DISCONTINUED OPERATIONS
| | --- | -----------------------



During
the first quarter of 2009, SMH closed three retail offices and another office in the second quarter of 2011.  This decision
was made due to the offices’ inability to achieve sufficient revenue to offset their costs.  The results of operations
for these offices have been reclassified as discontinued operations for all periods presented.



As of the
second quarter of 2011, The Juda Group, SSG and 10 Sports were held-for-sale, due to a plan approved by management in the second quarter to sell these businesses. In addition, a management
company of the entity was disposed in the second quarter of 2011, due to the full liquidation of the private equity funds in which
the management company managed. The results of operations for these entities have been reclassified as discontinued operations
for all periods presented, as management did not have significant continued involvement or cash flows in these entities as of June
30, 2011. All of these entities have been disposed of or sold as of June 30, 2012.



During
the fourth quarter of 2011, the Company disposed of its remaining equity interest in CCH and CCAdmin. There was no activity
related to Concept for the six months ended June 30, 2012. The 2011 results of operations for Concept have been
reclassified as discontinued operations for the three and six months ended June 30, 2011.



See “Note 2
– Acquisitions and Dispositions” regarding the sale of SSG and closure of 10 Sports in the second quarter of
2012.



A summary of selected
financial information of discontinued operations is as follows for the three and six months ended June 30, 2012 and 2011:





|                                                          |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|--------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                          |  | 2012                        |        |   | 2011                      |  
|                                                          |  | (in thousands)              |        |   | (in thousands)            |  
|Operating activities:                                     |  |                             |        |   |                           |  
|Revenue                                                   |  | $                           | 149    |   |                           | $
|Expenses                                                  |  |                             | 1,404  |   |                           |  
|Loss on sale of business                                  |  |                             | (980   | ) |                           |  
|Loss from discontinued operations
    before income taxes |  |                             | (2,235 | ) |                           |  
|Benefit for income taxes                                  |  |                             | 655    |   |                           |  
|Loss from discontinued operations, net of income taxes    |  | $                           | (1,580 | ) |                           | $



27







Major classes of assets
and liabilities of the closed offices, Concept, The Juda Group, SSG, and 10 Sports at June 30, 2012 and December 31, 2011 were
as follows:





|                                             |  | June 30,       |     |  | December 31, |  
|-------------------------------------------- |  | -------------- | --- |  | ------------ | -
|                                             |  | 2012           |     |  | 2011         |  
|                                             |  | (in thousands) |    
|                                             |  |                |    
|Cash and cash equivalents                    |  | $              | -   |  |              | $
|Receivables from customers, net              |  |                | 1   |  |              |  
|Furniture, equipment, and leaseholds, net    |  |                | -   |  |              |  
|Other assets and prepaid expenses            |  |                | 197 |  |              |  
|Total assets of discontinued operations      |  | $              | 198 |  |              | $
|Accounts payable and accrued liabilities     |  | $              | -   |  |              | $
|Total liabilities of discontinued operations |  | $              | -   |  |              | $





28











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, 2011. The Company does not undertake to publicly update or revise any forward-looking statements.



The following discussion
should be read in conjunction with the condensed consolidated financial statements and their related notes.



Overview



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



Our Mass Affluent segment
provides investment advisory services, wealth and investment management, and financial planning services to individual clients
in North America, through our subsidiary, Edelman Financial Services. It primarily earns advisory fee revenue based on the amount
of client assets under management. Additional services provided include financial planning and asset management for small or mid-size
organizations, and 401(k) benefit plan consultations for employers.



Our Other Wealth Management
segment provides investment management services to primarily high net worth individuals and institutions in North America, through
the branch offices of Sanders Morris Harris Inc. (“SMH”) and Global Financial Services, LLC (“GFS BD”) –
full service broker-dealers, as well as affiliated wealth managers and registered investment advisors (RIAs) wholly or partially
owned by the Company. The services provided include 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
wealth management products and services in specific investment styles to individuals, corporations, and institutions both through
internal marketing efforts and externally through formal sub-advisory relationships and other distribution arrangements with third
parties. The Other Wealth Management segment also includes asset management affiliates. These funds invest primarily in small to
mid-size companies, both public and private, primarily in the life sciences, energy, technology, and industrial services industries.





29







OurCorporate Support and Othersegmentincludes 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 the Corporate Support and Other segment.



The Prime Brokerage Services segment
provided trade execution, clearing, bookkeeping, reporting, custodial, securities borrowing, financing, research, and fund raising
to hedge fund clients. The Company maintained a small number of asset management accounts on behalf of individual asset managers
through this division. In 2010, these services were provided by Concept, which was largely disposed of during the fourth quarter
of 2010 and a final disposal transaction occurred on December 31, 2011; therefore, Concept is included in discontinued operations
for the six months ended June 30, 2011, and the Prime Brokerage Services segment no longer had activity as of December 31, 2011.



We are exposed to
volatility and trends in the general securities market and the economy. The end of 2010 and first quarter of 2011 showed signs
of improvement in the economy, with unemployment rates down to 8.5% in December 2011 from 9.9% in December 2010. The performance
of the U.S. equity markets showed improvement in the first and fourth quarters of 2011 with further improvement in the first and
second quarters of 2012.



Client assets have
recovered overall from the prior years’ recession, despite the lag in the economy and financial markets in the second and
third quarters of 2011. The recovery has resulted in, among other things, higher advisory fees for the first and second quarters
of 2012 for most of our business units. While many economists believe the recession ended some time during the first quarter of
fiscal 2010, there is no guarantee that conditions will not worsen again. All of these factors have had an impact on our operations.
Certain business operations were discontinued during 2011, which resulted in a decrease in client assets of $1.2 billion. The impact
of the $1.2 billion decrease was reflected in the first quarter of 2011. Client assets were as follows:





|                                                                                                                                                                                  |  | Client Assets(1)      |       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------
|                                                                                                                                                                                  |  | (dollars in millions) |       
|                                                                                                                                                                                  |  |                       |       
|December 31, 2010                                                                                                                                                                 |  |                       | 17,106
|March 31, 2011                                                                                                                                                                    |  |                       | 16,844
|June 30, 2011                                                                                                                                                                     |  |                       | 17,492
|September 30, 2011                                                                                                                                                                |  |                       | 15,773
|December 31, 2011                                                                                                                                                                 |  |                       | 16,315
|March 31, 2012                                                                                                                                                                    |  |                       | 17,712
|June 30, 2012                                                                                                                                                                     |  |                       | 17,528
|                                                                                                                                                                                  |  |                       |       
|(1)Client
assets include the gross value of assets under management directly or via outside managers and assets held in brokerage accounts
for clients by outside clearing firms. | 





Client assets decreased
by $184.0 million during the second quarter of 2012, of which $364.0 million was due to market depreciation offset by net inflows
of $180.0 million.   The Company’s 2.1% market-related decrease in client assets compares with a 2.8% decrease
in the S&P 500 and a 0.8% decrease in a 60/40 portfolio.





30











|                                   |  | Three Months Ended June 30, |       
|---------------------------------- |  | --------------------------- | ------
|                                   |  | 2012                        |       
|                                   |  | (in millions)               |       
|                                   |  |                             |       
|Client assets at April 1           |  | $                           | 17,712
|                                   |  |                             |       
|Inflows:                           |  |                             |       
|Asset inflows                      |  |                             | 1,147 
|Total asset inflows                |  |                             | 1,147 
|                                   |  |                             |       
|Outflows:                          |  |                             |       
|Asset outflows                     |  |                             | (967  
|Total asset outflows               |  |                             | (967  
|                                   |  |                             |       
|Net inflows                        |  |                             | 180   
|                                   |  |                             |       
|Market appreciation (depreciation) |  |                             | (364  
|Net change                         |  |                             | (184  
|Client assets at June 30           |  | $                           | 17,528







|                           |  | Six Months Ended June 30, |       
|-------------------------- |  | ------------------------- | ------
|                           |  | 2012                      |       
|                           |  | (in millions)             |       
|                           |  |                           |       
|Client assets at January 1 |  | $                         | 16,315
|                           |  |                           |       
|Adjustments                |  |                           | -     
|                           |  |                           |       
|Inflows:                   |  |                           |       
|Asset inflows              |  |                           | 3,007 
|Total asset inflows        |  |                           | 3,007 
|                           |  |                           |       
|Outflows:                  |  |                           |       
|Asset outflows             |  |                           | (2,633
|Total asset outflows       |  |                           | (2,633
|                           |  |                           |       
|Net inflows (outflows)     |  |                           | 374   
|                           |  |                           |       
|Market appreciation        |  |                           | 839   
|Net change                 |  |                           | 1,213 
|Client assets at June 30   |  | $                         | 17,528







Growth Strategy



Our expansion of Edelman
offices continues as planned. Four branches were added in the first quarter of 2011 in Boston, Detroit and Richmond. An additional
eight offices were opened in the Columbus, Detroit, Hartford, Los Angeles, Phoenix, and San Francisco areas during the third quarter
of 2011. Two additional offices were opened during the second quarter of 2012, bringing the total number of new Edelman offices
opened since 2009 to 32.





31







The expansion of Edelman offices in 2009
through 2012, along with the marketing efforts of the Edelman entities, has created more investor awareness of, and respect for,
the Edelman brand. In addition to Ric Edelman’s radio show and best-selling books, a new weekly television series, The
Truth About Money with Ric Edelman, airs on more than 200 public television stations across the country.



The Company plans
further growth by seeking to acquire other high-caliber practices. Initiatives are also underway to attract new broker-dealers
and advisors who we feel add to the success and profitability of the Company. The Company is also working to attract new clients
and assets to existing businesses and has implemented a significant marketing initiative for the current year.



We have instituted
cost savings in a variety of areas, including variable expense, integration of several support departments, and the use of technology
to reduce operating expenses. During the second quarter of 2012, management entered into a lease cancellation agreement with no
termination fee to reduce the corporate lease space in Houston, Texas, further reducing our overhead costs.



Business Environment



Our business is sensitive
to financial market conditions, which have been very volatile over the past few years.  Equity market indices reflected
an average increase from a year earlier with the Dow Jones Industrial Average, the S&P’s 500 Index and the NASDAQ Composite
Index up.  Despite the rally in the markets, the economic environment remains challenging with the national unemployment
rate at approximately 8.5% at December 31, 2011.  The Federal Reserve Board reduced the federal funds target rate to
0 – 0.25% on December 16, 2008, and has not yet begun increasing rates.  Most economists do not expect the federal
funds rate will increase significantly during 2012.



The disruptions and
developments in the general economy and the credit markets over the past few years have resulted in a range of actions by the U.S.
and foreign governments to attempt to bring liquidity and order to the financial markets and to prevent a long recession in the
world economy.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into
law on July 21, 2010.  The Act, among other things, established a Financial Stability Oversight Council and a Consumer
Financial Protection Bureau whose duties will include the monitoring of domestic and international financial regulatory proposals
and developments, as well as the protection of consumers.  Additional regulations will be issued to implement the Act
over the next few years, which may have an impact on our future operations.  We have reviewed the Act and presently do not
expect the legislation to have a significant impact on our operations. We are unable to determine the final impact that the Act
will have on our operations until all of the regulations have been issued.



Components of Revenue and Expenses



Revenue. Our
revenue is comprised primarily of (1) fees from asset-based advisory services, wealth management, and financial planning services,
(2) commission revenue from wealth advisory, and (3) principal transactions. We also earn interest on cash held and notes receivable,
receive dividends from the equity and fixed income securities held in our corporate capital accounts, receive sales credits from
third party placement agreements, 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. 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 second quarter of 2012, compensation and benefits represented 60.9% of total expenses and 55.3% of total
revenue, compared to 60.7% of total expenses and 56.5% of total revenue during the second quarter of 2011. The increase in compensation
and benefits as a percentage of total expenses is due to $2.1 million in non-compensation related expenses within “Other
general and administrative” during the second quarter of 2012. These costs are merger transaction costs of a potential go-private
merger transaction of the Company.





32







Floor brokerage, exchange,
and clearance fees include clearing and trade execution costs associated with the retail, prime, and institutional brokerage businesses.
The Company clears its transactions through several clearing firms, including Pershing, an affiliate of The Bank of New York Mellon,
First Clearing Corporation, T.D. Ameritrade, and J.P. Morgan Clearing Corp.



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





33









Results of Operations





Three Months Ended June 30, 2012 Compared to Three Months
Ended June 30, 2011



Edelman opened eight
new offices during the third quarter of 2011 and two additional offices were opened during the second quarter of 2012. On April
16, 2012, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Summer Holdings II, Inc.,
a Delaware corporation (“Parent”), and Summer Merger Sub, Inc., a Texas corporation and a wholly owned subsidiary of
Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving
the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by Lee Equity Partners, LLC. Pursuant to the
Merger Agreement, shareholders will be paid $8.85 per share of TEFG common stock. During the second quarter of 2012, the Company
recorded $2.1 million of merger transaction costs.



The proposed
transaction is expected to close in the third quarter of 2012. Following completion of the transaction, the Company will become
a privately held company and its stock will no longer trade on the Nasdaq Stock
Market.



Total revenue was
$45.3 million for the second quarter of 2012, compared to $42.8 million for the second quarter of 2011, primarily reflecting increases
of $2.5 million in investment advisory and related services revenue and $1.2 million in investment banking revenue. The increase
is offset by decreases of $1.1 million in commission revenue, and a decrease in interest and dividends of $787,000. Total expenses
for the second quarter of 2012 increased $1.3 million or 3.4%, to $41.2 million from $39.9 million in the same quarter of the previous
year, principally due to increases in employee compensation and benefits of $899,000, occupancy expense of $451,000, and other
general and administrative expenses of $4.5 million, offset by a $4.4 million decrease in loss on note receivable held-for-sale.
Income from continuing operations, net of income taxes, attributable to The Edelman Financial Group Inc. was $1.8 million, or $0.06
per diluted common share, for the second quarter of 2012 compared to $4.2 million, or $0.14 per diluted common share, for the second
quarter of 2011.



Revenue from investment
advisory and related services increased to $32.2 million in the second quarter of 2012 from $29.6 million in the same quarter of
2011 as a result of an increase in client assets under management or advisement. Commission revenue decreased to $3.8 million in
the second quarter of 2012 from $4.9 million for the same period in 2011 as a result of a decrease in trading volume during the
second quarter of 2012. Investment banking revenue, consisting of sales credits from our participation in syndicate transactions,
was $1.8 million in the second quarter of 2012 compared to $564,000 in the second quarter of 2011, reflecting several investment
banking transactions in which SMH participated in during the second quarter of 2012. Principal transactions revenue increased from
$3.6 million for the second quarter of 2011 to $3.8 million for the second quarter of 2012.



During the three months
ended June 30, 2012, employee compensation and benefits increased to $25.1 million from $24.2 million in the same period last year
principally due to an increase in commissions paid reflecting higher revenue on investment advisory fees. Occupancy costs increased
to $3.3 million from $2.8 million in the same period last year due to the additional Edelman offices opened throughout 2011. Other
general and administrative expenses increased to $8.6 million during the second quarter of 2012 from $4.0 million in the second
quarter of 2011 due to the Company’s merger transaction costs and costs incurred related to the opening of the additional
Edelman offices.



Our effective tax
rate from continuing operations increased to 28.4% for the three months ended June 30, 2012, compared to 27.9% for the three months
ended June 30, 2011. The effective tax rate is less than the federal statutory income tax rate primarily as a result of certain
state income tax adjustments.





34









Results
by Segment



Mass Affluent





|                                                      |  | Three Months Ended June 30, |       
|----------------------------------------------------- |  | --------------------------- | ------
|                                                      |  | 2012                        |       
|                                                      |  | (in thousands)              |       
|                                                      |  |                             |       
|Revenue                                               |  | $                           | 25,983
|                                                      |  |                             |       
|Income from continuing operations before income taxes |  | $                           | 6,423 





Revenue from the Mass
Affluent segment increased to $26.0 million from $23.0 million and income from continuing operations before income taxes increased
to $6.4 million from $6.0 million. Investment advisory and related services fees increased to $25.7 million from $22.0 million,
reflecting a $1.1 billion increase in assets under management or advisement, largely due to the opening of twelve new offices in
2011 and market appreciation. Total expenses increased to $19.6 million from $17.0 million due to higher employee compensation
costs of $1.4 million, an increase of $777,000 in marketing costs and occupancy costs of $317,000 associated with the Edelman expansion,
and the increase in existing client revenue.



Other Wealth Management





|                                                      |  | Three Months Ended June 30, |       
|----------------------------------------------------- |  | --------------------------- | ------
|                                                      |  | 2012                        |       
|                                                      |  | (in thousands)              |       
|                                                      |  |                             |       
|Revenue                                               |  | $                           | 16,147
|                                                      |  |                             |       
|Income from continuing operations before income taxes |  | $                           | 5,301 





Revenue from Other
Wealth Management decreased to $16.1 million in the second quarter of 2012 from $18.0 million in the second quarter of 2011 and
income from continuing operations decreased to $5.3 million from $6.3 million. Principal transactions revenue decreased to $2.9
million in the second quarter of 2012 from $3.3 in the same period in the prior year. Investment advisory and related services
fees decreased to $6.2 million from $7.0 million reflecting a decrease in the size of our client portfolios. Commissions revenue
also decreased from $4.3 million in the second quarter of 2011 to $3.4 million in the second quarter of 2012, due to a decrease
in mutual fund and trading transactions. These decreases were offset by an increase in sales credits from our participation in
large syndicate transactions from $564,000 in the second quarter of 2011 to $953,000 in the second quarter of 2012 and an increase
in other income by $1.4 million primarily due a gain recognized on the deferred rent credit related to the termination of the corporate
lease space during the second quarter of 2012. Total expenses decreased to $10.6 million from $11.9 million due to lower employee
compensation costs of $871,000 associated with the decrease in total revenue. Equity in income (loss) of limited partnerships decreased
to a loss of $207,000 from income of $180,000, due to a decrease in the net unrealized gain from investments in private investment
limited partnerships.





35







Corporate Support
and Other





|                                                    |  | Three Months Ended June 30, |       
|--------------------------------------------------- |  | --------------------------- | ------
|                                                    |  | 2012                        |       
|                                                    |  | (in thousands)              |       
|                                                    |  |                             |       
|Revenue                                             |  | $                           | 3,213 
|                                                    |  |                             |       
|Loss from continuing operations before income taxes |  | $                           | (6,541





Revenue from Corporate
Support and Other increased to $3.2 million from $1.8 million, and the loss from continuing operations before income taxes increased
to a loss of $6.5 million from a loss of $3.2 million. Revenue from principal transactions, which consists of changes in the values
of our investment portfolios, increased to $885,000 from $244,000, due to an increase in the value of certain investments held
by the Company. Total expenses increased to $11.1 million in the three months ended June 30, 2012 from $10.9 million in the three
months ended June 30, 2011, due to an increase in employee compensation costs of $380,000, offset by a decrease in other general
and administrative expenses of $564,000. The increase in employee compensation cost is due to expenses related to the merger transaction.
The decrease in other general and administrative expenses is due a loss recorded on a note receivable classified as held-for-sale
in the second quarter of 2011, offset by merger transaction costs. Equity in income of limited partnerships decreased $4.7 million
due to a reduction in the increase of the fair value of the investment in PTC.



Six Months Ended June 30, 2012 Compared
to Six Months Ended June 30, 2011



Total revenue was
$87.8 million for the six months ended June 30, 2012 compared to $84.4 million for the same period of 2011, primarily reflecting
increases of $6.2 million in investment advisory and related services revenue and $787,000 in principal transaction revenue. The
increase is offset by decreases of $3.2 million in commission revenue and a decrease in interest and dividends revenue of $1.4
million. Total expenses for the first six months of 2012 increased $5.7 million or 7.5%, to $81.4 million from $75.8 million in
the same period of the previous year principally due to increases in other general and administrative expenses of $7.6 million,
employee compensation and benefits of $1.7 million, and occupancy expense of $1.2 million. The increase in expenses was partially
offset by decreases in loss on note receivable held-for-sale of $4.4 million, floor, brokerage, exchange and clearance fees of
$230,000, and a decrease in interest expense of $271,000. Income from continuing operations, net of income taxes, attributable
to The Edelman Financial Group Inc. was $1.9 million, or $0.06 per diluted common share, for the first six months of 2012 compared
to $7.6 million, or $0.25 per diluted common share, for the first six months of 2011.



Revenue from investment
advisory and related services increased to $62.9 million in the first six months of 2012 from $56.8 million in the same period
of 2011 as a result of an increase in client assets under management or advisement. Commission revenue decreased to $7.8 million
in the first six months of 2012 from $11.0 million for the same period in 2011 as a result of a decrease in trading volume. Investment
banking revenue, consisting of sales credits from our participation in syndicate transactions, was $2.3 million in the first six
months of 2012 compared to $1.7 million in the first six months of 2011, reflecting a large syndicate transaction, in which SMH
participated during 2012. Principal transactions revenue increased from $7.0 million for the six months ended June 30, 2011 to
$7.8 million for the six months ended June 30, 2012 as the result of the disposal of Concept. Other income increased from $3.0
million during the first six months of 2011 to $3.5 million during the same period in 2012.



During the six months
ended June 30, 2012, employee compensation and benefits increased to $50.6 million from $48.9 million in the same period last year
principally due to the additional employees added due to expansion within the Mass Affluent segment. During the six months ended
June 30, 2012, floor brokerage, exchange, and clearance fees decreased to $293,000 from $523,000 in the same period last year due
to a decline in trading volume. Occupancy costs increased to $6.7 million in the first six months of 2012 from $5.5 million in
the same period last year due to the opening of additional Edelman offices.





36







In 2011 the Company
recorded a loss on note receivable held-for-sale in the amount of $4.4 million, related to the disposal of Madison Williams Capital
LLC. Other general and administrative expenses increased to $15.5 million during the first six months of 2012 from $8.2 million
in the same period of 2011 primarily due to the Company’s merger transaction costs.



Our
effective tax rate from continuing operations decreased to 26.2% for the six months ended June 30 2012, compared to 27.6% for
the six months ended June 30, 2011. The effective tax rate is less than the federal statutory income tax rate primarily as a
result of state income taxes and certain nondeductible expenses.





37









Results
by Segment



Mass Affluent





|                                                      |  | Six Months Ended June 30, |       
|----------------------------------------------------- |  | ------------------------- | ------
|                                                      |  | 2012                      |       
|                                                      |  | (in thousands)            |       
|                                                      |  |                           |       
|Revenue                                               |  | $                         | 50,953
|                                                      |  |                           |       
|Income from continuing operations before income taxes |  | $                         | 12,516





Revenue from the Mass
Affluent segment increased to $51.0 million from $44.3 million and income from continuing operations before income taxes increased
to $12.5 million from $10.8 million. Investment advisory and related services fees increased to $50.5 million from $42.3 million,
reflecting an increase in assets under management or advisement due to the opening of twelve new offices in 2011 and two new offices
in 2012. Total expenses increased to $38.4 million from $33.4 million due to higher employee compensation costs of $2.8 million,
occupancy costs of $567,000 associated with the Edelman expansion, and an increase in other general and administrative expenses
of $1.4 million, including an increase in advertising expenses of $1.4 million.



Other Wealth Management





|                                                      |  | Six Months Ended June 30, |       
|----------------------------------------------------- |  | ------------------------- | ------
|                                                      |  | 2012                      |       
|                                                      |  | (in thousands)            |       
|                                                      |  |                           |       
|Revenue                                               |  | $                         | 31,978
|                                                      |  |                           |       
|Income from continuing operations before income taxes |  | $                         | 11,008





Revenue from Other
Wealth Management decreased to $32.0 million in the six months ended June 30, 2012 from $38.5 million in the six months ended June
30, 2011, and income from continuing operations before income taxes decreased to $11.0 million from $15.7 million. Principal transactions
revenue decreased to $6.5 million in the first six months of 2012 from $6.7 million in the same period in the prior year. Investment
advisory and related services fees decreased to $12.2 million from $14.4 million reflecting a decrease in assets under management
or advisement, primarily due to a reduction in the revenue from independent representatives. Commissions revenue also decreased
to $7.0 million in the first six months of 2012 from $9.9 million in the first six months of 2011, due to a decrease in mutual
fund transactions and trading transactions. Total expenses decreased to $21.2 million from $25.6 million due to lower employee
compensation costs of $2.8 million associated with the decrease in commission payments as a result of the decrease in total revenue.
Other expenses that decreased were occupancy costs which decreased by $366,000, communication and data processing costs which decreased
by $168,000, and other general and administrative costs which decreased by $750,000. Equity in income of limited partnerships decreased
to $276,000 from $2.8 million. The decrease in equity in income of limited partnerships is attributable to a decrease in the net
unrealized gain from investments in limited partnerships.





38









Corporate Support and Other





|                                                    |  | Six Months Ended June 30, |        
|--------------------------------------------------- |  | ------------------------- | -------
|                                                    |  | 2012                      |        
|                                                    |  | (in thousands)            |        
|                                                    |  |                           |        
|Revenue                                             |  | $                         | 4,868  
|                                                    |  |                           |        
|Loss from continuing operations before income taxes |  | $                         | (15,189





Revenue from
Corporate Support and Other increased to $4.9 million from $1.7 million, and the loss from continuing operations before
income taxes increased to $15.2 million from $8.3 million. Revenue from principal transactions, which consists of changes in
the values of our investment portfolios, increased to $1.3 million from $262,000, due to an increase in the value of
securities held by the Company. Other income increased by $1.4 million primarily due a gain recognized on the deferred rent
credit related to the termination of the corporate lease space during the second quarter of 2012. Total expenses increased to
$21.7 million from $16.8 million due to an increase in employee compensation and benefits of $1.9 million, an increase in
occupancy costs of $966,000, and an increase in other general and administrative costs of $2.4 million. The increase in other
general and administrative expense is attributable to increases of $946,000 in fees associated with a service agreement
between Edelman and SMH for commission transactions, $1.0 million write off of leasehold improvements and $4.6 million in
merger transaction costs in 2012.  These increases are offset by the 2011 $4.4 million loss on note receivable
held-for-sale related to the disposal of Madison Williams Capital LLC. Equity in income of limited partnerships decreased to
$1.7 million during the first six months of 2012 from $6.7 million during the six months ended June 30, 2011 primarily due to
a decrease in fees received from PTC and a corresponding reduction in the increase in its fair value.





Liquidity and Capital Resources



The Company’s
funding needs consist of (1) funds necessary to maintain current operations, (2) capital expenditure requirements, including funds
needed for the Edelman expansion, (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 June 30, 2012, we had $35.8 million in cash and cash equivalents.



Receivables turnover,
calculated as annualized revenue divided by average accounts receivable, was 5.7 and 6.2 as of June 30, 2012 and December 31, 2011.
The allowance for doubtful accounts as a percentage of receivables was 1.4% at June 30, 2012 and 1.6% December 31, 2011.





For the six months
ended June 30, 2012, net cash provided by operations was $12.7 million versus $14.1 million during the same period in 2011. Financial
instruments, owned, at fair value, increased by $2.4 million during the first six months of 2012. The Company’s portfolio
consists of long equity positions as of June 30, 2012. Our asset managers generally seek to generate profits based on trading spreads,
rather than through speculation on the direction of the market and employ hedging strategies designed to insulate the net value
of our portfolios from fluctuations in the general level of interest rates and equity price variances. We finance a portion of
our positions through our clearing broker-dealers.



Not readily marketable
securities owned, primarily Level 3 investments in limited partnerships, were $26.0 million at June 30, 2012 and $26.6 million
at December 31, 2011.



Capital expenditures
for the first six months of 2012 were $1.9 million, mainly for the purchase of leasehold improvements, furniture, computer equipment
and software necessary for the Edelman expansion.





39







SMH and GFS BD are
subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC rule 15c3-1), which requires the maintenance of
minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15
to 1 (and the rule of the “applicable” exchange also provides that equity capital may not be withdrawn or cash dividends
paid if the resulting net capital ratio would exceed 10 to 1). At June 30, 2012, SMH had net capital of $4.4 million as defined,
which was $4.1 million in excess of its required net capital of $294,000. GFS BD had net capital of $1.8 million as defined, which
was $1.7 million in excess of its required net capital of $100,000.



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



Critical Accounting
Policies/Estimates



Investment –
Level 2 and Level 3 Financial Instruments.  Level 3 investments consist of investments in private companies, limited partnerships,
equities, options and warrants.  Investments in private investment limited partnerships are carried at fair value and
based on quarterly valuations prepared by the general partner of such partnerships, and reviewed by their valuation committee.  Investments
in other limited partnerships are valued at fair value based on either internal valuation models or management’s estimate
of amounts that could be realized under current market conditions assuming an orderly liquidation over a reasonable period of time.



Investments in Level
2 investments and Level 3 investments, including marketable financial instruments with insufficient trading volumes and restricted
financial instruments are carried at their estimated fair value by the Company in the absence of readily ascertainable market values.  These
estimated values may differ significantly from the values that would have been used had a readily available market existed for
these investments.  Such differences could be material to the financial statements.   At June 30, 2012,
the investment portfolio included investments totaling $26.0 million and $26.6 million as of June 30, 2012 and December 31, 2011, whose
values had been estimated by the Company.



The Company estimates
the fair value of its Level 3 investments using various valuation techniques.  The transaction price is typically its
best estimate of fair value at inception.  When evidence supports a change in the carrying value, adjustments are made
to reflect fair values at each measurement date.  Ongoing reviews by the Company are based on an assessment of each underlying
investment, incorporating valuations that consider one or more different valuation techniques (e.g., the market approach, the income
approach, or the cost approach) for which sufficient and reliable information is available.  Within Level 3, the use
of the market approach generally considers comparable transactions and trading multiples of comparable companies, while the use
of the income approach generally consists of the net present value of the estimated future cash flows, adjusted as appropriate
for liquidity, credit, market and/or other risk factors.



Level 2 investments
include 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.



The selection of appropriate
valuation techniques may be affected by the availability of relevant inputs as well as the relative reliability of the inputs.  In
some cases, one valuation technique may provide the best indication of fair value while in other circumstances, multiple valuation
techniques may be appropriate.  The results of the application of the various techniques may not be equally representative
of fair value, due to factors such as assumptions made in the valuation.  In some situations, the Company may determine
it appropriate to evaluate and weigh the results, as appropriate, to develop a range of possible values, with the fair value based
on the Company’s assessment of the most representative point within the range.





40







The inputs used by
the Company in estimating the value of Level 3 investments include estimated capital expenditures, estimated operating costs, and
risk-adjusted discount factors.  Other relevant information considered by the Company may include the following factors:
original transaction price, recent public or private transactions in the same or similar assets, restrictions on transfer, including
the Company’s right, if any, to require registration by the issuer of the offering and sale of securities held by the Company
under the securities laws; significant recent events affecting the issuer, including significant changes in financial condition
and pending mergers and acquisitions; and all other reasonable and customary factors affecting value.  The fair value
measurement of Level 3 investments does not include transaction costs that may have been capitalized as part of the investment’s
cost basis.  Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting
fair value and therefore the Company’s results of operations.



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



Factors considered
in determining fair value include, among other things, the Company’s market capitalization as determined by quoted market
prices for its common stock and the value of the Company’s reporting units.  The Company uses several methods to
value its reporting units, including discounted cash flows, comparisons with valuations of public companies in the same industry,
and multiples of assets under management.  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.



For the April 30,
2012 goodwill and other intangible assets analysis, the cash flow estimates reflect 6% revenue growth and 3% expense growth for
all entities, other than the Edelman and Global entities.  Edelman reflected higher growth rates of 10% based on the
Edelman expansion plan to continue expansion by opening new offices throughout the country.  The discount rates utilized
in the April 30, 2012 analysis ranged from 11% to 16%.  The Company also calculates estimated fair values of the reporting
units utilizing multiples of earnings, book value, and 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.  A sensitivity analysis was also performed, which did not impact management’s conclusion that there
is no indication of goodwill impairment.



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





41







Remaining amounts
of goodwill at June 30, 2012 were as follows:  Edelman - $67.2 million, Kissinger - $2.4 million, Dickenson - $2.1 million,
SMH Colorado - $1.5 million, Leonetti - $225,000, IFS - $409,000, and Global - $10.8 million.  Future goodwill impairment
tests may result in a future charge to earnings.



Other intangible assets
consist primarily of customer relationships and trade names acquired in business combinations.  Other intangible assets
acquired that have indefinite lives (trade names) are not amortized but are tested for impairment annually, or if certain circumstances
indicate a possible impairment may exist.  Certain other intangible assets acquired (customer relationships and covenants
not to compete) are amortized on a straight line basis over their estimated useful lives and tested for impairment if certain circumstances
indicate an impairment may exist.  Other intangible assets are tested for impairment by comparing expected future cash
flows to the carrying amount of the intangible assets.  Indefinite lived intangible assets were tested for impairment
as of April 30, 2012.  Based on the analysis performed as of April 30, 2012, there was no indication of impairment of
other intangible assets.



Variable Interest
Entities.We adopted accounting changes described in ASC 810, Consolidation as of January 1, 2010, which require
that the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s
economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that
could potentially be significant to the entity consolidate the variable interest entity. The changes to ASC 810, effective
as of January 1, 2010, eliminate the quantitative approach previously applied to assessing whether to consolidate a variable interest
entity and require ongoing reassessments for consolidation. Management reevaluates the Company’s variable interest entities
for consolidation or deconsolidation on a quarterly basis. Based on management’s review of variable interest entities at
June 30, 2012, the only changes to the entities that are consolidated from the previous quarter end relates to the deconsolidation
of a consolidated private investment limited partnership management company as of April 1, 2012 as well as the deconsolidation
of the professional sports agencies in the second quarter of 2012.





42







Item 3. Quantitative and Qualitative
Disclosures About Market Risk



Market Risk



During the six months
ended June 30, 2012, 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, 2011.



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



At June 30, 2012,
financial instruments, owned, at fair value by the Company was $28.0 million, including $3.7 million in marketable securities,
$22.6 million representing the Company’s investments in limited partnerships, and $1.7 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, also known as 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, has 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.





43







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.



Information regarding
certain of these matters is set forth in our Annual Report on Form 10-K for the year ended December 31, 2011, and in Note 11 to
the interim Condensed Consolidated Financial Statements.



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.



Merger Litigation



On April 20, 2012,
a putative class action lawsuit was filed in the District Court in Harris County, Texas purportedly on behalf of a class of shareholders
of the Company or alternatively, derivatively on behalf of the Company, docketed as Lax v. Ball et al., Case No. 2012-23137
(the “Lax Complaint”). The Lax Complaint names as defendants the Company, all of the Company’s directors and
Parent and Merger Sub. The Lax Complaint seeks certification of a class of the Company’s shareholders and alleges, inter
alia, that the members of the Board breached fiduciary duties owed to the Company’s shareholders by failing to engage in
a fair sales process in connection with the proposed transaction, by agreeing to an inadequate price, and by agreeing to certain
deal protection provisions, among other claims and that Lee Equity Partners, LLC (“Lee Equity”), Parent, and Merger
Sub aided and abetted the alleged breach of fiduciary duties. The Lax Complaint seeks, among other relief, an injunction prohibiting
the transactions contemplated by the merger agreement, rescission in the event such transactions are consummated, compensatory
damages, and attorneys’ fees and costs of the action. On June 6, 2012, a first amended complaint was filed. The amended
complaint seeks the same relief and asserts the same claims as the Lax Complaint.



On May 22, 2012, a
shareholder derivative action lawsuit was filed in the District Court in Harris County, Texas and on May 23, 2012, a first amended
complaint to the shareholder derivative action lawsuit was filed purportedly on behalf of a class of shareholders of the Company,
docketed as Shams v. Ball et al., Case No. 2012-29785 (the “Shams Complaint” and together with the Lax Complaint,
as amended, the “Complaints”). The Shams Complaint names as defendants the Company, the Company’s directors,
Lee Equity, Parent, and Merger Sub. The Shams Complaint alleges, inter alia, that the members of the Board breached fiduciary duties
owed to the Company’s shareholders by engaging in self-dealing and obtaining financial benefits for themselves that were
not shared by other shareholders, by agreeing to an inadequate price, and by agreeing to certain deal protection provisions, among
other claims and that Lee Equity, Parent, and Merger Sub aided and abetted the alleged breach of fiduciary duties. The Shams Complaint
seeks, among other relief, an injunction prohibiting the transactions contemplated by the merger agreement, rescission in the event
such transactions are consummated and attorneys’ fees and costs of the action.





44









Item 1A. Risk
Factors



Other than as
noted below, there have been no material changes in the Company’s risk factors from those disclosed in the Annual
Report on Form 10-K for the year ended December 31, 2011.



There are risks and uncertainties associated with our proposed
going private transaction with Lee Equity Partners, LLC (“Lee Equity Partners”).



As previously
announced, on April 16, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
Summer Holdings II, Inc., a Delaware corporation (“Parent”), and Summer Merger Sub, Inc., a Texas corporation and wholly
owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”),
with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by funds
affiliated with Lee Equity Partners.



There are a number
of risks and uncertainties relating to the Merger. For example, the Merger may not be consummated or may not be consummated in
the timeframe or manner currently anticipated, as a result of several factors, including, among other things, (a) the occurrence
of any event, change, or other circumstances that could give rise to the termination of the Merger Agreement, including a termination
under circumstances that would require us to pay a termination fee; or (b) Parent’s failure to obtain the necessary debt
or equity financing set forth in the equity commitment letter and debt commitment letters received in connection with the Merger,
or alternative financing, or the failure of any such financing to be sufficient to complete the Merger and the transactions contemplated
by the Merger Agreement. In addition, there can be no assurance that approval of our shareholders will be obtained, that the other
conditions to closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the
termination of the Merger. If the Merger is not completed, the price of our common stock may change to the extent that the current
market price of our common stock may reflect an assumption that the Merger will be consummated.



Pending the closing
of the Merger, the Merger Agreement also restricts us from engaging in certain actions without Parent’s consent, which could
prevent us from pursuing opportunities that may arise prior to the closing of the merger. Any delay in closing or a failure to
close could have a negative impact on our business and stock price as well as our relationships with our customers, vendors or
employees, as well as a negative impact on our ability to pursue alternative strategic transactions and/or our ability to implement
alternative business plans. In addition, if the Merger Agreement is terminated, depending on the circumstances giving rise to termination,
we may be required to (a) reimburse Parent, Merger Sub, and their respective affiliates for their reasonable and documented out-of-pocket
expenses incurred in connection with the Merger Agreement, up to a maximum of $2.0 million (“Parent Expenses”), and
(b) pay a termination fee (excluding any Parent Expenses), up to a maximum of $8.0 million.



Our business could be adversely impacted as a result of uncertainty
related to the proposed merger.



The proposed merger could cause disruptions
to our business or business relationships, which could have an adverse impact on our financial condition, results of operations
and cash flows. For example:



| | • | the attention of our management may be directed to transaction-related considerations and may be
diverted from the day-to-day operations of our business;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | our employees may experience uncertainty about their future roles with us, which might adversely
affect our ability to retain and hire key personnel and other employees; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | customers, vendors, or other parties with which we maintain business relationships may experience
uncertainty about our future and seek alternative relationships with third parties or seek to alter their business relationships
with us.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





45







In addition, we have incurred, and will
continue to incur, significant costs, expenses, and fees for professional services and other transaction costs in connection with
the merger, and many of these fees and costs are payable by us regardless of whether or not the merger is consummated.





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



None.





46







Item 5. Other Information



None.



47







Item 6. Exhibits



INDEX TO EXHIBITS





|Exhibit |            
|------- | -----------
|Number  | Description
|        |            
|3.1     |            
|3.2     |            
|3.3     |            
|†10.01  |            
|†10.02  |            
|†10.03  |            
|†10.04  |            
|†10.05  |            
|†10.06  |            
|†10.07  |            
|†10.08  |            
|†10.09  |            
|10.10   |            
|10.11   |            
|10.12   |            





48









|10.13  |  | 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).
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14  |  | 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).                                                                                                                       
|10.15  |  | 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).                                                                                                                                                                                                                                                                                                                                         
|10.16  |  | Amended and Restated Credit Agreement dated as of December 31, 2010, between Sanders Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit 10.08 to the Company’s Current Report on Form 8-K dated January 4, 2011.  (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                
|10.17  |  | Purchase Agreement dated as of November 26, 2010, among Sanders Morris Harris Group Inc., Robert C.A. Benjamin, Gerardo A. Chapa and Ricardo Perusquia (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated November 29, 2010 (File No. 000-30066), and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                
|†10.18 |  | Sanders Morris Harris Group Inc. 2011 Senior Executive Incentive Plan. (Filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                
|†10.19 |  | Sanders Morris Harris Group Inc. 2011 Executive Incentive Plan. (Filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                       
|†10.20 |  | Sanders Morris Harris Group Inc. 2011 Executive and Key Manager Restricted Stock Unit Sub-Plan. (Filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                       
|†10.21 |  | The Edelman Financial Group Inc. 2012 Senior Executive Incentive Plan. (Filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                
|†10.22 |  | The Edelman Financial Group Inc. 2012 Executive Incentive Plan. (Filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                       
|†10.23 |  | The Edelman Financial Group Inc. 2012 Executive and Key Manager Restricted Stock Unit Sub-Plan. (Filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                       
|†10.24 |  | Form of Indemnification Agreement with Directors and Executive Officers (Filed as Exhibit 10.21 to the Company’s Current Report on Form 8-K dated June 2, 2011.  (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                               
|*10.25 |  | Twelfth Amendment to Lease Agreement dated as of July 19, 2012, but effective as of June 30,
    2012, between Texas Tower Limited and Sanders Morris Harris Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|21.1   |  | Subsidiaries of The Edelman Financial Group Inc. (Filed as Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                       
|23.1   |  | Consent of Grant Thornton LLP. (Filed as Exhibit 23.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                         
|*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. (Filed as Exhibit 32.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                
|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 as Exhibit 32.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-30066), and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                



| | _______________
| | ---------------
| | *              



| | † | Management contract or compensation plan or arrangement.
| | - | --------------------------------------------------------





49









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.





THE EDELMAN FINANCIAL GROUP INC.



By: 	/s/ FREDRIC M. EDELMAN

Fredric M. Edelman

Chief Executive Officer





By:	 	/s/ RICK BERRY

Rick Berry

Chief Financial Officer







Date: August 9, 2012





50