**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


**(Mark
      one)**




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




**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008**




**OR**




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




**Commission
        File No. 000-30066**




**SANDERS
      MORRIS HARRIS GROUP INC.**




(Exact
      name of registrant as specified in its charter)




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




**(713)
      993-4610**


(Registrant’s
      telephone number, including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  x Yes o 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 filero
              Accelerated
                  filerxNon-accelerated
                  filero
              Smaller
                  reporting companyo




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




As
      of
      November 7, 2008, the registrant had 28,122,304 outstanding shares of common
      stock, par value $0.01 per share.










**SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**





**INDEX**





Page**PART
                  I. FINANCIAL INFORMATION**Item
                  1.
              Financial
                  Statements
              2Condensed
                  Consolidated Balance Sheets as of September 30, 2008 (unaudited)
                  and
                  December 31, 2007
              2Condensed
                  Consolidated Statements of Income for the Three and Nine Months
                  Ended
                  September 30, 2008 and 2007 (unaudited)
              3Condensed
                  Consolidated Statement of Changes in Shareholders' Equity for the
                  Nine
                  Months Ended September 30, 2008 (unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for the Nine Months Ended
                  September
                  30, 2008 and 2007 (unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              19Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              28Item
                  4.
              Controls
                  and Procedures
              28**PART
                  II. OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              29Item
                  1A.
              Risk
                  Factors
              29Item
                  5.
              Other
                  Information
              31Item
                  6.
              Exhibits
              32


1


**PART
      I. FINANCIAL INFORMATION**





**Item
      1.** ***Financial
      Statements***




**SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**As
      of September 30, 2008 and December 31, 2007**


(in
      thousands, except share and per share amounts)





**September 30,**
            
            **December 31,****2008**
            
            **2007**(unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            26,025
            
            $
            46,503Receivables,
                net of allowance of $3,360 and $2,330, respectivelyBroker-dealers
                and clearing organizations
            
            
            2,534
            
            
            232Customers
            
            
            23,683
            
            
            25,147Related
                parties
            
            
            11,086
            
            
            14,676Other
            
            
            78,086
            
            
            4,408Deposits
                with clearing organizations
            
            
            1,060
            
            
            1,095Securities
                owned
            
            
            64,674
            
            
            84,898Securities
                available for sale
            
            
            -
            
            
            759Furniture,
                equipment, and leasehold improvements, net
            
            
            19,221
            
            
            16,613Other
                assets and prepaid expenses
            
            
            1,921
            
            
            2,329Goodwill,
                net
            
            
            119,538
            
            
            88,461Other
                intangible assets, net
            
            
            12,991
            
            
            6,427Total
                assets
            
            $
            360,819
            
            $
            291,548**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                payable and accrued liabilities
            
            $
            34,463
            
            $
            29,523Borrowings
            
            
            -
            
            
            200Deferred
                tax liability, net
            
            
            19,474
            
            
            137Securities
                sold, not yet purchased
            
            
            15,468
            
            
            15,432Payable
                to broker-dealers and clearing organizations
            
            
            18
            
            
            2,973Total
                liabilities
            
            
            69,423
            
            
            48,265Commitments
                and contingenciesMinority
                interests
            
            
            11,616
            
            
            20,105Shareholders'
                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; 29,171,241
                and
                25,765,806 shares issued, respectively
            
            
            292
            
            
            258Additional
                paid-in capital
            
            
            232,203
            
            
            204,596Retained
                earnings
            
            
            53,706
            
            
            23,422Accumulated
                other comprehensive income
            
            
            -
            
            
            161Treasury
                stock, at cost, 1,049,085 and 929,285 shares, respectively
            
            
            (6,421
            )
            
            (5,259
            )Total
                shareholders' equity
            
            
            279,780
            
            
            223,178Total
                liabilities and shareholders' equity
            
            $
            360,819
            
            $
            291,548





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


2


**SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


(in
      thousands, except per share amounts)


(unaudited)





**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenue:Investment
                advisory and related services
            
            $
            19,658
            
            $
            19,580
            
            $
            58,720
            
            $
            51,450Commissions
            
            
            13,880
            
            
            12,883
            
            
            42,497
            
            
            40,209Investment
                banking
            
            
            4,094
            
            
            8,449
            
            
            10,792
            
            
            27,694Principal
                transactions
            
            
            5,269
            
            
            2,215
            
            
            16,231
            
            
            8,313Interest
                and dividends
            
            
            1,591
            
            
            1,374
            
            
            3,725
            
            
            5,272Other
                income
            
            
            2,468
            
            
            1,649
            
            
            9,721
            
            
            4,892Total
                revenue
            
            
            46,960
            
            
            46,150
            
            
            141,686
            
            
            137,830Expenses:Employee
                compensation and benefits
            
            
            29,978
            
            
            26,371
            
            
            83,401
            
            
            80,123Floor
                brokerage, exchange, and clearance fees
            
            
            1,638
            
            
            1,480
            
            
            4,484
            
            
            4,861Communications
                and data processing
            
            
            2,543
            
            
            2,516
            
            
            8,491
            
            
            7,647Occupancy
            
            
            3,547
            
            
            2,903
            
            
            9,713
            
            
            8,870Interest
            
            
            400
            
            
            9
            
            
            400
            
            
            30Amortization
                of intangible assets
            
            
            165
            
            
            95
            
            
            568
            
            
            234Other
                general and administrative
            
            
            6,220
            
            
            5,976
            
            
            20,540
            
            
            20,357Total
                expenses
            
            
            44,491
            
            
            39,350
            
            
            127,597
            
            
            122,122Income
                before equity in income of limited partnerships, minority interests,
                and
                income taxes
            
            
            2,469
            
            
            6,800
            
            
            14,089
            
            
            15,708Equity
                in income of limited partnerships
            
            
            43,285
            
            
            711
            
            
            46,556
            
            
            4,298Income
                before minority interests and income taxes
            
            
            45,754
            
            
            7,511
            
            
            60,645
            
            
            20,006Minority
                interests in net (income) loss of consolidated companies
            
            
            941
            
            
            (4,586
            )
            
            (7,011
            )
            
            (10,946
            )Income
                before income taxes
            
            
            46,695
            
            
            2,925
            
            
            53,634
            
            
            9,060Provision
                for income taxes
            
            
            17,735
            
            
            1,082
            
            
            20,589
            
            
            3,371Net
                income
            
            $
            28,960
            
            $
            1,843
            
            $
            33,045
            
            $
            5,689Earnings
                per common share:Basic
            
            $
            1.03
            
            $
            0.07
            
            $
            1.24
            
            $
            0.23Diluted
            
            $
            1.03
            
            $
            0.07
            
            $
            1.23
            
            $
            0.23Weighted
                average common shares outstanding:Basic
            
            
            28,033
            
            
            24,801
            
            
            26,583
            
            
            24,715Diluted
            
            
            28,192
            
            
            25,095
            
            
            26,764
            
            
            25,038





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


3


**SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY**


**For
      the nine months ended September 30, 2008**


(in
      thousands, except share and per share amounts)


(unaudited)





**Amounts**
              
              
              
              **Shares**Common
                  stock:Balance,
                  beginning of period
              
              $
              258
              
              
              
              
              
              25,765,806Stock
                  issued for acquisitions
              
              
              29
              
              
              
              
              
              2,859,996Stock
                  issued pursuant to employee benefit plan
              
              
              5
              
              
              
              
              
              545,439Balance,
                  end of period
              
              
              292
              
              
              
              
              
              29,171,241Additional
                  paid-in capital:Balance,
                  beginning of period
              
              
              204,596Stock
                  issued for acquisitions
              
              
              23,905Stock
                  issued pursuant to employee benefit plan; including tax
                  benefit
              
              
              1,523Stock-based
                  compensation expense
              
              
              2,179Balance,
                  end of period
              
              
              232,203Retained
                  earnings:Balance,
                  beginning of period
              
              
              23,422Cumulative
                  effect of adoption of a new accounting principle
              
              
              893Cash
                  dividends ($0.135 per share)
              
              
              (3,654
              )Net
                  income
              
              
              33,045
              
              
              33,045Balance,
                  end of period
              
              
              53,706
              
              
              33,045Accumulated
                  other comprehensive income (loss):Balance,
                  beginning of period
              
              
              161Net
                  change in unrealized appreciation on securities available for
                  sale
              
              
              (267
              )
              
              (267
              )Income
                  tax benefit on change in unrealized appreciation on securities
                  available
                  for sale
              
              
              106
              
              
              106Balance,
                  end of period
              
              
              -
              
              
              (161
              )Comprehensive
                  income
              
              
              
              
              
              32,884Treasury
                  stock:Balance,
                  beginning of period
              
              
              (5,259
              )
              
              
              
              
              (929,285
              )Acquisition
                  of treasury stock
              
              
              (1,162
              )
              
              
              
              
              (119,800
              )Balance,
                  end of period
              
              
              (6,421
              )
              
              
              
              
              (1,049,085
              )Total
                  shareholders' equity and common shares outstanding
              
              $
              279,780
              
              
              
              
              
              28,122,156





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


4


**SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**For
      the nine months ended September 30, 2008 and 2007**


(in
      thousands)


(unaudited)





**2008**
            
            **2007**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            33,045
            
            $
            5,689Adjustments
                to reconcile net income to net cash provided by operating
                activities:Realized
                gain on securities available for sale
            
            
            (205
            )
            
            (1
            )Loss
                on sales of assets
            
            
            79
            
            
            53Depreciation
            
            
            2,866
            
            
            2,462Provision
                for bad debts
            
            
            978
            
            
            3,228Stock-based
                compensation expense
            
            
            2,179
            
            
            1,780Amortization
                of intangible assets
            
            
            568
            
            
            234Deferred
                income taxes
            
            
            19,443
            
            
            (3,108
            )Equity
                in income of limited partnerships
            
            
            (46,556
            )
            
            (4,298
            )Minority
                interests in net income of consolidated companies
            
            
            7,011
            
            
            10,946Unrealized
                and realized loss on not readily marketable securities owned,
                net
            
            
            4,836
            
            
            2,185Not
                readily marketable securities owned received for payment of investment
                banking fees
            
            
            (581
            )
            
            (1,692
            )Net
                change in:Receivables
            
            
            820
            
            
            (15,008
            )Deposits
                with clearing organizations
            
            
            35
            
            
            (9
            )Marketable
                securities owned
            
            
            (1,404
            )
            
            5,824Other
                assets and prepaid expenses
            
            
            (393
            )
            
            (331
            )Accounts
                payable and accrued liabilities
            
            
            906
            
            
            (715
            )Securities
                sold, not yet purchased
            
            
            36
            
            
            (5,538
            )Payable
                to broker-dealers and clearing organizations
            
            
            (2,955
            )
            
            6,983Net
                cash provided by operating activities
            
            
            20,708
            
            
            8,684CASH
                FLOWS FROM INVESTING ACTIVITIES:Capital
                expenditures
            
            
            (7,203
            )
            
            (3,231
            )Acquisitions,
                net of cash acquired of $126and
                $59, respectively
            
            
            (29,070
            )
            
            (8,249
            )Purchases
                of not readily marketable securities owned
            
            
            (882
            )
            
            (22,452
            )Proceeds
                from sales of not readily marketable securities owned
            
            
            11,020
            
            
            4,476Proceeds
                from sales and maturities of securities available for sale
            
            
            697
            
            
            584Proceeds
                from sales of assets
            
            
            266
            
            
            39Net
                cash used in investing activities
            
            
            (25,172
            )
            
            (28,833
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Purchases
                of treasury stock
            
            
            (1,162
            )
            
            -Proceeds
                from shares issued pursuant to employee benefit plan
            
            
            1,164
            
            
            428Tax
                benefit of stock options exercised
            
            
            364
            
            
            119Proceeds
                from borrowings
            
            
            250
            
            
            145Repayment
                of borrowings
            
            
            (450
            )
            
            (500
            )Investments
                by minority interests
            
            
            -
            
            
            40Distributions
                to minority interests
            
            
            (13,791
            )
            
            (6,645
            )Payments
                of cash dividends
            
            
            (2,389
            )
            
            (3,326
            )Net
                cash used in financing activities
            
            
            (16,014
            )
            
            (9,739
            )Net
                decrease in cash and cash equivalents
            
            
            (20,478
            )
            
            (29,888
            )CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            46,503
            
            
            68,861CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            26,025
            
            $
            38,973





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


5


**SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(unaudited)





**1.**
            **BASIS
                OF PRESENTATION**





*Nature
      of Operations*




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





*Principles
      of Consolidation*




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





In
      management's opinion, the unaudited condensed consolidated financial statements
      include all adjustments necessary for a fair presentation of our consolidated
      financial position at September 30, 2008 and December 31, 2007, our consolidated
      results of operations for the three and nine months ended September 30, 2008
      and
      2007, our consolidated changes in shareholders’ equity for the nine months ended
      September 30, 2008, and our consolidated cash flows for the nine months ended
      September 30, 2008 and 2007. 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, 2007.





*Management’s
      Estimates*





The
      preparation of the consolidated financial statements in conformity with U.S.
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the reported amounts of consolidated assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      dates
      of the consolidated financial statements and the amounts of revenue and expenses
      during the reporting periods. Actual results could differ from those
      estimates.





*Recent
      Accounting Pronouncements*





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141R, *Business
      Combinations (Revised 2007)* .
      SFAS
      No. 141R replaces SFAS No. 141, *Business
      Combinations* ,
      and
      applies to all transactions and other events in which one entity obtains control
      over one or more other businesses. SFAS No. 141R requires an acquirer, upon
      initially obtaining control of another entity, to recognize the assets,
      liabilities, and any non-controlling interest in the acquiree at fair value
      as
      of the acquisition date. Contingent consideration is required to be recognized
      and measured at fair value on the date of acquisition rather than at a later
      date when the amount of that consideration may be determinable beyond a
      reasonable doubt. This fair value approach replaces the cost-allocation process
      required under SFAS No. 141 whereby the cost of an acquisition was
      allocated to the individual assets acquired and liabilities assumed based on
      their estimated fair value. SFAS No. 141R requires acquirers to expense
      acquisition-related costs as incurred rather than allocating such costs to
      the
      assets acquired and liabilities assumed, as was previously the case under SFAS
      No. 141. Under SFAS No. 141R, the requirements of SFAS No. 146, *Accounting
      for Costs Associated with Exit or Disposal Activities* ,
      would
      have to be met in order to accrue for a restructuring plan in purchase
      accounting. Pre-acquisition contingencies are to be recognized at fair value,
      unless it is a non-contractual contingency that is not likely to materialize,
      in
      which case, nothing should be recognized in purchase accounting and, instead,
      that contingency would be subject to the probable and estimable recognition
      criteria of SFAS No. 5, *Accounting
      for Contingencies* .
      SFAS
      No. 141R is expected to have a significant impact on the Company’s accounting
      for business combinations closing on or after January 1, 2009.


6


In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* .
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      U.S. generally accepted accounting principles, and expands disclosures about
      fair value measurements. SFAS No. 157 was effective for the Company on January
      1, 2008. As a result of the adoption of SFAS No. 157, the Company recorded
      an
      increase in retained earnings of $893,000 on the adoption date.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities — Including an
      amendment of FASB Statement No. 115* .
      SFAS
      No. 159 permits an entity to measure financial instruments and certain other
      items at estimated fair value. Most of the provisions of SFAS No. 159 are
      elective; however, the amendment to SFAS No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      applies
      to all entities that own trading and available-for-sale securities. The fair
      value option created by SFAS No. 159 permits an entity to measure eligible
      items
      at fair value as of specified election dates. The fair value option (a) may
      generally be applied instrument by instrument, (b) is irrevocable unless a
      new
      election date occurs, and (c) must be applied to the entire instrument and
      not
      to only a portion of the instrument. SFAS No. 159 was effective for the
      Company on January 1, 2008 and did not have an impact on the Company’s
      financial statements. The Company did not elect the fair value option as
      permitted by SFAS No. 159.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interest in Consolidated Financial Statements, an amendment of ARB Statement
      No. 51* .
      SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, *Consolidated
      Financial Statements* ,
      to
      establish accounting and reporting standards for the non-controlling interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies
      that a non-controlling interest in a subsidiary, which is sometimes referred
      to
      as minority interest, is an ownership interest in the consolidated entity that
      should be reported as a component of equity in the consolidated financial
      statements. Among other requirements, SFAS No. 160 requires consolidated net
      income to be reported at amounts that include the amounts attributable to both
      the parent and the non-controlling interest. It also requires disclosure, on
      the
      face of the consolidated income statement, of the amounts of consolidated net
      income attributable to the parent and to the non-controlling interest.
      SFAS No. 160 is effective for the Company on January 1, 2009. At
      September 30, 2008, the Company had $11.6 million in minority interests that
      would be reported as a component of equity under the requirements of SFAS No.
      160.





**2.**
            **ACQUISITIONS**





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





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


7


On
      September 14, 2007, the Company acquired a 50.1% interest in Dickenson, an
      insurance agency with four registered agents based in Solon, Ohio. The
      acquisition was accounted for as a purchase and, accordingly, the financial
      information of Dickenson has been included in the Company’s consolidated
      financial statements from September 14, 2007. The consideration of $6.0 million,
      consisting of a combination of cash and shares of the Company’s common stock,
      exceeded the fair market value of identifiable net tangible assets by $6.0
      million, $4.6 million of which has been recorded as goodwill and $1.4 million
      of
      which has been recorded as other intangible assets.





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





On
      May
      10, 2005, the Company acquired a 51% interest in Edelman, one of the leading
      financial planning firms in the country. Edelman, based in Fairfax, Virginia,
      manages approximately $3.4 billion in assets. On May 12, 2008, the Company
      purchased an additional 25% membership interest in Edelman. The Company paid
      an
      amount determined based upon Edelman’s 2007 pretax income (the “Second Tranche
      Consideration”). The Second Tranche Consideration of $44.4 million, which was
      paid in a combination of cash and the Company’s common stock, has been recorded
      as goodwill.


8


**3.**
            **SECURITIES
                OWNED AND SECURITIES SOLD, NOT YET
                PURCHASED**





Securities
      owned and securities sold, not yet purchased as of September 30, 2008 and
      December 31, 2007 were as follows:





**September 30, 2008**
            
            **December 31, 2007****Sold, Not Yet**
            
            
            
            **Sold, Not Yet****Owned**
            
            **Purchased**
            
            **Owned**
            
            **Purchased**(in thousands)Marketable:Corporate
                stocks and options
            
            $
            19,739
            
            $
            15,468
            
            $
            23,799
            
            $
            15,432Total
                marketable
            
            
            19,739
            
            
            15,468
            
            
            23,799
            
            
            15,432Not
                readily marketable:Limited
                partnerships
            
            
            40,655
            
            
            -
            
            
            53,012
            
            
            -Warrants
            
            
            3,722
            
            
            -
            
            
            5,649
            
            
            -Equities
                and options
            
            
            558
            
            
            -
            
            
            2,438
            
            
            -Total
                not readily marketable
            
            
            44,935
            
            
            -
            
            
            61,099
            
            
            -Total
            
            $
            64,674
            
            $
            15,468
            
            $
            84,898
            
            $
            15,432





Securities
        not readily marketable include investment securities (a) for which there
        is no
        market on a securities exchange or no independent publicly quoted market,
        (b)
        that cannot be publicly offered or sold unless registration has been effected
        under the Securities Act of 1933, or (c) that cannot be offered or sold because
        of other arrangements, restrictions, or conditions applicable to the securities
        or to the company. Not readily marketable securities consist of investments
        in
        limited partnerships, equities, options, and warrants. The investments in
        limited partnerships are accounted for using the equity method, which
        approximates fair value, and principally consist of Environmental Opportunities
        Fund, L.P., Environmental Opportunities Fund II, L.P., Environmental
        Opportunities Fund II (Institutional), L.P., Corporate Opportunities Fund,
        L.P.,
        Corporate Opportunities Fund (Institutional), L.P., Sanders Opportunity Fund,
        L.P., Sanders Opportunity Fund (Institutional),
        L.P., SMH Credit Opportunity Fund, L.P. (formerly Tactical Opportunities
        High
        Yield Fund, L.P.), Life Sciences Opportunity Fund, L.P., Life Sciences
        Opportunity Fund (Institutional), L.P., Life Sciences Opportunity Fund II,
        L.P.,
        Life Sciences Opportunity Fund (Institutional) II, L.P., 2003 Houston Energy
        Partners, L.P., 2005 Houston Energy Partners, L.P., Concept Capital, LLC,
        Select
        Sports Group, Ltd., SMH Private Equity Group I, L.P., SMH Private Equity
        Group
        II, L.P., and SMH NuPhysicia, LLC.





SFAS
      No.
      157 establishes a fair value hierarchy that prioritizes the inputs to valuation
      techniques used to measure fair value. The hierarchy gives the highest priority
      to unadjusted quoted prices in active markets for identical assets or
      liabilities (level 1 measurements) and the lowest priority to unobservable
      inputs (level 3 measurements). The three levels of the fair value hierarchy
      under SFAS No. 157 are as follows:





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





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





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





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


9


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





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





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





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





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





The
      following table sets forth by level within the fair value hierarchy securities
      owned and securities sold, not yet purchased as of September 30, 2008:





**Level 1**
            
            **Level 2**
            
            **Level 3**
            
            **Total**(in thousands)Securities
                owned
            
            $
            19,300
            
            $
            4,036
            
            $
            41,338
            
            $
            64,674Securities
                sold, not yet purchased
            
            
            15,416
            
            
            52
            
            
            -
            
            
            15,468


10


The
        following table sets forth a summary of changes in the fair value of the
        Company’s level 3 securities owned for the three and nine months ended September
        30, 2008:





**Level 3 Securities Owned****Three Months Ended**
            
            **Nine Months Ended****September 30, 2008**
            
            **September 30, 2008**(in
                thousands)Balance,
                beginning of period
            
            $
            51,085
            
            $
            55,880Realized
                gains
            
            
            47,735
            
            
            47,560Unrealized
                losses relating to securities still held at the reporting
                date
            
            
            (5,161
            )
            
            (3,621
            )Purchases,
                issuances, and settlements
            
            
            (52,321
            )
            
            (58,481
            )Balance,
                end of period
            
            $
            41,338
            
            $
            41,338





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





**Three Months Ended**
              
              **Nine Months Ended****September 30, 2008**
              
              **September 30, 2008****Equity in Income**
              
              
              
              **Equity in Income****Principal**
              
              **of Limited**
              
              **Principal**
              
              **of Limited****Transactions**
              
              **Partnerships**
              
              **Transactions**
              
              **Partnerships**(in thousands)Unrealized
                  gains (losses) relating to securities still held at the reporting
                  date
              
              $
              (104
              )
              $
              (5,057
              )
              $
              152
              
              $
              (3,773
              )





In
      May
      2008, the Company, Salient Partners, L.P., and Endowment Advisers, L.P. began
      an
      appraisal process relating to Salient Partners’ and Endowment Advisers’ option
      to acquire the Company’s 50% interest in Salient Partners and its 23.15%
      interest in Endowment Advisers. The option was granted as part of the Company’s
      2003 purchase of the interests.





In
      August
      2008, agreements were reached which provided for Salient Partners’ and Endowment
      Advisers’ purchase of the Company’s interest in such entities for a total of
      $95.3 million. The terms of the agreements provide that Endowment Advisers
      will
      pay the Company annually the greater of $12.0 million in priority to other
      distributions, or 23% of total distributions, until the Company has received
      a
      total of $86.0 million plus 6% per annum. The Company received an additional
      $9.3 million note for its 50% interest in Salient Partners, payable with
      interest over a five-year period.





The
      Company recorded a receivable in the amount of $74.7 million representing the
      net present value of the expected receipts. The Company recognized a $48.5
      million gain on this sale in the third quarter of 2008.





**4.**
            **BORROWINGS**





During
        May 2005, the Company entered into a $15.0 million revolving credit facility
        with a bank. In May 2008, this credit agreement was amended to decrease the
        revolving credit facility to the lesser of $5.0 million or the loan value
        of
        certain collateral pledged to secure the revolving credit facility. The line
        of
        credit expires on May 31, 2009, unless extended. Borrowings under the line
        of
        credit bear interest at LIBOR plus 200 basis points. Interest is payable
        quarterly on this line of credit. The credit facility is secured by a pledge
        of
        ownership interests in three of the Company’s subsidiaries. Debt covenants
        require the Company to maintain certain debt to EBITDA and liquidity to funded
        debt ratios, as well as minimum assets under management. At September 30,
        2008,
        the Company was in compliance with all covenants. There was no outstanding
        balance on the line of credit at September 30, 2008. The amount of available
        borrowings under the line of credit, which is reduced by letters of credit
        issued by the Company, was $3.8 million at September 30,
        2008.


11


**5.**
            **INCOME
                TAXES**





The
      difference between the effective tax rate reflected in the provision for income
      taxes and the statutory federal rate is analyzed as follows:





**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**(in thousands)Expected federal tax
                at statutory rate of 34% for 2008 and 35% for 2007
            
            $
            15,876
            
            $
            1,024
            
            $
            18,236
            
            $
            3,171State
                and other income taxes
            
            
            1,859
            
            
            58
            
            
            2,353
            
            
            200Total
            
            $
            17,735
            
            $
            1,082
            
            $
            20,589
            
            $
            3,371





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





**6.**
            **ACCOUNTING
                FOR STOCK-BASED COMPENSATION
                PLANS**





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





The
      following table sets forth pertinent information regarding stock option
      transactions for the nine months ended September 30, 2008:


**Weighted****Number**
              
              **Average****of Shares**
              
              **Exercise Price**Outstanding
                  at January 1, 2008
              
              
              856,385
              
              $
              8.30Granted
              
              
              50,000
              
              
              8.17Exercised
              
              
              (214,706
              )
              
              4.90Outstanding
                  at September 30, 2008
              
              
              691,679
              
              
              9.35Options
                  exercisable at September 30, 2008
              
              
              620,846
              
              
              9.06Incentive
                  award shares available for grant at September 30, 2008
              
              
              2,647,547





12




During
        the nine months ended September 30, 2008 and 2007, 214,706 and 55,200 options
        were exercised for which the Company received proceeds of
        $1.1 million and $257,000, respectively. The Company recognized pretax
        compensation expense of $131,000 and $116,000 during the nine months ended
        September 30, 2008 and 2007, respectively, related to stock options. The
        portion
        of stock-based compensation expense related to stock options that was
        unrecognized at September 30, 2008 was $151,000 and is expected to be recognized
        over a weighted average period of 0.92 years.





The
      following table summarizes certain information related to restricted common
      stock grants at September 30, 2008:




**Weighted****Average****Number of**
            
            **Grant Date****Shares**
            
            **Fair Value**Nonvested
                at January 1, 2008
            
            
            526,741
            
            $
            13.39Nonvested
                at September 30, 2008
            
            
            702,386
            
            
            11.21For
                the nine months ended September 30, 2008:Granted
            
            
            334,558
            
            
            8.74Vested
            
            
            155,088
            
            
            13.28Forfeited
            
            
            3,825
            
            
            12.15





Employees
      deferred compensation of $114,000 and $171,000 during the nine months ended
      September 30, 2008 and 2007, respectively, that was used to purchase restricted
      common stock. The Company recognized pretax compensation expense of $2.0 million
      and $1.7 million during the nine months ended September 30, 2008 and 2007,
      respectively, related to its restricted common stock plan. At September 30,
      2008, total unrecognized compensation cost, net of estimated forfeitures,
      related to nonvested restricted stock was $5.2 million and is expected to be
      recognized over the next 4.5 years.





**7.**
            **TREASURY
                STOCK**





On
      November 6, 2007, the Company’s board of directors approved a program to
      repurchase up to 1,000,000 shares of the Company’s common stock. Under the
      program, shares are repurchased in the open market or privately negotiated
      transactions from time to time at prevailing market prices. Such repurchases
      are
      accounted for using the cost method. The Company repurchased 119,800 shares
      of
      its common stock during the nine months ended September 30, 2008 related to
      this
      program.


13


**8.**
            **EARNINGS
                PER COMMON SHARE**





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





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**(in thousands, except per share amounts)Net
                income
            
            $
            28,960
            
            $
            1,843
            
            $
            33,045
            
            $
            5,689Earnings
                per common share:Basic
            
            $
            1.03
            
            $
            0.07
            
            $
            1.24
            
            $
            0.23Diluted
            
            $
            1.03
            
            $
            0.07
            
            $
            1.23
            
            $
            0.23Weighted
                average number of commonshares
                outstanding:Basic
            
            
            28,033
            
            
            24,801
            
            
            26,583
            
            
            24,715Incremental
                common shares issuable under stock option plan, net
            
            
            159
            
            
            294
            
            
            181
            
            
            323Diluted
            
            
            28,192
            
            
            25,095
            
            
            26,764
            
            
            25,038




Outstanding
      stock options of 310,000 and 305,000 for the three and nine months ended
      September 30, 2008 and 2007, respectively, have not been included in diluted
      earnings per common share because to do so would have been antidilutive for
      the
      periods presented.





**9.**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Company has issued letters of credit in the amounts of $630,000, $245,000,
      $230,000, $144,000, and $92,000 to the owners of five of the offices that we
      lease to secure payment of our lease obligations for those facilities. The
      Company has issued a letter of credit in the amount of $100,000 to secure the
      payment of the deductible portion of the Company’s workers compensation
      insurance policy.





In
      December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
      LLC (“EFA”) to expand the Edelman financial platform into additional markets
      outside the Washington, D.C. metropolitan area. The Company owns a 10%
      membership interest in EFA. We committed to initially loan EFA up to $20.0
      million to cover its start-up expenses of which $10.0 million has been advanced
      and subsequently repaid. Mr. Edelman has guaranteed repayment of the EFA
      obligation to the extent of funds that will be owed to him by the Company in
      connection with the purchase of Edelman. There was no outstanding balance on
      the
      Company’s loan to EFA at September 30, 2008. EFA has entered into an agreement
      with Radio Networks, LLC, an affiliate of ABC, Inc. and The Walt Disney Company,
      to nationally syndicate Mr. Edelman’s weekly radio program. The program is being
      syndicated into 21 additional markets, including Albuquerque, Atlanta,
      Baltimore, Chicago, Cleveland, Columbus, Corsicana, Dallas, Detroit, Houston,
      Jackson, Los Angeles, Miami, Mt. Jackson, New York City, Orlando, Phoenix,
      Portland, San Diego, San Francisco, and Tucson.





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


14


In
      the
      normal course of business, the Company enters into underwriting commitments.
      There were no firm underwriting commitments open at September 30,
      2008.





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





In
      May
      2005, SMH acted as placement agent for a private placement of $50.0 million
      in
      convertible preferred stock of Ronco Corporation, a company involved in direct
      response marketing. Subsequent to the offering, Ronco experienced financial
      difficulties and ultimately filed a voluntary petition under Chapter 11 of
      the
      Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale
      of substantially all of Ronco’s assets in August 2007, and the case has been
      converted to liquidation under Chapter 7. It is unlikely that there will be
      any
      distribution to its unsecured creditors or equity security holders.  In
      2007, SMH wrote off a $3.0 million subordinated working capital loan that it
      made to Ronco in 2006.





On
      May
      23, 2007, two purchasers of Ronco convertible preferred stock filed a complaint
      against SMH, US Special Opportunities Trust PLC and Renaissance US Growth
      Investment Trust PLC, Case No. 07-04837, in the 193rd Judicial District Court,
      Dallas County, Texas, alleging common law fraud, statutory fraud in a stock
      transaction, violations of the Texas Securities Act, and negligent
      misrepresentation in connection with the plaintiffs’ purchase of $2.0 million in
      Ronco convertible preferred stock. SMH has filed an answer and special
      exceptions. SMH believes it has valid defenses to all claims made by the
      plaintiffs. However, there is no assurance that the Company will successfully
      defend such claims.





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





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





**10.**
            **BUSINESS
                SEGMENT INFORMATION**





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





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


15


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





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





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





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





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


16


The
      following summarizes certain financial information of each reportable business
      segment for the three and nine months ended September 30, 2008 and 2007,
      respectively. SMHG does not analyze asset information in all business
      segments.





**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**(in thousands)Revenue:Asset/Wealth
                Management
            
            $
            26,624
            
            $
            26,878
            
            $
            82,360
            
            $
            76,583Capital
                Markets:Investment
                banking
            
            
            3,373
            
            
            5,994
            
            
            8,771
            
            
            19,798Institutional
                brokerage
            
            
            5,039
            
            
            3,936
            
            
            13,777
            
            
            12,301Prime
                brokerage services
            
            
            14,116
            
            
            8,701
            
            
            35,300
            
            
            26,372Capital
                Markets Total
            
            
            22,528
            
            
            18,631
            
            
            57,848
            
            
            58,471Corporate
                Support and Other
            
            
            (2,192
            )
            
            641
            
            
            1,478
            
            
            2,776Total
            
            $
            46,960
            
            $
            46,150
            
            $
            141,686
            
            $
            137,830Income
                (loss) before equity in income (loss) of limited partnerships, minority
                interests, and income taxes:Asset/Wealth
                Management
            
            $
            8,891
            
            $
            8,414
            
            $
            26,627
            
            $
            21,619Capital
                Markets:Investment
                banking
            
            
            (1,033
            )
            
            1,327
            
            
            (3,663
            )
            
            4,532Institutional
                brokerage
            
            
            828
            
            
            306
            
            
            1,201
            
            
            1,117Prime
                brokerage services
            
            
            1,303
            
            
            739
            
            
            2,750
            
            
            2,748Capital
                Markets Total
            
            
            1,098
            
            
            2,372
            
            
            288
            
            
            8,397Corporate
                Support and Other
            
            
            (7,520
            )
            
            (3,986
            )
            
            (12,826
            )
            
            (14,308
            )Total
            
            $
            2,469
            
            $
            6,800
            
            $
            14,089
            
            $
            15,708Equity
                in income (loss) of limited partnerships:Asset/Wealth
                Management
            
            $
            (1,661
            )
            $
            2,827
            
            $
            3,716
            
            $
            6,146Capital
                Markets:Investment
                banking
            
            
            -
            
            
            -
            
            
            -
            
            
            -Institutional
                brokerage
            
            
            -
            
            
            -
            
            
            -
            
            
            -Prime
                brokerage services
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                Markets Total
            
            
            -
            
            
            -
            
            
            -
            
            
            -Corporate
                Support and Other
            
            
            44,946
            
            
            (2,116
            )
            
            42,840
            
            
            (1,848
            )Total
            
            $
            43,285
            
            $
            711
            
            $
            46,556
            
            $
            4,298Minority
                interests in net (income) loss of consolidated companies:Asset/Wealth
                Management
            
            $
            941
            
            $
            (4,586
            )
            $
            (7,011
            )
            $
            (10,946
            )Capital
                Markets:Investment
                banking
            
            
            -
            
            
            -
            
            
            -
            
            
            -Institutional
                brokerage
            
            
            -
            
            
            -
            
            
            -
            
            
            -Prime
                brokerage services
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                Markets Total
            
            
            -
            
            
            -
            
            
            -
            
            
            -Corporate
                Support and Other
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            941
            
            $
            (4,586
            )
            $
            (7,011
            )
            $
            (10,946
            )Income
                (loss) before income taxes:Asset/Wealth
                Management
            
            $
            8,171
            
            $
            6,655
            
            $
            23,332
            
            $
            16,819Capital
                Markets:Investment
                banking
            
            
            (1,033
            )
            
            1,327
            
            
            (3,663
            )
            
            4,532Institutional
                brokerage
            
            
            828
            
            
            306
            
            
            1,201
            
            
            1,117Prime
                brokerage services
            
            
            1,303
            
            
            739
            
            
            2,750
            
            
            2,748Capital
                Markets Total
            
            
            1,098
            
            
            2,372
            
            
            288
            
            
            8,397Corporate
                Support and Other
            
            
            37,426
            
            
            (6,102
            )
            
            30,014
            
            
            (16,156
            )Total
            
            $
            46,695
            
            $
            2,925
            
            $
            53,634
            
            $
            9,060


17


**11.**  **SUPPLEMENTAL
      CASH FLOW INFORMATION**





**Nine Months Ended September 30,****2008**
            
            **2007**(in thousands)Cash
                payment for income taxes, net
            
            $
            2,056
            
            $
            3,671Cash
                paid for interest
            
            
            9
            
            
            19Noncash
                investing activities:Acquisitions:Receivables
            
            
            10
            
            
            -Goodwill
            
            
            24,136
            
            
            2,400Accounts
                payable and accrued liabilities
            
            
            (290
            )
            
            -Minority
                interests
            
            
            77
            
            
            -Common
                stock
            
            
            (23,933
            )
            
            (2,400
            )Sale
                of nonmarketable securities:Receivables
            
            
            74,732
            
            
            -Sale
                of limited partnerships
            
            
            (70,666
            )
            
            -Accounts
                payable and accrued liabilities
            
            
            (4,066
            )
            
            -Noncash
                financing activities:Dividends
                declared not yet paid
            
            
            1,265
            
            
            1,126





**12.**
            **RELATED
                PARTIES**





The
      Company had receivables from related parties totaling $11.1 million at September
      30, 2008, primarily consisting of $6.2 million of advances to unconsolidated
      related entities to fund operating expenses, $3.5 million of notes receivable
      from employees and consultants representing loans made to induce the employees
      and consultants to affiliate with the Company, and $609,000 of management fees
      receivable from the limited partnerships that the Company manages.


18


**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 II, Item 1A below and in Part I, Item 1A of our Annual Report on Form
      10-K for the year ended December 31, 2007. The Company does not undertake to
      publicly update or revise any forward-looking statements.





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





**Overview**





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





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





Our *Capital Markets* segment
      provides investment banking, institutional equity and fixed income brokerage,
      prime brokerage services, and proprietary trading services to institutional
      clients.




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





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


19


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





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





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





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





**Components
      of Revenue and Expenses**





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





*Expenses.* Our
      expenses consist of (1) compensation and benefits, (2) floor brokerage,
      exchange, and clearance fees, and (3) other expenses. Compensation and benefits
      have both a variable component, based on revenue production, and a fixed
      component. The variable component includes institutional and retail sales
      commissions, bonuses, overrides, and other incentives. Wealth advisory and
      institutional commissions are based on competitive commission schedules.
      Employees of the investment banking group and the research group receive a
      salary and discretionary bonuses as compensation. The fixed component includes
      administrative and executive salaries, payroll taxes, employee benefits, and
      temporary employee costs. Compensation and benefits is our largest expense
      item
      and includes wages, salaries, and benefits. During the third quarter of 2008,
      compensation and benefits represented 67.4% of total expenses and 63.8% of
      total
      revenue, compared to 67.0% of total expenses and 57.1% of total revenue during
      the third quarter of 2007. The increase in compensation and benefits as a
      percentage of total revenue is principally due to an increase in revenue in
      our
      prime brokerage services division which has a higher payout than our other
      business lines. During the first nine months of 2008, compensation and benefits
      represented 65.4% of total expenses and 58.9% of total revenue, compared to
      65.6% of total expenses and 58.1% of total revenue for the same period in 2007.





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





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


20


**Results
      of Operations**





*Three
      Months Ended September 30, 2008 Compared to Three Months Ended September 30,
      2007*





Total
      revenue was $47.0 million for the third quarter of 2008 compared to $46.2
      million for the same quarter in 2007, an increase of $810,000, or 1.8%,
      primarily reflecting increases in commissions and principal transactions revenue
      partially offset by a decrease in investment banking revenue. Total expenses
      for
      the third quarter of 2008 increased $5.1 million, or 13.1%, to $44.5 million
      from $39.4 million in the same quarter of the previous year principally due
      to
      higher employee compensation and benefits due to the revenue growth in the
      prime
      brokerage services division. Equity in income of limited partnerships increased
      to $43.3 million for the third quarter of 2008 compared to $711,000 for the
      third quarter of 2007, primarily due to the sale of our interests in two limited
      partnerships. Net income was $29.0 million, or $1.03 per diluted common share,
      for the third quarter of 2008 compared to $1.8 million, or $0.07 per diluted
      common share, for the third quarter of 2007.





Revenue
      from investment advisory and related services increased to $19.7 million in
      the
      third quarter of 2008 from $19.6 million in the same quarter of 2007. Commission
      revenue increased to $13.9 million in the third quarter of 2008 from $12.9
      million for the same period in 2007, primarily as a result of an increase in
      trading volume in the institutional brokerage division. Investment banking
      revenue decreased to $4.1 million during the third quarter of 2008 from $8.4
      million in the same period of 2007, principally due to decreases in advisory
      fees and syndicate income. Principal transactions revenue increased from $2.2
      million for the third quarter of 2007 to $5.3 million for the third quarter
      of
      2008, primarily as the result of an increase in proprietary trading gains to
      $3.4 million in the third quarter of 2008 from $837,000 for the same period
      in
      2007. Also, principal transactions revenue from the sale of fixed income
      products increased to $3.9 million during the third quarter of 2008 from $1.1
      million in the same period of 2007. Interest and dividend income increased
      to
      $1.6 million in the third quarter of 2008 from $1.4 million in the same period
      last year. Other income increased from $1.6 million during the third quarter
      of
      2007 to $2.5 million during the same period in 2008 reflecting growth in hedge
      fund servicing revenue and third-party marketing fees.





During
      the three months ended September 30, 2008, employee compensation and benefits
      increased to $30.0 million from $26.4 million in the same period last year
      due
      to higher employee compensation and benefits due to the revenue growth in the
      prime brokerage services division. During the three months ended September
      30,
      2008, floor brokerage, exchange, and clearance fees increased to $1.6 million
      from $1.5 million in the same period last year. Communications and data
      processing costs were unchanged at $2.5 million in the third quarter of 2008
      compared to the same period last year. Occupancy costs were $3.5 million in
      the
      third quarter of 2008 compared to $2.9 million in the third quarter of 2007
      due
      to the addition of Dickenson, Leonetti, and Miller-Green, and the opening of
      a
      new retail branch in Boca Raton, Florida. Interest expense increased to $400,000
      for the third quarter of 2008 compared to $9,000 for the third quarter of 2007
      due to the accrual of interest for taxes payable on the income recognized as
      the
      result of the sale of our interests in two limited partnerships. Amortization
      of
      intangible assets increased to $165,000 for the third quarter of 2008 compared
      to $95,000 for the third quarter of 2007 due to the addition of Dickenson,
      Leonetti, and Miller-Green. Other general and administrative expenses increased
      to $6.2 million during the third quarter of 2008 from $6.0 million in the third
      quarter of last year.





Our
      effective tax rate was 38.0% for the three months ended September 30, 2008
      compared to 37.0% for the three months ended September 30, 2007. The effective
      tax rate exceeds the federal statutory income tax rate primarily as a result
      of
      state income taxes and certain nondeductible expenses.


21


RESULTS
        BY SEGMENT





**Asset/Wealth
      Management**





**Three Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            26,624
            
            $
            26,878Income
                before income taxes
            
            $
            8,171
            
            $
            6,655





Revenue
      from asset/wealth management decreased to $26.6 million from $26.9 million
      and
      income before income taxes increased to $8.2 million from $6.7 million. Total
      expenses decreased to $17.7 million from $18.5 million, primarily due to a
      decrease in outside sales commissions. Equity in income (loss) of limited
      partnerships decreased to a loss of $1.7 million from income of $2.8 million,
      principally due to a decrease in the value of the investment portfolio of three
      of the limited partnerships that we manage. This decrease was partially offset
      by an increase in the value of the investment portfolio in another limited
      partnership. Minority interests in net (income) loss of consolidated
      subsidiaries, which reduces (increases) the Company’s pretax income, was
      $941,000 for the third quarter of 2008 compared to $(4.6) million for the same
      period last year, principally due to decreases in the values of the investment
      portfolios of the limited partnerships.




**Capital
      Markets**





*Investment*  *Banking*





**Three Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            3,373
            
            $
            5,994Income
                (loss) before income taxes
            
            $
            (1,033
            )
            $
            1,327





Revenue
      from investment banking decreased to $3.4 million from $6.0 million and income
      (loss) before income taxes decreased to a loss of $1.0 million from income
      of
      $1.3 million. The revenue decrease is due to a decrease in advisory fees caused
      by weakness in the financial markets that has adversely affected the volume
      and
      timing of our clients’ investment banking transactions. Total expenses decreased
      to $4.4 million from $4.7 million. The decrease in expenses is attributable
      to
      decreased employee compensation, which is partially tied to
      revenue.





*Institutional
      Brokerage*





**Three Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            5,039
            
            $
            3,936Income
                before income taxes
            
            $
            828
            
            $
            306


22


Revenue
      from institutional brokerage increased to $5.0 million from $3.9 million and
      income before income taxes increased to $828,000 from $306,000. Commission
      revenue increased to $3.5 million from $2.4 million reflecting a $1.2 million
      increase in commissions from the sale of collateralized debt obligations in
      our
      fixed income division. Total expenses increased to $4.2 million from $3.6
      million, primarily due to increased employee compensation related to the higher
      revenue.





*Prime
      Brokerage Services*





**Three Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            14,116
            
            $
            8,701Income
                before income taxes
            
            $
            1,303
            
            $
            739





Revenue
      from prime brokerage services increased to $14.1 million from $8.7 million
      and
      income before income taxes increased to $1.3 million from $739,000. Principal
      transactions revenue increased to $7.0 million from $1.8 million reflecting
      an
      increase in revenue earned from the sale of fixed income products. In addition,
      commission revenue and third-party marketing fees increased to $6.8 million
      from
      $6.1 million reflecting growth in hedge fund servicing revenue. Total expenses
      increased to $12.8 million from $8.0 million reflecting increased compensation
      and outside sales commissions related to the increased revenue.





**Corporate
      Support and Other**





**Three Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            (2,192
            )
            $
            641Income
                (loss) before income taxes
            
            $
            37,426
            
            $
            (6,102
            )





Revenue
      from corporate support and other decreased to $(2.2) million from $641,000
      and
      income (loss) before income taxes increased to income of $37.4 million from
      a
      loss of $6.1 million. Revenue from principal transactions, which consists
      principally of changes in the values of our investment portfolios, decreased
      to
      a loss of $3.5 million from a loss of $531,000. Total expenses increased to
      $5.3
      million from $4.6 million, primarily due to the accrual of interest for taxes
      payable on the income recognized as the result of the sale of our interests
      in
      two limited partnerships. Equity in income (loss) of limited partnerships
      increased to income of $44.9 million from a loss of $2.1 million, primarily
      due to the sale of our interests in two limited partnerships.





*Nine
      Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
      2007*





Total
        revenue was $141.7 million for the nine months ended September 30, 2008 compared
        to $137.8 million for the same period in 2007, an increase of $3.9 million,
        or
        2.8%, primarily reflecting increases in revenue from investment advisory
        and
        related services and principal transactions revenue partially offset by a
        decline in investment banking revenue. Total expenses for the nine months
        ended
        September 30, 2008 increased $5.5 million, or 4.5%, to $127.6 million from
        $122.1 million in the same period of the previous year, principally due to
        higher employee compensation and benefits due to the revenue growth in the
        prime
        brokerage services division. Also, occupancy costs were $9.7 million for
        the
        nine months ended September 30, 2008 compared to $8.9 million in the same
        period
        of 2007 due to an increase in the amount of rental space occupied by SMH,
        the
        addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening
        of a
        new retail branch in Boca Raton, Florida. Equity in income of limited
        partnerships was $46.6 million for the nine months ended September 30, 2008
        compared to $4.3 million for the same period in 2007, primarily due to the
        sale
        of our interests in two limited partnerships. Net income was $33.0 million,
        or
        $1.23 per diluted common share, for the nine months ended September 30, 2008
        compared to $5.7 million, or $0.23 per diluted common share, for the same
        period
        in 2007.


23


Revenue
        from investment advisory and related services increased to $58.7 million
        for the
        nine months ended September 30, 2008 from $51.5 million in the same period
        of
        2007, primarily due to the acquisitions of Rikoon, Dickenson, Leonetti, and
        Miller-Green and the opening of a retail branch in Boca Raton, Florida.
        Commission revenue increased to $42.5 million for the nine months ended
        September 30, 2008 from $40.2 million for the same period in 2007, primarily
        as
        a result of an increase in trading volume in the institutional brokerage
        division. Investment banking revenue decreased to $10.8 million for the nine
        months ended September 30, 2008 from $27.7 million in the same period of
        2007,
        principally due to a decrease in the number of banking transactions completed
        during 2008 caused by weakness in the financial markets. Principal transactions
        revenue increased from $8.3 million for the nine months ended September 30,
        2007
        to $16.2 million for the same period in 2008, primarily as the result of
        an
        increase in proprietary trading gains to $5.0 million for the nine months
        ended
        September 30, 2008 from $2.5 million for the same period in 2007. Also,
        principal transactions revenue from the sale of fixed income products increased
        to $9.6 million during the nine months ended September 30, 2008 from $3.8
        million in the same period of 2007. Interest and dividend income decreased
        to
        $3.7 million for the nine months ended September 30, 2008 from $5.3 million
        in
        the same period last year due to a decrease in the amount of money in the
        firm’s
        accounts that are earning interest income and a decline in interest rates.
        This
        decrease was partially offset by interest earned on a note receivable issued
        to
        fund the sale of our interests in two limited partnerships. Other income
        increased from $4.9 million for the nine months ended September 30, 2007
        to $9.7
        million during the same period in 2008 reflecting growth in hedge fund servicing
        revenue and third-party marketing fees.





During
      the nine months ended September 30, 2008, employee compensation and benefits
      increased to $83.4 million from $80.1 million in the same period last year
      due
      to higher employee compensation and benefits resulting from the revenue growth
      in the prime brokerage services division. Floor brokerage, exchange, and
      clearance fees decreased to $4.5 million for the nine months ended September
      30,
      2008 from $4.9 million in the same period in 2007 reflecting lower clearing
      and
      execution costs resulting from a decline in trading volume. Communications
      and
      data processing costs increased to $8.5 million for the nine months ended
      September 30, 2008 from $7.6 million in the same period last year, primarily
      due
      to higher clearing firm service fees. Occupancy costs were $9.7 million for
      the
      nine months ended September 30, 2008 compared to $8.9 million in the same period
      of 2007 due to an increase in the amount of rental space occupied by SMH, the
      addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening
      of a
      new retail branch in Boca Raton, Florida. Interest expense increased to $400,000
      for the nine months ended September 30, 2008 from $30,000 for the same period
      in
      2007 due to the accrual of interest for taxes payable on the income recognized
      as the result of the sale of our interests in two limited partnerships.
      Amortization of intangible assets increased to $568,000 for the nine months
      ended September 30, 2008 compared to $234,000 for the same period in 2007 due
      to
      the addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Other general
      and
      administrative expenses increased to $20.5 million during the nine months ended
      September 30, 2008 from $20.4 million in the same period of last year. The
      increase in other general and administrative expenses was primarily due to
      increases in outside sales commissions and legal expenses partially offset
      by a
      decrease in the provision for bad debts.





Our
      effective tax rate was 38.4% for the nine months ended September 30, 2008
      compared to 37.2% for the nine months ended September 30, 2007. The effective
      tax rate exceeds the federal statutory income tax rate primarily as a result
      of
      state income taxes and certain nondeductible expenses.


24


RESULTS
        BY SEGMENT





**Asset/Wealth
      Management**





**Nine Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            82,360
            
            $
            76,583Income
                before income taxes
            
            $
            23,332
            
            $
            16,819





Revenue
      from asset/wealth management increased to $82.4 million from $76.6 million
      and
      income before income taxes increased to $23.3 million from $16.8 million.
      Investment advisory and related services revenue increased to $58.6 million
      from
      $51.2 million, primarily due to the acquisitions of Rikoon, Dickenson, Leonetti,
      and Miller-Green and the opening of a retail branch in Boca Raton, Florida.
      Additionally, the conversion of Edelman’s assets under management from a
      commission-based to a fee-based compensation structure contributed to the growth
      in investment advisory fee revenue. Commission revenue increased to $15.6
      million from $14.5 million, primarily as a result of an increase in trading
      volume. Total expenses increased to $55.7 million from $55.0 million, primarily
      due to increased employee compensation related to the higher revenue. In
      addition, clearing firm service fees increased due to the conversion of
      Edelman’s assets under management from a commission-based to a fee-based
      compensation structure. Equity in income of limited partnerships decreased
      to
      $3.7 million from $6.1 million, principally due to a decrease in the value
      of
      the investment portfolio of one of the limited partnerships that we manage.
      Minority interests in net income of consolidated subsidiaries, which reduces
      the
      Company’s pretax income, decreased to $7.0 million from $10.9 million,
      principally due to decreases in the values of the investment portfolios of
      the
      limited partnerships.




**Capital
      Markets**





*Investment*  *Banking*





**Nine Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            8,771
            
            $
            19,798Income
                (loss) before income taxes
            
            $
            (3,663
            )
            $
            4,532





Revenue
        from investment banking decreased to $8.8 million from $19.8 million and
        income
        (loss) before income taxes decreased to a loss of $3.7 million from income
        of
        $4.5 million. The revenue decrease is principally due to a decrease in the
        number of banking transactions
        completed during 2008 caused by weakness in the financial markets. Total
        expenses decreased to $12.4 million from $15.3 million. The decrease in expenses
        is attributable to decreased employee compensation, which is partially tied
        to
        revenue.


25


*Institutional
      Brokerage*





**Nine Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            13,777
            
            $
            12,301Income
                before income taxes
            
            $
            1,201
            
            $
            1,117





Revenue
      from institutional brokerage increased to $13.8 million from $12.3 million
      and
      income before income taxes increased to $1.2 million from $1.1 million.
      Commission revenue increased to $10.2 million from $7.9 million reflecting
      a
      $3.2 million increase in commissions from the sale of collateralized debt
      obligations in our fixed income division. This increase was partially offset
      by
      a decline in the number of shares traded in our institutional equity division.
      This decline is largely the result of the growth in electronic trading strategy
      execution software that replaces, in some cases, the role of traditional
      traders. Additionally, sales credits from syndicate and investment banking
      activities declined to $667,000 from $2.5 million reflecting a lower volume
      of
      offerings sold by the institutional division. Total expenses increased to $12.6
      million from $11.2 million, primarily due to increased employee compensation
      related to the higher commission revenue.





*Prime
      Brokerage Services*





**Nine Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            35,300
            
            $
            26,372Income
                before income taxes
            
            $
            2,750
            
            $
            2,748





Revenue
      from prime brokerage services increased to $35.3 million from $26.4 million
      and
      income before income taxes increased to $2.8 million from $2.7 million.
      Commission revenue and third-party marketing fees increased to $21.0 million
      from $17.6 million reflecting growth in hedge fund servicing revenue. In
      addition, principal transactions revenue increased to $13.0 million from $5.9
      million reflecting an increase in revenue earned from the sale of fixed income
      products. Total expenses increased to $32.6 million from $23.6 million
      reflecting increased compensation and outside sales commissions related to
      the
      increased revenue.





**Corporate
      Support and Other**





**Nine Months Ended September 30,****2008**
            
            **2007**(in thousands)Revenue
            
            $
            1,478
            
            $
            2,776Income
                (loss) before income taxes
            
            $
            30,014
            
            $
            (16,156
            )





Revenue
      from corporate support and other decreased to $1.5 million from $2.8 million
      and
      income (loss) before income taxes increased to income of $30.0 million from
      a
      loss of $16.2 million. Revenue from principal transactions, which consists
      principally of changes in the values of our investment portfolios, decreased
      to
      a loss of $1.2 million from a loss of $789,000. Interest and dividend income
      decreased to $2.4 million from $3.0 million due to a decrease in the amount
      of
      money in the firm’s accounts that are earning interest income and a decline in
      interest rates. Total expenses decreased to $14.3 million from $17.1 million,
      primarily due to a $3.0 million provision for bad debts related to a note
      receivable that was recorded in the second quarter of 2007. Equity in income
      (loss) of limited partnerships increased to income of $42.8 million from a
      loss
      of $1.8 million, primarily due to the sale of our interests in two limited
      partnerships.


26


**Liquidity
      and Capital Resources**





We
      intend
      to satisfy a large portion of our funding needs with our own capital resources,
      consisting mainly of internally generated earnings and liquid assets we
      currently hold.





At
      September 30, 2008, we had $26.0 million in cash and cash equivalents, which
      together with receivables from broker-dealers and clearing organizations,
      deposits with clearing organizations, and marketable securities owned
      represented 13.7% of our total assets at the end of the third quarter.





Receivables
      turnover, calculated as annualized revenue divided by average receivables,
      was
      three for the nine months ended September 30, 2008 compared to five for the
      same
      period in the prior year. The decrease in the receivables turnover is due to
      an
      increase in average receivables from related parties that typically mature
      in
      one to five years. The allowance for doubtful accounts as a percentage of
      receivables was 2.8% at September 30, 2008 compared to 5.0% at December 31,
      2007. The decrease in the allowance for doubtful accounts as a percentage of
      receivables was the result of an increase in receivables from a note receivable
      issued to fund the sale of our interests in two limited
      partnerships.





For
      the
      nine months ended September 30, 2008, net cash provided by operations was $20.7
      million versus net cash provided by operations of $8.7 million during the same
      period in 2007. Marketable securities owned increased by $1.4 million during
      the
      first nine months of 2008, securities sold, not yet purchased increased by
      $36,000, and payables to broker-dealers and clearing organizations decreased
      by
      $3.0 million. The change in marketable securities owned, securities sold, not
      yet purchased, and payables to broker-dealers and clearing organizations is
      primarily due to the trading portfolios of our proprietary trading operations.
      The Company’s proprietary trading operations carry both long and short equity
      securities. These trading operations generally seek to generate profits based
      on
      trading spreads, rather than through speculation on the direction of the market.
      We employ hedging strategies designed to insulate the net value of our trading
      inventories from fluctuations in the general level of interest rates and equity
      price variances. We finance a portion of our trading positions through our
      clearing broker-dealers.





Not
      readily marketable securities owned, primarily investments in limited
      partnerships, were $44.9 million at September 30, 2008 compared to $61.1 million
      at December 31, 2007. This decrease is the result of net dispositions of
      investment positions as well as changes in the values of our investment
      portfolios. Management believes its investment in limited partnerships is a
      critical part of its capital market investing activities that has historically
      generated favorable returns for the Company. These limited partnerships
      typically have a ten-year life.





Capital
      expenditures for the first nine months of 2008 were $7.2 million, mainly for
      the
      purchase of leasehold improvements, furniture, and computer equipment and
      software necessary for our growth.





At
      September 30, 2008, SMH, our registered broker-dealer subsidiary, was in
      compliance with the net capital requirements of the Securities and Exchange
      Commission's Uniform Net Capital Rules and had capital in excess of the required
      minimum.





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


27


**Item
      3** ***.
      Quantitative and Qualitative Disclosures About Market
      Risk***





**Market
      Risk**





During
      the nine months ended September 30, 2008, 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, 2007.





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





At
      September 30, 2008, securities owned by the Company were recorded at a fair
      value of $64.7 million, including $19.7 million in marketable securities, $40.7
      million representing the Company’s investments in limited partnerships, and $4.3
      million representing other not readily marketable securities.





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





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




**Item
      4.**  ***Controls
      and Procedures***





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


28


**PART
      II. OTHER INFORMATION**





**Item
      1.** ***Legal
      Proceedings***





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





In
      May
      2005, SMH acted as placement agent for a private placement of $50.0 million
      in
      convertible preferred stock of Ronco Corporation, a company involved in direct
      response marketing. Subsequent to the offering, Ronco experienced financial
      difficulties and ultimately filed a voluntary petition under Chapter 11 of
      the
      Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale
      of substantially all of Ronco’s assets in August 2007, and the case has been
      converted to liquidation under Chapter 7. It is unlikely that there will be
      any
      distribution to its unsecured creditors or equity security holders.  In
      2007, SMH wrote off a $3.0 million subordinated working capital loan that it
      made to Ronco in 2006.





On
      May
      23, 2007, two purchasers of Ronco convertible preferred stock filed a complaint
      against SMH, US Special Opportunities Trust PLC and Renaissance US Growth
      Investment Trust PLC, Case No. 07-04837, in the 193rd Judicial District Court,
      Dallas County, Texas, alleging common law fraud, statutory fraud in a stock
      transaction, violations of the Texas Securities Act, and negligent
      misrepresentation in connection with the plaintiffs’ purchase of $2.0 million in
      Ronco convertible preferred stock. SMH has filed an answer and special
      exceptions. SMH believes it has valid defenses to all claims made by the
      plaintiffs. However, there is no assurance that the Company will successfully
      defend such claims.





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





**Item
      1A.** ***Risk
      Factors***





Information
        regarding risk factors associated with our business is set forth in Part
        I, Item
        1A of our Annual Report on Form 10-K for the year ended December 31, 2007
        filed
        with the SEC on March 13, 2008. These risk factors describe some of the
        assumptions, risks, uncertainties, and other factors that could adversely
        affect
        our business or that could otherwise result in changes that differ materially
        from our expectations. Except for the addition of the risk factors below,
        there
        have not been any material changes from the risk factors associated with
        our
        business as previously disclosed in Part I, Item 1A of our Annual Report
        on Form
        10-K for the year ended December 31, 2007.




29




***There
      is no assurance that recently enacted legislation authorizing the Department
      of
      the Treasury to establish programs to purchase illiquid mortgages and invest
      directly in financial institutions will stabilize the financial
      markets.***





On
      October 3, 2008, President Bush signed into law the Emergency Economic
      Stabilization Act of 2008 (“EESA”). The legislation was the result of a proposal
      by President Bush and Treasury Secretary Henry M. Paulson, Jr. to the United
      States Congress on September 20, 2008 in response to the financial crises
      affecting the banking system and financial markets and going concern threats
      to
      major investment banks and other financial institutions. Pursuant to the EESA,
      the Department of the Treasury has the authority to, among other things,
      purchase and insure up to $700 billion of mortgages, mortgage-backed securities,
      and certain other financial instruments from financial institutions for the
      purpose of providing liquidity to the United States financial system. The
      Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation
      (“FDIC”) are implementing an array of other assistance programs. There is no
      assurance that government intervention will succeed in reducing the extreme
      levels of volatility and increasing the limited credit availability currently
      being experienced. The failure of EESA to help stabilize the financial markets
      and a continuation or worsening of current financial market conditions could
      materially and adversely affect our business, financial condition, results
      of
      operations, access to credit, and the trading price of our common
      stock.





***Difficult
      market conditions have adversely affected the financial services industry and
      could adversely affect us.***





The
      stock
      and credit markets have been experiencing volatility and disruption for more
      than twelve months. In October, the volatility and disruption reached
      unprecedented levels. In some cases, the markets have produced downward pressure
      on stock prices and credit availability for certain issuers without regard
      to
      those issuers’ underlying financial strength. In addition, the financial
      services industry is experiencing unprecedented change and volatility. During
      2008, several banks and securities firms in the United States and elsewhere
      have
      failed outright or have been acquired by other financial institutions, often
      in
      distressed sales. The continuation or worsening of current conditions may cause
      us to face some or all of the following risks:




**•**    The
      number of investment banking transactions where we act as advisor could be
      adversely affected by continued uncertainties in valuations related to asset
      quality and creditworthiness, volatility in the equity markets, and diminished
      access to financing.





**•**    Our
      opportunity to act as underwriter or placement agent in equity and debt
      offerings could be adversely affected by competing government sources of equity
      or by volatile equity or debt markets.





**•**    We
      may
      experience losses in securities trading activities or as a result of write-downs
      in the value of securities that we own as a result of deteriorations in the
      businesses or creditworthiness of the issuers of such securities.





**•**    We
      may
      incur unexpected costs or losses as a result of the bankruptcy or other failure
      of companies for which we have performed investment banking services to honor
      ongoing obligations such as indemnification or expense reimbursement
      agreements.




•    As
      an
      introducing broker to clearing firms, we are responsible to the clearing firms
      and could be held liable for the defaults of our customers, including losses
      incurred as the result of a customer’s failure to meet a margin call. Although
      we review credit exposure to specific customers, default risk may arise from
      events or circumstances that are difficult to detect or foresee. When we allow
      customers to purchase securities on margin, we are subject to risks inherent
      in
      extending credit. This risk increases when a market is rapidly declining and
      the
      value of the collateral held falls below the amount of a customer’s
      indebtedness. If a customer’s account is liquidated as the result of a margin
      call, we are liable to our clearing firm for any deficiency.




**•**    Competition
      in our investment banking, sales, and trading businesses could intensify as
      a
      result of the increasing pressures on financial services companies and larger
      firms competing for transactions and business that historically would have
      been
      too small for them to consider.





**•**    Our
      industry could face increased regulation as a result of legislative or
      regulatory initiatives, and the responsibilities of the SEC and other federal
      agencies may be reallocated. Compliance
      with such regulation may increase our costs and limit our ability to pursue
      business opportunities.





**•**    Government
      intervention may not succeed in stabilizing the financial and credit markets
      and
      may have negative consequences for our business.





If
      one or
      more of the foregoing risks occurs, we could experience an adverse effect,
      which
      may be material, on our business, financial condition, and results of
      operations.




30




***Lack
      of sufficient liquidity or access to capital could impair our business and
      financial condition.***





Historically,
      we have satisfied our need for funding from internally generated funds, sales
      of
      shares of our common stock to our employees and to the public, and a revolving
      credit facility with a financial institution. As a result of the low level
      of
      leverage that we have traditionally employed in our business model, we have
      not
      been forced to significantly curtail our business activities as a result of
      lack
      of credit sources and we believe that our capital resources are currently
      sufficient to continue to support our current business activities. However,
      to
      complete our acquisition of Edelman Financial Center we will need approximately
      $50 million in available cash in May 2009. In the event existing internal and
      external financial resources do not satisfy our needs, we would have to seek
      additional outside financing. The availability of outside financing will depend
      on a variety of factors, such as our financial condition and results of
      operations, the availability of acceptable collateral, market conditions, the
      general availability of credit, the volume of trading activities, and the
      overall availability of credit to the financial services industry.





***The
      soundness of other financial institutions could adversely affect us.***





Our
      ability to engage in routine funding transactions could be adversely affected
      by
      the actions and commercial soundness of other financial institutions. Financial
      services institutions are interrelated as a result of trading, clearing,
      counterparty, or other relationships. We have exposure to many different
      counterparties and we routinely execute transactions with counterparties in
      the
      financial services industry, including brokers and dealers, commercial banks,
      investment banks, mutual and hedge funds, and other institutional clients.
      As a
      result, defaults by, or even rumors or questions about, one or more financial
      services institutions, or the financial services industry generally, have led
      to
      market-wide liquidity problems and could lead to losses or defaults by us or
      by
      other institutions. Many of these transactions expose us to credit risk in
      the
      event of default of our counterparty or client. In addition, our credit risk
      may
      be exacerbated when the collateral held by us cannot be realized upon or is
      liquidated at prices not sufficient to recover the full amount of the receivable
      due us. Any such losses could be material and could materially and adversely
      affect our business, financial condition, and results of operations.





**Item
      5.** ***Other
      Information***





None.


31


**Item
      6.** ***Exhibits***





**INDEX
      TO EXHIBITS**





**Exhibit****Number**
            
            **Description**3.1
            
            Articles
                of Incorporation of the Company, as amended (Filed as Exhibit 3.1
                to the
                Company’s Annual Report on Form 10-K for the year ended December 31, 2001
                (File No. 000-30066), and incorporated herein by
                reference).3.2
            
            Amended
                and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended September 30,
                2007
                (File No. 000-30066), and incorporated herein by
                reference).†10.01
            
            Sanders
                Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as
                Appendix
                A to the Definitive Proxy Statement on Schedule 14A of the Company
                dated
                May 3, 2002 (File No. 000-30066), and incorporated herein by
                reference).†10.02
            
            Sanders
                Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit
                10.1
                to the Company’s Form 10-Q for the quarter ended September 30, 2001 (File
                No. 000-30066), and incorporated herein by reference).†10.03
            
            Form
                of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
                10.03 to the Company’s Annual Report on Form 10-K for the year ended
                December 31, 2005 (File No. 000-30066), and incorporated herein by
                reference).†10.04
            
            Form
                of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed
                as
                Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
                ended December 31, 2005 (File No. 000-30066), and incorporated herein
                by
                reference).10.05
            
            Office
                Lease Agreement and related amendments dated September 25, 1996,
                between
                Texas Tower Limited and Sanders Morris Mundy Inc. (Filed as Exhibit
                10.3
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2000 (File No. 000-30066), and incorporated herein by
                reference).10.06
            
            Eleventh
                Amendment to Lease Agreement dated as of December 21, 2006, between
                Texas
                Tower Limited and Sanders Morris Harris Inc. (Filed as Exhibit 10.6
                to the
                Company’s Annual Report on Form 10-K for the year ended December 31, 2007
                (File No. 000-30066), and incorporated herein by
                reference).10.07
            
            Credit
                Agreement dated as of May 9, 2005, between Sanders Morris Harris
                Group
                Inc. and JPMorgan Chase Bank, National Association (Filed as Exhibit
                10.7
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005 (File No. 000-30066), and incorporated herein by
                reference).*10.08
            
            Agreement
                and Fifth Amendment to Credit Agreement and Amendment to Interest
                Rate
                Agreement dated as of May 31, 2008, among Sanders Morris Harris Group
                Inc.
                and JPMorgan Chase Bank, National Association.10.09
            
            Reorganization
                and Purchase Agreement dated as of May 10, 2005, among Sanders Morris
                Harris Group Inc., The Edelman Financial Center, Inc., The Edelman
                Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1
                to the
                Company’s Current Report on Form 8-K dated May 10, 2005 (File No.
                000-30066), and incorporated herein by reference).10.10
            
            Contribution
                Agreement dated as of April 28, 2003, by and between Salient Partners,
                L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas
                limited
                partnership, Salient Capital, L.P., a Texas limited partnership,
                Salient
                Partners GP, LLC, a Texas limited liability company, John A. Blaisdell,
                Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag
                Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc.
                (Filed
                as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
                ended December 31, 2007 (File No. 000-30066), and incorporated herein
                by
                reference).10.11
            
            Agreement
                to Retire Partnership Interest and Second Amendment to the Limited
                Partnership Agreement of Endowment Advisers, L.P. dated as of August
                29,
                2008, among Sanders Morris Harris Group Inc. and Endowment Advisers,
                L.P.,
                The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC,
                and
                their respective partners and members (Filed as Exhibit 99.2 to the
                Company’s Current Report on Form 8-K dated August 29, 2008 (File No.
                000-30066), and incorporated herein by
                reference).


32





*31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer.*31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer.*32.1
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.*32.2
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.





*
            Filed
                herewith.


†
            Management
                contract or compensation plan or
                arrangement.


33


**SIGNATURES**





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





**SANDERS
                MORRIS HARRIS GROUP INC.**By:
            /s/
                BEN T. MORRIS**Ben
                T. Morris****Chief
                Executive Officer**By:
            /s/
                RICK BERRY**Rick
                Berry****Chief
                Financial Officer**





Date:  November
      10, 2008


34