**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**




**(Mark
      one)**




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




**FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2008**




**OR**




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




**Commission
      File No. 0-30066**




**SANDERS
      MORRIS HARRIS GROUP INC.**


(Exact
      name of registrant as specified in its charter)




**Texas**
            
            **76-0583569**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              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 filer o
            Accelerated
                filer xNon-accelerated
                filer o
            Smaller
                reporting company o




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 May
      8, 2008, the registrant had 25,270,809 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 March 31, 2008 (unaudited) and
                December
                31, 2007
            
            2Condensed
                Consolidated Statements of Operations for the Three Months Ended
                March 31,
                2008 and 2007 (unaudited)
            
            3Condensed
                Consolidated Statement of Shareholders' Equity for the Three Months
                Ended
                March 31, 2008 (unaudited)
            
            4Condensed
                Consolidated Statements of Cash Flows for the Three Months Ended
                March 31,
                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
            
            25Item
                4.
            Controls
                and Procedures
            
            25**PART
                II. OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            
            26Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            27Item
                6.
            Exhibits
            
            28




1




**PART
      I. FINANCIAL INFORMATION**





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





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


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**As
      of March 31, 2008 and December 31, 2007**


(in
      thousands, except share and per share amounts)





**March** **31,**
              **2008**
            
            **December** **31,**
              **2007**(unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            27,125
            
            $
            46,503Receivables,
                net of allowance of $2,721 and $2,330, respectivelyBroker-dealers
                and clearing organizations
            
            
            266
            
            
            232Customers
            
            
            24,942
            
            
            25,147Related
                parties
            
            
            18,773
            
            
            14,676Other
            
            
            2,870
            
            
            4,408Deposits
                with clearing organizations
            
            
            1,095
            
            
            1,095Securities
                owned
            
            
            75,800
            
            
            84,898Securities
                available for sale
            
            
            667
            
            
            759Furniture,
                equipment, and leasehold improvements, net
            
            
            18,893
            
            
            16,613Deferred
                tax asset, net
            
            
            34
            
            
            -Other
                assets and prepaid expenses
            
            
            2,194
            
            
            2,329Goodwill,
                net
            
            
            94,385
            
            
            88,461Other
                intangible assets, net
            
            
            6,297
            
            
            6,427Total
                assets
            
            $
            273,341
            
            $
            291,548**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                payable and accrued liabilities
            
            $
            19,475
            
            $
            29,523Borrowings
            
            
            450
            
            
            200Deferred
                tax liability, net
            
            
            -
            
            
            137Securities
                sold, not yet purchased
            
            
            12,721
            
            
            15,432Payable
                to broker-dealers and clearing organizations
            
            
            766
            
            
            2,973Total
                liabilities
            
            
            33,412
            
            
            48,265Commitments
                and contingenciesMinority
                interests
            
            
            17,256
            
            
            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; 26,291,494
                and
                25,765,806 shares issued, respectively
            
            
            263
            
            
            258Additional
                paid-in capital
            
            
            207,634
            
            
            204,596Retained
                earnings
            
            
            21,072
            
            
            23,422Accumulated
                other comprehensive income
            
            
            125
            
            
            161Treasury
                stock, at cost, 1,049,085 and 929,285 shares, respectively
            
            
            (6,421
            )
            
            (5,259
            )Total
                shareholders' equity
            
            
            222,673
            
            
            223,178Total
                liabilities and shareholders' equity
            
            $
            273,341
            
            $
            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 OPERATIONS**


(in
      thousands, except per share amounts)


(unaudited)





**Three Months Ended**
              **March 31,****2008**
            
            **2007**Revenue:Investment
                advisory and related services
            
            $
            20,857
            
            $
            14,860Commissions
            
            
            13,989
            
            
            13,518Investment
                banking
            
            
            2,365
            
            
            10,159Principal
                transactions
            
            
            2,717
            
            
            3,322Interest
                and dividends
            
            
            1,170
            
            
            1,940Other
                income
            
            
            3,718
            
            
            1,684Total
                revenue
            
            
            44,816
            
            
            45,483Expenses:Employee
                compensation and benefits
            
            
            28,438
            
            
            26,516Floor
                brokerage, exchange, and clearance fees
            
            
            1,457
            
            
            1,505Communications
                and data processing
            
            
            2,878
            
            
            2,270Occupancy
            
            
            3,206
            
            
            3,031Interest
            
            
            5
            
            
            12Amortization
                of intangible assets
            
            
            169
            
            
            -Other
                general and administrative
            
            
            7,162
            
            
            5,673Total
                expenses
            
            
            43,315
            
            
            39,007Income
                before equity in loss of limited partnerships, minority interests,
                and
                income taxes
            
            
            1,501
            
            
            6,476Equity
                in loss of limited partnerships
            
            
            (1,749
            )
            
            (315
            )Income
                (loss) before minority interests and income taxes
            
            
            (248
            )
            
            6,161Minority
                interests in net income of consolidated companies
            
            
            (3,101
            )
            
            (1,839
            )Income
                (loss) before income taxes
            
            
            (3,349
            )
            
            4,322Provision
                (benefit) for income taxes
            
            
            (1,242
            )
            
            1,581Net
                income (loss)
            
            $
            (2,107
            )
            $
            2,741Earnings
                (loss) per common share:Basic
            
            $
            (0.08
            )
            $
            0.11Diluted
            
            $
            (0.08
            )
            $
            0.11Weighted
                average common shares outstanding:Basic
            
            
            24,940
            
            
            24,611Diluted
            
            
            25,165
            
            
            24,939





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 three months ended March 31, 2008**


(in
      thousands, except share and per share amounts)


(unaudited)




**Amounts**
              
              
              
              **Shares****Common
                  stock**Balance,
                  beginning of period
              
              $
              258
              
              
              
              
              
              25,765,806Stock
                  issued for acquisition
              
              
              2
              
              
              
              
              
              186,567Stock
                  issued pursuant to employee benefit plan
              
              
              3
              
              
              
              
              
              339,121Balance,
                  end of period
              
              
              263
              
              
              
              
              
              26,291,494**Additional
                paid-in capital**Balance,
                  beginning of period
              
              
              204,596Stock
                  issued for acquisition
              
              
              1,748Stock
                  issued pursuant to employee benefit plan; including tax
                  benefit
              
              
              614Stock-based
                  compensation expense
              
              
              676Balance,
                  end of period
              
              
              207,634**Retained
                  earnings**Balance,
                  beginning of period
              
              
              23,422Cumulative
                  effect of adoption of a new accounting principle
              
              
              893Cash
                  dividends ($0.045 per share)
              
              
              (1,136
              )Net
                  loss
              
              
              (2,107
              )
              
              (2,107
              )Balance,
                  end of period
              
              
              21,072
              
              
              (2,107
              )**Accumulated
                  other comprehensive income (loss)**Balance,
                  beginning of period
              
              
              161Net
                  change in unrealized appreciation on securities available for
                  sale
              
              
              (58
              )
              
              (58
              )Income
                  tax benefit on change in unrealized appreciation on securities
                available
                  for sale
              
              
              22
              
              
              22Balance,
                  end of period
              
              
              125
              
              
              (36
              )**Comprehensive
                  income (loss)**
              
              
              
              
              
              (2,143
              )**Treasury
                  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**
              
              **$**
              **222,673**
              
              
              
              
              
              **25,242,409**
 
 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 three months ended March 31, 2008 and 2007**
 (in
        thousands)
 (unaudited)
 **2008**
                ****
                **2007**CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income (loss)
                
                $
                (2,107
                )
                $
                2,741Adjustments
                    to reconcile net income (loss) to net cash provided by (used
                    in) operating
                    activities:(Gain)
                    loss on sales of assets
                
                
                89
                
                
                (3
                )Depreciation
                
                
                946
                
                
                843Provision
                    for bad debts
                
                
                398
                
                
                3Stock-based
                    compensation expense
                
                
                676
                
                
                598Amortization
                    of intangible assets
                
                
                169
                
                
                -Deferred
                    income taxes
                
                
                (149
                )
                
                (179
                )Equity
                    in loss of limited partnerships
                
                
                1,749
                
                
                315Minority
                    interests in net income of consolidated companies
                
                
                3,101
                
                
                1,839Unrealized
                    and realized losses on not readily marketable securities owned,
                    net
                
                
                1,291
                
                
                314Not
                    readily marketable securities owned received for payment of investment
                    banking fees
                
                
                (10
                )
                
                (607
                )Net
                    change in:Receivables
                
                
                (2,776
                )
                
                (3,303
                )Deposits
                    with clearing organizations
                
                
                -
                
                
                (3
                )Marketable
                    securities owned
                
                
                7,166
                
                
                17,472Other
                    assets and prepaid expenses
                
                
                (146
                )
                
                (798
                )Accounts
                    payable and accrued liabilities
                
                
                (10,068
                )
                
                (8,467
                )Securities
                    sold, not yet purchased
                
                
                (2,711
                )
                
                (6,420
                )Payable
                    to broker-dealers and clearing organizations
                
                
                (2,207
                )
                
                (186
                )Net
                    cash provided by (used in) operating activities
                
                
                (4,589
                )
                
                4,159CASH
                    FLOWS FROM INVESTING ACTIVITIES:Capital
                    expenditures
                
                
                (3,447
                )
                
                (541
                )Acquisitions,
                    net of cash acquired of $126
                
                
                (3,874
                )
                
                -Purchases
                    of not readily marketable securities owned
                
                
                (205
                )
                
                (20,060
                )Proceeds
                    from sales of not readily marketable securities owned
                
                
                -
                
                
                123Proceeds
                    from sales and maturities of securities available for sale
                
                
                34
                
                
                53Proceeds
                    from sales of assets
                
                
                132
                
                
                4Net
                    cash used in investing activities
                
                
                (7,360
                )
                
                (20,421
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Purchases
                    of treasury stock
                
                
                (1,162
                )
                
                -Proceeds
                    from shares issued pursuant to employee benefit plan
                
                
                471
                
                
                199Tax
                    benefit of stock options exercised
                
                
                146
                
                
                54Proceeds
                    from borrowings
                
                
                250
                
                
                -Distributions
                    to minority interests
                
                
                (6,018
                )
                
                (3,210
                )Payments
                    of cash dividends
                
                
                (1,116
                )
                
                (1,103
                )Net
                    cash used in financing activities
                
                
                (7,429
                )
                
                (4,060
                )Net
                    decrease in cash and cash equivalents
                
                
                (19,378
                )
                
                (20,322
                )CASH
                    AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                46,503
                
                
                68,861CASH
                    AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                27,125
                
                $
                48,539
 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*




Through
      its operating subsidiaries SMH Capital Inc. (formerly Sanders Morris Harris
      Inc.) (“SMH”), Salient Capital Management, LLC (“Salient”), 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”), and Select Sports
      Group, Ltd. (“SSG”), 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, trust related services, sports representation and
      management), investment and merchant banking, and institutional services
      (including institutional sales and trading, prime brokerage services, and
      research). The Company serves a diverse group of institutional, corporate,
      and
      individual clients.





*Principles
      of Consolidation*




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





In
      management's opinion, the unaudited condensed consolidated financial statements
      include all adjustments necessary for a fair presentation of our consolidated
      financial position at March 31, 2008, our results of operations for the three
      months ended March 31, 2008 and 2007, and our cash flows for the three months
      ended March 31, 2008 and 2007. All adjustments are of a normal 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
      SFAS No. 141, *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
      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 March
      31, 2008, the Company had $17.3 million in minority interests that would be
      reported as a component of equity under the requirements of SFAS No.
      160.





**2.**
            **ACQUISITIONS**





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 $6.0 million, which has been recorded as
      goodwill and other intangible assets.





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, which has been recorded as goodwill and other intangible
      assets.




7




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
      goodwill and other intangible assets.





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





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





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




**March
                  31, 2008**
              
              **December
                  31, 2007****Owned**
              
              **Sold, Not Yet**
                **Purchased**
              
              **Owned**
              
              **Sold, Not Yet**
                **Purchased**(in
                  thousands)Marketable:Corporate
                  stocks and options
              
              $
              16,816
              
              $
              12,721
              
              $
              23,799
              
              $
              15,432Corporate
                  bond
              
              
              40
              
              
              -
              
              
              -
              
              
              -16,856
              
              
              12,721
              
              
              23,799
              
              
              15,432Not
                  readily marketable:Limited
                  partnerships
              
              
              52,659
              
              
              -
              
              
              53,012
              
              
              -Warrants
              
              
              5,316
              
              
              -
              
              
              5,649
              
              
              -Equities
                  and options
              
              
              969
              
              
              -
              
              
              2,438
              
              
              -58,944
              
              
              -
              
              
              61,099
              
              
              -$
              75,800
              
              $
              12,721
              
              $
              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.,
      Endowment Advisors, L.P., SMH Private Equity Group I, L.P., SMH Private Equity
      Group II, L.P., Salient Enhanced Credit Fund, L.P., Salient Total Return Fund,
      L.P., Global Hedged Equity Fund, L.P., and SMH NuPhysicia, LLC.




8




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
      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, net yet purchased as of March 31, 2008:




**Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3**
              
              **Total**(in
                  thousands)Securities
                  owned
              
              $
              16,551
              
              $
              5,473
              
              $
              53,776
              
              $
              75,800Securities
                  sold, net yet purchased
              
              
              12,555
              
              
              166
              
              
              **-**
              
              
              12,721




The
      following table sets forth a summary of changes in the fair value of the
      Company’s level 3 securities owned for the three months ended March 31,
      2008:




**Level 3**
                  **Securities Owned**(in
                    thousands)Balance
                    at beginning of period
                
                $
                55,880Unrealized
                    losses relating to securities still held at the reporting
                    date
                
                
                (2,319
                )Purchases,
                    issuances, and settlements
                
                
                215Balance
                    at end of period
                
                $
                53,776




9




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


**Three
                  Months Ended**
                **March
                  31, 2008****Principal**
                **Transactions**
              
              **Equity in Loss**
                **of Limited**
                **Partnerships**(in
                  thousands)Unrealized
                  losses relating to securities still held at the reporting
                  date
              
              $
              (570
              )
              $
              (1,749
              )





**4.**
            **SECURITIES
                AVAILABLE FOR SALE**





Securities
      available for sale at March 31, 2008 were as follows:




**Amortized**
              
              **Gross
                  Unrealized**
              
              **Estimated****Cost**
              
              **Gains**
              
              **Losses**
              
              **Fair
                  Value**(in
                  thousands)U.S.
                  government and agency obligation
              
              $
              100
              
              $
              1
              
              $
              -
              
              $
              101Marketable
                  equity securities
              
              
              359
              
              
              207
              
              
              -
              
              
              566Total
              
              $
              459
              
              $
              208
              
              $
              -
              
              $
              667




The
      contractual maturity of the debt security available for sale at March 31, 2008
      was as follows:


**Amortized**
                **Cost**
              
              **Estimated**
                **Fair Value**(in
                  thousands)Over
                  25 years
              
              $
              100
              
              $
              101




The
      following table sets forth by level within the fair value hierarchy securities
      available for sale as of March 31, 2008:




**Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3**
              
              **Total**(in
                  thousands)Securities
                  available for sale
              
              $
              566
              
              $
              101
              
              $
              -
              
              $
              667





No
      realized gains or losses on securities available for sale were recorded for
      the
      three months ended March 31, 2008 and 2007.





**5.**
            **BORROWINGS**





During
      May 2005, the Company entered into a $15.0 million revolving credit facility
      with a bank. In May 2006, this credit agreement was amended to increase the
      revolving credit facility to $18.0 million. The line of credit expires on May
      31, 2008, unless extended. Borrowings under the line of credit bear interest
      at
      LIBOR plus 150 basis points. Interest is payable quarterly on this line of
      credit. The credit facility is secured by a pledge of ownership interests in
      two
      of the Company’s subsidiaries. Debt covenants require the Company to maintain
      certain debt-to-EBITDA and liquidity to funded debt ratios, as well as minimum
      assets under management. At March 31, 2008, the Company was in compliance with
      all covenants. The line of credit has a commitment fee of 1/8% per annum. There
      was no outstanding balance on the line of credit at March 31, 2008. The amount
      of available borrowings under the line of credit, which is reduced by letters
      of
      credit issued by the Company, was $16.5 million at March 31, 2008.




10




During
      December 2005, Salient entered into a $2.5 million revolving credit facility
      with a bank. The line of credit expired in April 2008. Salient is in the process
      of renewing this line of credit under similar terms and conditions to the
      existing credit facility. Borrowings under the line of credit bear interest
      at
      LIBOR plus 165 basis points. The interest rate of Salient’s borrowings ranged
      from 4.33% to 6.51% during 2008 and was 4.33% at March 31, 2008. Interest is
      payable monthly on this line of credit. The credit facility is unsecured and
      not
      subject to financial covenants; however, payment is guaranteed by SMHG and
      the
      principals of Salient. The outstanding balance on the line of credit was
      $450,000 at March 31, 2008.





**6.**
            **INCOME
                TAXES**





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


**Three
                  Months Ended**
                **March
                  31,****2008**
              
              **2007**(in
                  thousands)Expected
                  federal tax at statutory rate of 34% for 2008 and 35% for
                  2007
              
              $
              (1,139
              )
              $
              1,513State
                  and other income taxes
              
              
              (103
              )
              
              68Total
              
              $
              (1,242
              )
              $
              1,581




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.





**7.**
            **ACCOUNTING
                FOR STOCK-BASED COMPENSATION
                PLANS**





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





The
      following table sets forth pertinent information regarding stock option
      transactions for the three months ended March 31, 2008.


**Number**
                **of
                  Shares**
              
              **Weighted**
                **Average**
                **Exercise Price**Outstanding
                  at January 1, 2008
              
              
              856,385
              
              $
              8.30Granted
              
              
              -
              
              
              -Exercised
              
              
              (89,394
              )
              
              4.84Outstanding
                  at March 31, 2008
              
              
              766,991
              
              $
              8.70Options
                  exercisable at March 31, 2008
              
              
              689,491
              
              $
              7.97Incentive
                  award shares available for grant at March 31, 2008
              
              
              1,989,138




11




During
      the three months ended March 31, 2008 and 2007, 89,394 and 25,000 options were
      exercised for which the Company received proceeds of $433,000 and $121,000,
      respectively. The Company recognized pretax compensation expense of $27,000
      and
      $48,000 during the three months ended March 31, 2008 and 2007, respectively,
      related to stock options. The portion of stock-based compensation expense
      related to stock options that was unrecognized at March 31, 2008 was
      $159,000.





The
      following table summarizes certain information related to restricted common
      stock grants at March 31, 2008:


**Number
                  of**
                **Shares**
              
              **Weighted**
                **Average**
                **Grant
                  Date**
                **Fair
                  Value**Nonvested
                  at January 1, 2008
              
              
              526,741
              
              $
              13.39Nonvested
                  at March 31, 2008
              
              
              693,163
              
              $
              11.80For
                  the three months ended March 31, 2008:Granted
              
              
              249,940
              
              $
              8.96Vested
              
              
              83,305
              
              $
              13.33Forfeited
              
              
              213
              
              $
              10.58





Employees
      deferred compensation of $38,000 and $78,000 during the three months ended
      March
      31, 2008 and 2007, respectively, that was used to purchase restricted common
      stock. The Company recognized pretax compensation expense of $649,000 and
      $550,000 during the three months ended March 31, 2008 and 2007, respectively,
      related to its restricted common stock plan. At March 31, 2008, total
      unrecognized compensation cost, net of estimated forfeitures, related to
      nonvested restricted stock totaled $5.8 million.





**8.**
            **TREASURY
                STOCK**





On
      November 6, 2007, the Company’s board of directors approved a program to
      repurchase up to 1,000,000 shares of the Company’s common stock. Under the
      program, shares are repurchased in the open market or privately negotiated
      transactions from time to time at prevailing market prices. Such repurchases
      are
      accounted for using the cost method. The Company repurchased 119,800 shares
      of
      its common stock during the three months ended March 31, 2008 related to this
      program.




12




**9.**
            **EARNINGS
                (LOSS) PER COMMON SHARE**





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




**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands,
                except
                    per share amounts)Net
                  income (loss)
              
              $
              (2,107)
                  $
              
              
              2,741Earnings
                  (loss) per common share:Basic
              
              $
              (0.08
              )
              $
              0.11Diluted
              
              $
              (0.08
              )
              $
              0.11Weighted
                  average number of common shares outstanding:Basic
              
              
              24,940
              
              
              24,611Incremental
                  common shares issuable under stock option plan, net
              
              
              225
              
              
              328Diluted
              
              
              25,165
              
              
              24,939





Outstanding
      stock options of 305,000 for each of the three months ended March 31, 2008
      and
      2007 have not been included in diluted earnings per common share because to
      do
      so would have been antidilutive for the periods presented.





**10.**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Company has issued letters of credit in the amounts of $630,000, $250,000,
      $245,000, $230,000, $144,000, and $92,000 to the owners of six 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.





As
      discussed in Note 2 – Acquisitions, in May 2008 the Company will purchase
      an additional 25% membership interest in Edelman for $44.4 million payable
      in a
      combination of cash and the Company’s common stock.





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 million
      to cover its start-up expenses. The loans to EFA are payable on May 12, 2009.
      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. The outstanding balance of the Company’s loan to EFA was $10.0 million
      at March 31, 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 sixteen
      additional markets, including Atlanta, Baltimore, Chicago, Columbus, Dallas,
      Detroit, Houston, Indianapolis, Los Angeles, Miami, New York City, Orlando,
      Phoenix, Portland, Oregon, San Diego, and San Francisco.




13




Pursuant
      to the terms of (a) the Contribution Agreement dated as of April 28, 2003,
      among
      the Company and the other owners of Salient (the “Salient Partners”), pursuant
      to which Salient was formed, and (b) the Contribution and Option Agreement
      dated
      as of April 28, 2003, among the Company, the Salient Partners, and MWY
      Consulting, LLC, pursuant to which the Company acquired an interest in Endowment
      Advisers GP, L.P. (“EA GP”) and Endowment Advisers, L.P. (“EA LP”), subsequent
      to May 1, 2008, the Company and the Salient Partners have the right, at any
      time, exercisable by written notice to the other party to buy each other’s
      ownership interests in Salient, EA GP, and EA LP. Under the procedure
      established by the agreements, following the giving of notice of an offer,
      the
      parties have 30 days to arrive at a mutually agreeable price. If the parties
      cannot agree on a price within such 30-day period, the price based on the fair
      market value of Salient, EA GP, and EA LP, will be determined by independent
      appraisers selected by the parties. Following determination of the price, the
      Salient Partners have the first right exercisable within ten days following
      the
      price determination to exercise their right to buy the Company’s interest in
      Salient, EA GP, and EA LP from the Company. The purchase price is payable 50%
      in
      cash and the balance in the form of a promissory note maturing three years
      following its date of issuance and bearing interest at the prime rate. If the
      Salient Partners do not exercise their right to purchase the Company’s interest
      in Salient, EA GP, and EA LP, the Company has the right to purchase the Salient
      Partners’ interests in such entities. If the Company exercises its right to
      purchase Salient Partner’s interest, certain principals of Salient are obligated
      to enter into employment agreements with the Company with a minimum term of
      two-years (which shall contain a coterminous non-compete provision) with
      compensation and upon terms mutually acceptable to the parties (but in no event
      with compensation less than that which is being received by a principal at
      such
      time). If following commencement of the process neither party exercises its
      right to purchase the other parties’ interest, the ownership would remain the
      same with the purchase right exercisable again at a future date by either party.





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





In
      the
      normal course of business, the Company enters into underwriting commitments.
      There were no firm underwriting commitments open at March 31, 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.





The
      Financial Industry Regulatory Authority (formerly the NASD) (“FINRA”) initially
      conducted an inspection of our Concept Capital prime brokerage and private
      investment or hedge fund support operations based in our New York office in
      November 2004.  Subsequent to such inspection, FINRA opened an
      investigation with respect to our prime brokerage and related hedge fund
      operations. In August 2006, SMH received a “Wells letter” notification from
      FINRA, which stated that the staff of FINRA had made a preliminary determination
      to recommend that disciplinary action be brought against SMH and four of its
      employees based on alleged violations of certain conduct rules of FINRA. 
On October 17, 2007, SMH executed an Acceptance, Waiver and Consent (“AWC”) to
      resolve all matters with respect to the disciplinary action, which was accepted
      by FINRA on January 9, 2008.  Pursuant to the AWC, SMH has paid a fine of
      $450,000.





In
      May
      2005, SMH acted as placement agent for a private placement of $50.0 million
      in
      convertible preferred stock of Ronco Corporation, a leading company 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.  SMH
      has written off a $3.0 million subordinated working capital loan that it made
      to
      Ronco in 2006.  SMH is a defendant in two proceedings related to Ronco, one
      of which is material and discussed below.




14




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
      by 2018 with initial noncancelable terms in excess of one year.





**11.**
            **BUSINESS
                SEGMENT INFORMATION**





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





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





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





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




15




·
            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 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. Gains and losses from sports representation
      and
      management services performed by SSG are included in Corporate Support.




16




The
      following summarizes certain financial information of each reportable business
      segment for the three months ended March 31, 2008 and 2007, respectively. SMHG
      does not analyze asset information in all business segments.


**Three
                  Months Ended**
                **March
                  31,****2008**
              
              **2007**(in
                  thousands)Revenue:Asset/Wealth
                  Management
              
              $
              30,619
              
              $
              23,684Capital
                  Markets:Investment
                  banking
              
              
              656
              
              
              7,224Institutional
                  brokerage
              
              
              3,757
              
              
              4,644Prime
                  brokerage services
              
              
              10,520
              
              
              8,869Capital
                  Markets Total
              
              
              14,933
              
              
              20,737Corporate
                  Support
              
              
              (736
              )
              
              1,062Total
              
              $
              44,816
              
              $
              45,483Income
                  (loss) before equity in income (loss) of limited partnerships,
                  minority
                  interests, and income taxes:Asset/Wealth
                  Management
              
              $
              9,196
              
              $
              6,432Capital
                  Markets:Investment
                  banking
              
              
              (3,172
              )
              
              1,571Institutional
                  brokerage
              
              
              (9
              )
              
              626Prime
                  brokerage services
              
              
              507
              
              
              1,073Capital
                  Markets Total
              
              
              (2,674
              )
              
              3,270Corporate
                  Support
              
              
              (5,021
              )
              
              (3,226
              )Total
              
              $
              1,501
              
              $
              6,476Equity
                  in income (loss) of limited partnerships:Asset/Wealth
                  Management
              
              $
              463
              
              $
              (588
              )Capital
                  Markets:Investment
                  banking
              
              
              -
              
              
              -Institutional
                  brokerage
              
              
              -
              
              
              -Prime
                  brokerage services
              
              
              -
              
              
              -Capital
                  Markets Total
              
              
              -
              
              
              -Corporate
                  Support
              
              
              (2,212
              )
              
              273Total
              
              $
              (1,749
              )
              $
              (315
              )Minority
                  interests in net income of consolidated companies:Asset/Wealth
                  Management
              
              $
              (3,101
              )
              $
              (1,839
              )Capital
                  Markets:Investment
                  banking
              
              
              -
              
              
              -Institutional
                  brokerage
              
              
              -
              
              
              -Prime
                  brokerage services
              
              
              -
              
              
              -Capital
                  Markets Total
              
              
              -
              
              
              -Corporate
                  Support
              
              
              -
              
              
              -Total
              
              $
              (3,101
              )
              $
              (1,839
              )Income
                  (loss) before income taxes:Asset/Wealth
                  Management
              
              $
              6,558
              
              $
              4,005Capital
                  Markets:Investment
                  banking
              
              
              (3,172
              )
              
              1,571Institutional
                  brokerage
              
              
              (9
              )
              
              626Prime
                  brokerage services
              
              
              507
              
              
              1,073Capital
                  Markets Total
              
              
              (2,674
              )
              
              3,270Corporate
                  Support
              
              
              (7,233
              )
              
              (2,953
              )Total
              
              $
              (3,349
              )
              $
              4,322




17




**12.**
            **SUPPLEMENTAL
                CASH FLOW INFORMATION**


**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Cash
                  payment (refund) for income taxes, net
              
              $
              221
              
              $
              (8
              )Cash
                  paid for interest
              
              
              4
              
              
              10Noncash
                  investing activities:Acquisition:Receivables
              
              
              10
              
              
              -Minority
                  interests
              
              
              (68
              )
              
              -Common
                  stock
              
              
              (1,750
              )
              
              -Noncash
                  financing activities:Dividends
                  declared not yet paid
              
              
              1,141
              
              
              1,105





**13.**
            **RELATED
                PARTIES**





The
      Company had receivables from related parties totaling $18.8 million at March
      31,
      2008, primarily consisting of $10.0 million notes receivable from EFA, $2.3
      million of advances to unconsolidated related entities to fund operating
      expenses, $4.0 million of notes receivable from employees and consultants
      representing loans made to induce the employees and consultants to affiliate
      with the Company, and $631,000 of management fees receivable from the limited
      partnerships that the Company manages.





**14.**
            **SUBSEQUENT
                EVENT**





On
      April
      1, 2008, the Company completed the acquisition Miller-Green Financial Services
      Inc., an independent wealth management firm based in Houston, Texas with
      approximately $400 million of assets under management, for cash consideration
      of
      $3.0 million.





18




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





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, financial
      planning, and trust 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.





*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. The growth in assets under our management over the prior year
      resulted in higher management fees for us. During the last half of 2007 and
      through the first three months of 2008, uncertain and unfavorable economic
      conditions along with weak credit markets have resulted in an overall decline
      in
      the values of many of our security positions and adversely affected our
      investment banking business.





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.




19




**Components
      of Revenue and Expenses**





*Revenue* .
      Our
      revenue is comprised primarily of (1) fees from asset-based advisory services,
      asset management, financial planning, and fiduciary 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 dividends received from the equity and
      fixed
      income securities held in our corporate capital accounts, earn fees through
      the
      sale of insurance products, and have realized and unrealized gains (or losses)
      on securities in our inventory account.





*Expenses.* Our
      expenses consist of (1) compensation and benefits, (2) floor brokerage,
      exchange, and clearance fees, and (3) other expenses. Compensation and benefits
      have both a variable component, based on revenue production, and a fixed
      component. The variable component includes institutional and retail sales
      commissions, bonuses, overrides, and other incentives. Wealth advisory and
      institutional commissions are based on competitive commission schedules.
      Employees of the investment banking group and the research group receive a
      salary and discretionary bonuses as compensation. The fixed component includes
      administrative and executive salaries, payroll taxes, employee benefits, and
      temporary employee costs. Compensation and benefits is our largest expense
      item
      and includes wages, salaries, and benefits. During the first quarter of 2008,
      compensation and benefits represented 65.7% of total expenses and 63.5% of
      total
      revenue, compared to 68.0% of total expenses and 58.3% of total revenue during
      the first quarter of 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.





**Results
      of Operations**





*Three
      Months Ended March 31, 2008 Compared to Three Months Ended March 31,
      2007*





Total
      revenue was $44.8 million in the first quarter of 2008 compared to $45.5 million
      for the same quarter in 2007, a decrease of $667,000, or 1.5%, primarily
      reflecting a decline in investment banking revenue partially offset by an
      increase in revenue from investment advisory and related services. Total
      expenses for the first quarter of 2008 increased $4.3 million, or 11.0%, to
      $43.3 million from $39.0 million in the same quarter of the previous year
      principally due to higher employee compensation and benefits due to the revenue
      growth in the asset/wealth management segment. Also, communications and data
      processing expense increased as the result of an increase in clearing firm
      service fees at Edelman. Equity in loss of limited partnerships was $1.7 million
      for the first quarter of 2008 compared to $315,000 for the first quarter of
      2007, principally due to a decline in the value of the investment portfolio
      of
      one of the limited partnerships that we manage. Net loss was $2.1 million,
      or
      $0.08 per diluted common share, for the first quarter of 2008 compared to net
      income of $2.7 million, or $0.11 per diluted common share, for the first quarter
      of 2007.




20




Revenue
      from investment advisory and related services increased to $20.9 million in
      the
      first quarter of 2008 from $14.9 million in the same quarter of 2007, primarily
      due to the conversion of Edelman’s assets under management from a
      commission-based to a fee-based compensation structure and to the addition
      of
      assets under management at Edelman and Salient. Additionally, the acquisitions
      of Rikoon, Dickenson, and Leonetti contributed to the growth in investment
      advisory fee revenue. Commission revenue increased to $14.0 million in the
      first
      quarter of 2008 from $13.5 million for the same period in 2007, primarily as
      a
      result of an increase in trading volume in the asset/wealth management division.
      Investment banking revenue decreased to $2.4 million during the first quarter
      of
      2008 from $10.2 million in the same period of 2007 principally due to a decrease
      in private placement income and advisory fees. Principal transactions revenue
      decreased from $3.3 million for the first quarter of 2007 to $2.7 million for
      the first quarter of 2008 as the result of declines in the value of our
      investment portfolios. Interest and dividend income decreased to $1.2 million
      in
      the first quarter of 2008 from $1.9 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. Other income increased from
      $1.7 million during the first quarter of 2007 to $3.7 million during the same
      period in 2008 due to higher trading volume in the propriety trading operations
      of our Concept Capital division.





During
      the three months ended March 31, 2008, employee compensation and benefits
      increased to $28.4 million from $26.5 million in the same period last year
      due
      to higher employee compensation and benefits resulting from the revenue growth
      in the asset/wealth management segment. Floor brokerage, exchange, and clearance
      fees remained constant at $1.5 million in the first quarter of 2008 and 2007.
      Communications and data processing costs increased to $2.9 million in 2008
      from
      $2.3 million in the same period last year, primarily due to higher clearing
      firm
      service fees at Edelman caused by the conversion of accounts from a
      commission-based to a fee-based fee structure. Occupancy costs totaled $3.2
      million during the first quarter of 2008 compared to $3.0 million in the first
      quarter of 2007 due to the increase in the amount of rental space occupied
      by
      Salient, the addition of Rikoon, Dickenson, and Leonetti, and the opening of
      a
      new retail branch in Boca Raton, Florida. Interest expense decreased to $5,000
      for the first quarter of 2008 from $12,000 for the first quarter of 2007.
      Amortization of intangible assets was $169,000 for the first quarter of 2008.
      There was no such amortization recorded in 2007. Other general and
      administrative expenses increased to $7.2 million during the first quarter
      of
      2008 from $5.7 million in the first quarter of last year. The increase in other
      general and administrative expenses was primarily due to an increase in the
      allowance for doubtful accounts and increases in travel, regulatory licenses,
      outside sales commissions, and non-capitalized software expenses.





Our
      effective tax rate was 37.1% for the three months ended March 31, 2008 compared
      to 36.6% for the three months ended March 31, 2007. The effective tax rate
      exceeds the federal statutory income tax rate primarily as a result of state
      income taxes, which was partially affected by certain interest and dividend
      income not subject to tax.





RESULTS
      BY SEGMENT





**Asset/Wealth
      Management**




**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              30,619
              
              $
              23,684Income
                  before income taxes
              
              $
              6,558
              
              $
              4,005





Revenue
      from asset/wealth management increased to $30.6 million from $23.7 million
      and
      income before income taxes increased to $6.6 million from $4.0 million.
      Investment advisory and related services revenue increased to $20.8 million
      from
      $14.7 million, primarily due to the conversion of Edelman’s assets under
      management from a commission-based to a fee-based compensation structure and
      to
      the addition of assets under management at Edelman and Salient. Additionally,
      the acquisitions of Rikoon, Dickenson, and Leonetti contributed to the growth
      in
      investment advisory fee revenue. Total expenses increased to $21.4 million
      from
      $17.3 million, primarily due to increased employee compensation related to the
      higher revenue. Equity in income (loss) of limited partnerships increased to
      income of $463,000 from a loss of $588,000, principally due to an increase
      in
      the value of the investment portfolio of one of the limited partnerships that
      we
      manage.




21




**Capital
      Markets**





*Investment*  *Banking*




**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              656
              
              $
              7,224Income
                  (loss) before income taxes
              
              $
              (3,172
              )
              $
              1,571




Revenue
      from investment banking decreased to $656,000 from $7.2 million and income
      (loss) before income taxes decreased to a loss of $3.2 million from income
      of
      $1.6 million. The revenue decrease is due to a decrease in private placement
      income and 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 $3.8 million from $5.7 million. This
      decrease in expenses is attributable to decreased employee compensation, which
      is partially tied to revenue.





*Institutional
      Brokerage*




**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              3,757
              
              $
              4,644Income
                  (loss) before income taxes
              
              $
              (9
              )
              $
              626





Revenue
      from institutional brokerage decreased to $3.8 million from $4.6 million and
      income (loss) before income taxes decreased to a loss of $9,000 from income
      of
      $626,000. Commission revenue declined to $2.8 million from $3.1 million
      reflecting 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 $121,000 from $909,000 reflecting a lower volume
      of offerings sold by the institutional division. Total expenses decreased to
      $3.8 million from $4.0 million, primarily due to decreased employee compensation
      related to the lower revenue.




22




*Prime
      Brokerage Services*




**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              10,520
              
              $
              8,869Income
                  before income taxes
              
              $
              507
              
              $
              1,073





Revenue
      from prime brokerage increased to $10.5 million from $8.9 million and income
      before income taxes decreased to $507,000 from $1.1 million. Commission revenue
      and third-party marketing fees increased to $7.5 million from $5.6 million
      reflecting growth in hedge fund servicing revenue. Total expenses increased
      to
      $10.0 million from $7.8 million reflecting increased compensation and other
      costs related to increased revenue.





**Corporate
      Support**




**Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              (736
              )
              $
              1,062Loss
                  before income taxes
              
              $
              (7,233
              )
              $
              (2,953
              )





Revenue
      from corporate support decreased to $(736,000) from $1.1 million and the loss
      before income taxes increased to $7.2 million from $3.0 million. Revenue from
      principal transactions, which consists principally of changes in the values
      of
      our investment portfolios, decreased to a loss of $1.4 million from a loss
      of
      $234,000. Total expenses remained constant at $4.3 million, with a decrease
      in
      compensation expense offset by an increase in legal fees and professional
      services. Equity in income (loss) of limited partnerships decreased to a loss
      of
      $2.2 million from income of $273,000, principally due to a decrease in the
      value
      of the investment portfolio of one of the limited partnerships that we
      manage.





**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
      March
      31, 2008, we had $27.1 million in cash and cash equivalents, which together
      with
      receivables from broker-dealers and clearing organizations, deposits with
      clearing organizations, marketable securities owned, and securities available
      for sale represented 16.8% of our total assets at the end of the first quarter.





Receivables
      turnover, calculated as annualized revenue divided by average receivables,
      was
      four for the quarter ended March 31, 2008 compared to six for the same period
      in
      the prior year. The decrease in the receivables turnover is due to an increase
      in receivables from related parties that typically mature in one to five years.
      The allowance for doubtful accounts as a percentage of receivables was 5.5%
      at
      March 31, 2008 compared to 5.2% at December 31, 2007. The increase in the
      allowance for doubtful accounts as a percentage of receivables was the result
      of
      a $398,000 provision for bad debts recorded in the first quarter of
      2008.





For
      the
      quarter ended March 31, 2008, net cash used in operations totaled $4.6 million
      versus net cash provided by operations of $4.2 million during the first quarter
      of 2007. Accounts payable and accrued liabilities decreased by $10.1 million
      during the three months ended March 31, 2008, principally due to the payment
      of
      accrued compensation during the first quarter of 2008.




23




Marketable
      securities owned decreased by $7.2 million during the first quarter of 2008,
      securities sold, not yet purchased decreased by $2.7 million, and payables
      to
      broker-dealers and clearing organizations decreased by $2.2 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 $58.9 million at March 31, 2008 compared to $61.1 million
      at
      December 31, 2007. This decrease is primarily the result of 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 quarter of 2008 were $3.4 million, mainly for the
      purchase of leasehold improvements, furniture, and computer equipment and
      software necessary for our growth.





At
      March
      31, 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. Salient
      Trust Co., LTA was in compliance with the Texas Department of Banking net
      capital requirements 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.




**Factors
      Affecting 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 (the "Acts"). 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. The Private
      Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. To comply with the safe harbor, the Company cautions
      readers that a variety of factors could cause the Company's actual results
      to
      differ materially from the anticipated results or other expectations expressed
      in the Company's forward-looking statements. These risks and uncertainties,
      many
      of which are beyond the Company's 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, which could
      affect the demand for the Company's services or the cost of doing business;
      (4)
      general economic conditions, both domestic and foreign, especially in the
      regions where the Company does 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 the Company’s trading and warrant portfolios resulting from
      mark-to-market adjustments; (10) dependence on key personnel; and (11) demand
      for the Company's services. The Company does not undertake to publicly update
      or
      revise any forward-looking statements.




24




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





**Market
      Risk**





During
      the three months ended March 31, 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. The growth in assets under our management resulted in higher
      advisory fees for us. In addition, the instability in the credit markets, which
      sharply widened the spreads over treasuries of certain less than investment
      grade bonds held primarily in our newly established high yield hedge fund,
      created losses in our investment portfolio and declines in investment banking
      revenue during the second half of 2007 and the first quarter of
      2008.





At
      March
      31, 2008, securities owned by the Company were recorded at a fair value of
      $75.8
      million, including $16.9 million in marketable securities, $52.6 million
      representing the Company’s investments in limited partnerships, and $6.3 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.





At
      March
      31, 2008, Salient had securities available for sale with a fair value of
      $667,000. These securities have an original cost of $459,000 and are subject
      to
      equity price risk. At March 31, 2008, the unrealized increase in fair value
      totaling $209,000, less tax of $84,000, has been included as a separate
      component of shareholders’ equity.




**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 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.




25




**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.





The
      Financial Industry Regulatory Authority (formerly the NASD) (“FINRA”) initially
      conducted an inspection of our Concept Capital prime brokerage and private
      investment or hedge fund support operations based in our New York office in
      November 2004.  Subsequent to such inspection, FINRA opened an
      investigation with respect to our prime brokerage and related hedge fund
      operations. In August 2006, SMH received a “Wells letter” notification from
      FINRA, which stated that the staff of FINRA had made a preliminary determination
      to recommend that disciplinary action be brought against SMH and four of its
      employees based on alleged violations of certain conduct rules of FINRA. 
On October 17, 2007, SMH executed an Acceptance, Waiver and Consent (“AWC”) to
      resolve all matters with respect to the disciplinary action, which was accepted
      by FINRA on January 9, 2008.  Pursuant to the AWC, SMH has paid a fine of
      $450,000.





In
      May
      2005, SMH acted as placement agent for a private placement of $50.0 million
      in
      convertible preferred stock of Ronco Corporation, a leading company 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.  SMH
      has written off a $3.0 million subordinated working capital loan that it made
      to
      Ronco in 2006.  SMH is a defendant in two proceedings related to Ronco, one
      of which is material and discussed below.





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.




26




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





On
      February 29, 2008, the Company issued 186,567 shares of common stock to Leonetti
      & Associates, Inc. and its former owner as partial consideration for the
      purchase of the assets and goodwill of such business. The shares were valued
      at
      $1.75 million, or $9.38 per share. In addition to the shares, the owner of
      Leonetti & Associates, Inc. received a cash payment of $4.0 million. The
      shares were issued by the Company without registration under the Securities
      Act
      of 1933 pursuant to and in reliance on Section 4(2) of such Act, relating to
      transactions not involving a public offering, and Regulation D
      thereunder.




27


**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 Fourth Amendment to Credit Agreement dated as of May 7, 2007,
                    among
                    Sanders Morris Harris Group Inc. and JPMorgan Chase Bank, National
                    Association (Filed as Exhibit 10.10 to the Company’s Quarterly Report on
                    Form 10-Q for the quarter ended June 30, 2007 (File No. 000-30066),
                    and
                    incorporated herein by reference).10.09
                
                Reorganization
                    and Purchase Agreement dated as of May 10, 2005, among Sanders
                    Morris
                    Harris Group Inc., The Edelman Financial Center, Inc., The Edelman
                    Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit
                    2.1 to the
                    Company’s Current Report on Form 8-K dated May 10, 2005 (File No.
                    000-30066), and incorporated herein by reference).10.10
                
                Contribution
                    Agreement dated as of April 28, 2003, by and between Salient
                    Partners,
                    L.P., a Texas limited partnership, Salient Advisors, L.P., a
                    Texas limited
                    partnership, Salient Capital, L.P., a Texas limited partnership,
                    Salient
                    Partners GP, LLC, a Texas limited liability company, John A.
                    Blaisdell,
                    Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A.
                    Haag
                    Sherman, and Adam L. Thomas, and Sanders Morris Harris Group,
                    Inc. (Filed
                    as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
                    ended December 31, 2007 (File No. 000-30066), and incorporated
                    herein by
                    reference).*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. 1350, as Adopted Pursuant to Section 906
                    of the
                    Sarbanes-Oxley Act of 2002.*32.2
                
                Certification
                    Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906
                    of the
                    Sarbanes-Oxley Act of 2002.
  
 * Filed
          herewith.
 † Management
          contract or compensation plan or arrangement.
  28




**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:
                  May 12, 2008




29