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, 2010




OR




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




Commission
File No. 000-30066




SANDERS
MORRIS HARRIS GROUP INC.




(Exact
name of registrant as specified in its charter)




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




(713)
224-3100




(Registrant’s
telephone number, including area code)




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




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




Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.




Large
      accelerated filer   ̈
              Accelerated
      filerxNon-accelerated
      filer   ̈
              Smaller
      reporting company  ̈




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




As of May 6, 2010, the registrant had
29,993,394 outstanding shares of common stock, par value $0.01 per
share.









SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES





INDEX





PagePART
      I.FINANCIAL
      INFORMATIONItem
      1.
                                      Financial
      Statements
                                      2Condensed
      Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December
      31, 2009
                                      2Condensed
      Consolidated Statements of Operations for the Three Months Ended March 31,
      2010 and 2009 (unaudited)
                                      3Condensed
      Consolidated Statement of Changes in Equity for the Three Months Ended
      March 31, 2010 (unaudited)
                                      4Condensed
      Consolidated Statements of Cash Flows for the Three
      Months  Ended March 31, 2010 and 2009
(unaudited)
                                      5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                      6Item
      2.
                                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      23Item
      3.
                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                      31Item
      4.
                                      Controls
      and Procedures
                                      31PART II.OTHER
      INFORMATIONItem
      1.
                                      Legal
      Proceedings
                                      32Item
      1A.
                                      Risk
      Factors
                                      33Item
      2.
                                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                                      33Item
      5.
                                      Other
      Information
                                      33Item
      6.
                                      Exhibits
                                      34




1


PART
I.   FINANCIAL INFORMATION


Item
1.  Financial
Statements




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


As
of March 31, 2010 and December 31, 2009


(in
thousands, except share and per share amounts)





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(unaudited)ASSETSCash
      and cash equivalents
                  
                  $
                  40,323
                  
                  
                  $
                  41,926Receivables,
      net
                  
                  
                  115,035
                  
                  
                  
                  113,072Deposits
      with clearing organizations
                  
                  
                  2,473
                  
                  
                  
                  2,527Securities
      owned
                  
                  
                  32,028
                  
                  
                  
                  39,380Furniture,
      equipment, and leasehold improvements, net
                  
                  
                  14,417
                  
                  
                  
                  14,617Other
      assets and prepaid expenses
                  
                  
                  3,354
                  
                  
                  
                  2,863Goodwill,
      net
                  
                  
                  73,864
                  
                  
                  
                  73,455Other
      intangible assets, net
                  
                  
                  32,708
                  
                  
                  
                  32,198Total
      assets
                  
                  $
                  314,202
                  
                  
                  $
                  320,038LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued liabilities
                  
                  $
                  32,377
                  
                  
                  $
                  35,357Borrowings
                  
                  
                  18,452
                  
                  
                  
                  20,238Deferred
      tax liability, net
                  
                  
                  15,697
                  
                  
                  
                  15,455Securities
      sold, not yet purchased
                  
                  
                  5,877
                  
                  
                  
                  8,339Payable
      to broker-dealers and clearing organizations
                  
                  
                  15
                  
                  
                  
                  22Total
      liabilities
                  
                  
                  72,418
                  
                  
                  
                  79,411Commitments
      and contingenciesEquity:Preferred
      stock, $0.10 par value; 10,000,000 shares authorized;  no shares
      issued and outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.01 par value; 100,000,000 shares authorized; 30,006,622 and
      29,882,238 shares issued, respectively
                  
                  
                  300
                  
                  
                  
                  299Additional
      paid-in capital
                  
                  
                  241,805
                  
                  
                  
                  240,450Accumulated
      deficit
                  
                  
                  (15,493
                  )
                  
                  
                  (16,555
                  )Treasury
      stock, at cost, 367,798 and 0 shares, respectively
                  
                  
                  (1,889
                  )
                  
                  
                  -Total
      Sanders Morris Harris Group Inc. shareholders' equity
                  
                  
                  224,723
                  
                  
                  
                  224,194Noncontrolling
      interest
                  
                  
                  17,061
                  
                  
                  
                  16,433Total
      equity
                  
                  
                  241,784
                  
                  
                  
                  240,627Total
      liabilities and equity
                  
                  $
                  314,202
                  
                  
                  $
                  320,038





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


2


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except per share amounts)


(unaudited)





Three
      Months EndedMarch
      31,2010
                      
                      
                      2009Revenue:Investment
      advisory and related services
                      
                      $
                      21,933
                      
                      
                      $
                      14,185Commissions
                      
                      
                      11,362
                      
                      
                      
                      10,404Investment
      banking
                      
                      
                      1,497
                      
                      
                      
                      280Principal
      transactions
                      
                      
                      6,717
                      
                      
                      
                      6,289Interest
      and dividends
                      
                      
                      2,795
                      
                      
                      
                      2,627Other
      income
                      
                      
                      2,756
                      
                      
                      
                      2,073Total
      revenue
                      
                      
                      47,060
                      
                      
                      
                      35,858Expenses:Employee
      compensation and benefits
                      
                      
                      29,537
                      
                      
                      
                      23,066Floor
      brokerage, exchange, and clearance fees
                      
                      
                      1,248
                      
                      
                      
                      1,699Communications
      and data processing
                      
                      
                      3,048
                      
                      
                      
                      2,295Occupancy
                      
                      
                      3,318
                      
                      
                      
                      2,811Interest
                      
                      
                      460
                      
                      
                      
                      180Goodwill
      and other intangible assets impairment charges
                      
                      
                      -
                      
                      
                      
                      14,928Amortization
      of other intangible assets
                      
                      
                      445
                      
                      
                      
                      209Other
      general and administrative
                      
                      
                      7,832
                      
                      
                      
                      5,357Total
      expenses
                      
                      
                      45,888
                      
                      
                      
                      50,545Income
      (loss) from continuing operations before equity in income (loss)
      of  limited partnerships and income taxes
                      
                      
                      1,172
                      
                      
                      
                      (14,687
                      )Equity
      in income (loss) of limited partnerships
                      
                      
                      3,226
                      
                      
                      
                      (498
                      )Income
      (loss) from continuing operations before income taxes
                      
                      
                      4,398
                      
                      
                      
                      (15,185
                      )Provision
      (benefit) for income taxes
                      
                      
                      1,240
                      
                      
                      
                      (5,751
                      )Income
      (loss) from continuing operations, net of income taxes
                      
                      
                      3,158
                      
                      
                      
                      (9,434
                      )Loss
      from discontinued operations, net of income taxes
                      
                      
                      (112
                      )
                      
                      
                      (2,358
                      )Net
      income (loss)
                      
                      
                      3,046
                      
                      
                      
                      (11,792
                      )Less:  Net
      income attributable to the noncontrolling interest
                      
                      
                      (1,211
                      )
                      
                      
                      (1,052
                      )Net
      income (loss) attributable to Sanders Morris Harris Group
    Inc.
                      
                      $
                      1,835
                      
                      
                      $
                      (12,844
                      )Basic
      earnings (loss) per common share:Continuing
      operations
                      
                      $
                      0.07
                      
                      
                      $
                      (0.38
                      )Discontinued
      operations
                      
                      
                      (0.01
                      )
                      
                      
                      (0.09
                      )Net
      earnings (loss)
                      
                      $
                      0.06
                      
                      
                      $
                      (0.47
                      )Diluted
      earnings (loss) per common share:Continuing
      operations
                      
                      $
                      0.07
                      
                      
                      $
                      (0.38
                      )Discontinued
      operations
                      
                      
                      (0.01
                      )
                      
                      
                      (0.09
                      )Net
      earnings (loss)
                      
                      $
                      0.06
                      
                      
                      $
                      (0.47
                      )Weighted
      average common shares outstanding:Basic
                      
                      
                      29,915
                      
                      
                      
                      27,567Diluted
                      
                      
                      29,920
                      
                      
                      
                      27,567Amounts
      attributable to Sanders Morris Harris Group Inc.
      common  shareholders:Income
      (loss) from continuing operations, net of income taxes
                      
                      $
                      1,947
                      
                      
                      $
                      (10,486
                      )Discontinued
      operations, net of income taxes
                      
                      
                      (112
                      )
                      
                      
                      (2,358
                      )Net
      income (loss)
                      
                      $
                      1,835
                      
                      
                      $
                      (12,844
                      )





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


3


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


For
the three months ended March 31, 2010


(in
thousands, except share and per share amounts)


(unaudited)





Amounts
                              
                              
                              SharesCommon
      stock:Balance,
      beginning of period
                              
                              $
                              299
                              
                              
                              
                              29,882,238Stock
      issued pursuant to employee benefit plan
                              
                              
                              1
                              
                              
                              
                              124,384Balance,
      end of period
                              
                              
                              300
                              
                              
                              
                              30,006,622Additional
      paid-in capital:Balance,
      beginning of period
                              
                              
                              240,450Stock
      issued pursuant to employee benefit plan; including tax
      benefit
                              
                              
                              44Cash
      settlement of stock options
                              
                              
                              (140
                              )Tax
      adjustment related to employee benefit plan
                              
                              
                              859Stock-based
      compensation expense
                              
                              
                              592Balance,
      end of period
                              
                              
                              241,805Accumulated
      deficit:Balance,
      beginning of period
                              
                              
                              (16,555
                              )Cumulative
      effect of adoption of a new accounting principle
                              
                              
                              577Cash
      dividends ($0.045 per share)
                              
                              
                              (1,350
                              )Net
      income attributable to Sanders Morris Harris Group Inc.
                              
                              
                              1,835Balance,
      end of period
                              
                              
                              (15,493
                              )Treasury
      stock:Balance,
      beginning of period
                              
                              
                              -
                              
                              
                              
                              -Acquisition
      of treasury stock
                              
                              
                              (1,889
                              )
                              
                              
                              (367,798
                              )Balance,
      end of period
                              
                              
                              (1,889
                              )
                              
                              
                              (367,798
                              )Noncontrolling
      interest:Balance,
      beginning of period
                              
                              
                              16,433Cumulative
      effect of adoption of a new accounting principle
                              
                              
                              (462
                              )Purchase
      of membership interest
                              
                              
                              410Contributions
                              
                              
                              -Distributions
                              
                              
                              (531
                              )Net
      income attributable to the noncontrolling interest
                              
                              
                              1,211Balance,
      end of period
                              
                              
                              17,061Total
      equity and common shares outstanding
                              
                              $
                              241,784
                              
                              
                              
                              29,638,824





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


4


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





Three
      Months EndedMarch 31,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                  
                  $
                  3,046
                  
                  
                  $
                  (11,792
                  )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Loss
      on sales of assets
                  
                  
                  1
                  
                  
                  
                  12Depreciation
                  
                  
                  1,092
                  
                  
                  
                  1,038Provision
      for bad debts
                  
                  
                  1,505
                  
                  
                  
                  24Stock-based
      compensation expense
                  
                  
                  592
                  
                  
                  
                  689Goodwill
      and other intangible assets impairment charges
                  
                  
                  -
                  
                  
                  
                  14,928Amortization
      of other intangible assets
                  
                  
                  445
                  
                  
                  
                  209Deferred
      income taxes
                  
                  
                  242
                  
                  
                  
                  (4,944
                  )Equity
      in (income) loss of limited partnerships
                  
                  
                  (3,226
                  )
                  
                  
                  498Unrealized
      and realized (gain) loss on not readily marketable securities owned,
      net
                  
                  
                  (303
                  )
                  
                  
                  723Net
      change in:Receivables
                  
                  
                  (3,311
                  )
                  
                  
                  (6,212
                  )Deposits
      with clearing organizations
                  
                  
                  54
                  
                  
                  
                  (501
                  )Marketable
      securities owned
                  
                  
                  8,930
                  
                  
                  
                  3,244Other
      assets and prepaid expenses
                  
                  
                  (479
                  )
                  
                  
                  (282
                  )Accounts
      payable and accrued liabilities
                  
                  
                  (3,221
                  )
                  
                  
                  (2,803
                  )Securities
      sold, not yet purchased
                  
                  
                  (2,462
                  )
                  
                  
                  (4,710
                  )Payable
      to broker-dealers and clearing organizations
                  
                  
                  (7
                  )
                  
                  
                  (558
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  2,898
                  
                  
                  
                  (10,437
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                  
                  
                  (891
                  )
                  
                  
                  (396
                  )Acquisitions,
      net of cash acquired of $0 and $0, respectively
                  
                  
                  (750
                  )
                  
                  
                  (34
                  )Cumulative
      effect of adoption of a new accounting principle
                  
                  
                  560
                  
                  
                  
                  -Purchases
      of not readily marketable securities owned
                  
                  
                  (95
                  )
                  
                  
                  (209
                  )Proceeds
      from sales of not readily marketable securities owned
                  
                  
                  1,434
                  
                  
                  
                  2,387Proceeds
      from sales of assets
                  
                  
                  31
                  
                  
                  
                  76Net
      cash provided by investing activities
                  
                  
                  289
                  
                  
                  
                  1,824CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchases
      of treasury stock
                  
                  
                  (1,889
                  )
                  
                  
                  (28
                  )Proceeds
      from shares issued pursuant to employee benefit plan
                  
                  
                  41
                  
                  
                  
                  10Tax
      benefit of stock options exercised
                  
                  
                  4
                  
                  
                  
                  -Tax
      adjustment related to employee benefit plan
                  
                  
                  859
                  
                  
                  
                  (486
                  )Cash
      settlement of stock options
                  
                  
                  (140
                  )
                  
                  
                  -Repayment
      of borrowings
                  
                  
                  (1,786
                  )
                  
                  
                  -Contributions
      by noncontrolling interest
                  
                  
                  -
                  
                  
                  
                  20Distributions
      to noncontrolling interest
                  
                  
                  (531
                  )
                  
                  
                  (1,934
                  )Payments
      of cash dividends
                  
                  
                  (1,348
                  )
                  
                  
                  (1,269
                  )Net
      cash used in financing activities
                  
                  
                  (4,790
                  )
                  
                  
                  (3,687
                  )Net
      decrease in cash and cash equivalents
                  
                  
                  (1,603
                  )
                  
                  
                  (12,300
                  )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  41,926
                  
                  
                  
                  30,224CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  40,323
                  
                  
                  $
                  17,924





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


5


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            BASIS
      OF PRESENTATION





Nature
of Operations




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





Principles
of Consolidation




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




In June
2009, the Financial Accounting Standards Board (“FASB”) amended its guidance on
accounting for variable interest entities (“VIEs”). The new accounting guidance
resulted in a change in our accounting policy effective January 1, 2010.
Among other things, the new guidance requires more qualitative than quantitative
analyses to determine the primary beneficiary of a VIE, requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE, and
amends certain guidance for determining whether an entity is a VIE. Under the
new guidance, a VIE must be consolidated if an enterprise has both (a) the
power to direct the activities of the VIE that most significantly impact the
entity's economic performance and (b) the obligation to absorb losses or
the right to receive benefits from the VIE that could potentially be significant
to the VIE. This new accounting guidance was effective for the Company on
January 1, 2010, and is being applied prospectively.




On
January 1, 2010, we deconsolidated an investment in one of the Company’s
limited partnerships as a result of this change in accounting policy. This
entity had previously been consolidated due to financial support provided by the
Company. The Company does not hold a majority of the variable interests in this
limited partnership and it does not have the power to direct the activities of
the VIE that most significantly impact the VIE’s economic performance.
Consequently, subsequent to the change in accounting policy, the Company
deconsolidated this entity.  The Company has accounted for this
limited partnership investment at fair value since January 1,
2010.  This investment will now be on the balance sheet within
securities owned at fair value with the change in fair value included in equity
in income (loss) of limited partnerships on the statement of
operations.  In prior periods, this entity’s results, assets, and
liabilities were reflected in each of the Company’s line items in the statement
of operations and balance sheet.  The Company recorded a $4.7 million
cumulative adjustment to retained earnings that represents the fair value of
this limited partnership at January 1, 2010.




In
addition, the Company concluded that it was a primary beneficiary of two
variable interest entities at January 1, 2010.  The Company has a 50%
direct ownership in one of these entities and a 65% direct ownership in the
other.  These entities are professional sports agencies that assist
professional athletes with contract negotiation, marketing, and public
relations.  The Company provided significant financial support, which
it was not contractually obligated to do, beginning on January 1, 2010 to
assist these entities to continue operating as a going concern and also became
significantly more involved with the day to day operations of managing the
businesses. The Company intends to provide additional financial support
when necessary in the future. These facts enabled the Company to conclude
that it has the power to direct the activities that significantly impact these
entities’ economic performance and has the obligation to absorb the significant
losses and receive benefits related to these entities due to its increased
support.  The Company has provided $850,000 in financial support as of
March 31, 2010, which has been eliminated in consolidation.  The
results of these entities have been included in the condensed consolidated
statement of operations since January 1, 2010.  The carrying amounts
of the assets and liabilities consolidated at January 1, 2010 are as
follows:


6





Total
      assets
                  
                  $
                  733,000Total
      liabilities
                  
                  
                  34,000Noncontrolling
      interest
                  
                  
                  490,000





The
creditors and/or beneficial holders of the consolidated VIEs do not have
recourse to the general credit of the Company.





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, 2010 and December 31, 2009, our consolidated
results of operations for the three months ended March 31, 2010 and 2009, our
consolidated changes in equity for the three months ended March 31, 2010, and
our consolidated cash flows for the three months ended March 31, 2010 and
2009.  All adjustments are of a normal and recurring nature. Interim
results are not necessarily indicative of results for a full year.





These
financial statements and notes should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009.





Management’s
Estimates





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





Fair
Values of Financial Instruments





The fair
values of cash and cash equivalents, receivables, accounts payable and accrued
liabilities, and payables to broker-dealers approximate cost due to the short
period of time to maturity.  Securities owned, and securities sold,
not yet purchased are carried at their fair values.  The carrying
amount of our borrowings approximates fair value because the interest rate is
variable and, accordingly, approximates current market rates.





New
Authoritative Accounting Guidance





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


7


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





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





Accounting
Standards Update (“ASU”) No. 2010-02, Consolidation (Topic 810) –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification,clarifies implementation issues relating to a decrease in
ownership of a subsidiary that is a business or not-profit
activity.  This amendment affects entities that have previously
adopted FASB ASC Topic 810-10.  This update was effective January 1,
2010 and did not have a material impact on the Company’s consolidated financial
statements.





ASU No.
2010-10, Consolidation (Topic
810) – Amendments for Certain InvestmentFunds,
defers the effective date of the amendments to the consolidation requirements to
a company’s interest in an entity (i) that has all of the attributes of an
investment company, as specified under ASC Topic 946, Financial Services – Investment
Companies, or (ii) for which it is industry practice to apply measurement
principles of financial reporting that are consistent with those in ASC Topic
946.  As a result of the deferral, a company will not be required to
apply the ASU 2009-17 amendments to the Subtopic 810-10 consolidation
requirements to its interest in an entity that meets the criteria to qualify for
the deferral.  ASU 2010-10 also clarifies that any interest held by a
related party should be treated as though it is an entity’s own interest when
evaluating the criteria for determining whether such interest represents a
variable interest.  In addition, ASU 2010-10 clarifies that a
quantitative calculation should not be the sole basis for evaluating whether a
decision maker’s or service provider’s fee is a variable
interest.  The provisions of ASU 2010-10 were effective January 1,
2010.  Adoption
of the new guidance had a material impact on the Company’s consolidated
financial statements.See “Note 1 – Basis of Presentation – Principles of
Consolidation.”





FASB ASC Topic 820, Fair Value
Measurements and Disclosures.  New authoritative guidance under
ASC Topic 820 requires expanded disclosures related to fair value measurements
including (i) the amounts of significant transfers of assets or liabilities
between Levels 1 and 2 of the fair value hierarchy and the reasons for the
transfers, (ii) the reasons for transfers of assets or liabilities in or out of
Level 3 of the fair value hierarchy, with significant transfers disclosed
separately, (iii) the policy for determining when transfers between levels of
the fair value hierarchy are recognized, and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value hierarchy, a
gross presentation of information about purchases, sales, issuances, and
settlements.  The guidance further clarifies that (i) fair value
measurement disclosures should be provided for each class of assets and
liabilities (rather than major category), which would generally be a subset of
assets or liabilities within a line item in the statement of financial position
and (ii) company’s should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements for each class of assets and liabilities included in Levels 2 and 3
of the fair value hierarchy.  The disclosures related to the gross
presentation of purchases, sales, issuances, and settlements of assets and
liabilities included in Level 3 of the fair value hierarchy will be required for
the Company beginning January 1, 2011.  The remaining disclosure
requirements and clarifications became effective for the Company on January 1,
2010 and did
not have a material impact on the Company’s consolidated financial statements.See “Note 3 – Securities Owned and Securities Sold, Not Yet
Purchased.”


8


FASB ASC Topic 855, Subsequent
Events. In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855) –
Amendments to Certain Recognition and Disclosure
Requirements.ASU No. 2010-09 reiterates that SEC filers are
required to evaluate subsequent events through the date the financial statements
have been issued and eliminated the requirement that SEC filers disclose the
date through which subsequent events have been evaluated.  ASU No.
2010-09 was effective upon issuance and did not have a material impact on the
Company’s consolidated financial statements.





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





2.
            ACQUISITIONS
      AND DISPOSITIONS





On
January 1, 2010, the Company completed the acquisition of a 51% interest in
Investor Financial Solutions (“IFS”), a wealth management firm based in
Huntington Beach, California for cash consideration of $1.0 million, $750,000 of
which was payable at acquisition with the remainder, subject to adjustment based
on gross revenue of IFS during
the three months ended June 30, 2011, payable in July 2011. Because the
additional consideration is based on future earnings, the range of the
additional purchase price can not be estimated but it is expected to be between
$0 and $250,000.  The liability for the additional purchase
price was recorded at its January 1, 2010 fair value of $204,000.  The
fair value of the consideration exceeded the fair market value of identifiable
net tangible assets by $954,000, $409,000 of which has been recorded as
goodwill, $955,000 of which has been recorded as other intangible assets, and
$410,000 of which has been recorded as noncontrolling interest.  All of
the goodwill associated with the IFS acquisition is expected to be deductible
for tax purposes. The acquisition was conducted in an arms length transaction to
expand the Company’s high net worth business.As of March 31, 2010, IFS
had approximately $96.8 million in assets under management.





On May
10, 2005, the Company acquired a 51% interest in Edelman, one of the leading
financial planning firms in the country.  As of March 31, 2010,
Edelman, based in Fairfax, Virginia, managed approximately $4.9 billion in
assets.  On May 12, 2008, the Company purchased an additional 25%
membership interest in Edelman.  The Company paid an amount determined
based upon Edelman’s 2007 pretax income (the “Second Tranche
Consideration”).  The Second Tranche Consideration of $44.4 million,
which was paid in a combination of cash and the Company’s common stock, has been
recorded as goodwill.





In
December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
LLC (“EFA”), to expand the Edelman financial platform into additional
markets outside the Washington, D.C. metropolitan area.  In exchange
for a 10% membership interest in EFA, we initially committed to loan EFA up to
$20.0 million to cover its start-up expenses of which $10.0 million was advanced
and subsequently repaid.  On April 1, 2009, the Company acquired an
additional 66% membership interest in EFA for an aggregate consideration of
$25.5 million in cash and a subordinated promissory note in the principal amount
of $10.0 million.  Under the terms of the EFA acquisition agreement,
the earlier loan agreement was terminated.  The fair value of the
Company’s previously-held noncontrolling interest in EFA on April 1, 2009 was
$3.0 million.  The consideration exceeded the fair market value of
identifiable net tangible assets by $36.3 million, $24.2 million of which has
been recorded as goodwill, $22.3 million of which has been recorded as other
intangible assets, $7.2 million of which has been recorded as noncontrolling
interest, and $3.0 million of which has been recorded as a gain on step
acquisition.  All of the goodwill associated with the EFA acquisition
is expected to be deductible for tax purposes.  On August 24, 2009,
EFA was merged with and into another Edelman subsidiary, Edelman Financial
Services, LLC (“EFS”).


9


The EFA
acquisition was accounted for using the acquisition method and, accordingly, the
financial information of EFA has been included in the Company’s Condensed
Consolidated Financial Statements from April 1, 2009.  The pro forma
combined historical results as if the EFA acquisition had been included in
operations commencing January 1, 2009 are as follows:





Three
      Months EndedMarch 31,2010
                  
                  
                  2009(in
      thousands, except per share amounts)Total
      revenue
                  
                  $
                  47,060
                  
                  
                  $
                  37,395Net
      income (loss) attributable to Sanders Morris Harris Group
    Inc.
                  
                  
                  1,835
                  
                  
                  
                  (13,665
                  )Earnings
      (loss) per common share:Basic
                  
                  $
                  0.06
                  
                  
                  $
                  (0.50
                  )Diluted
                  
                  $
                  0.06
                  
                  
                  $
                  (0.50
                  )





3.
            SECURITIES
      OWNED AND SECURITIES SOLD, NOT YET
PURCHASED





Securities
owned and securities sold, not yet purchased as of March 31, 2010 and December
31, 2009 were as follows:





March 31, 2010
                      
                      
                      December 31, 2009Sold, Not Yet
                      
                      
                      
                      
                      
                      Sold, Not YetOwned
                      
                      
                      Purchased
                      
                      
                      Owned
                      
                      
                      Purchased(in
      thousands)Marketable:Corporate
      stocks and options
                      
                      $
                      7,067
                      
                      
                      $
                      5,877
                      
                      
                      $
                      12,695
                      
                      
                      $
                      8,339Corporate
      bond
                      
                      
                      791
                      
                      
                      
                      -
                      
                      
                      
                      3,861
                      
                      
                      
                      -Total
      marketable
                      
                      
                      7,858
                      
                      
                      
                      5,877
                      
                      
                      
                      16,556
                      
                      
                      
                      8,339Not
      readily marketable:Limited
      partnerships
                      
                      
                      21,900
                      
                      
                      
                      -
                      
                      
                      
                      19,969
                      
                      
                      
                      -Warrants
                      
                      
                      1,809
                      
                      
                      
                      -
                      
                      
                      
                      2,429
                      
                      
                      
                      -Equities
      and options
                      
                      
                      461
                      
                      
                      
                      -
                      
                      
                      
                      426
                      
                      
                      
                      -Total
      not readily marketable
                      
                      
                      24,170
                      
                      
                      
                      -
                      
                      
                      
                      22,824
                      
                      
                      
                      -Total
                      
                      $
                      32,028
                      
                      
                      $
                      5,877
                      
                      
                      $
                      39,380
                      
                      
                      $
                      8,339




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





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





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


10


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





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





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





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





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





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





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





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


11


The
following table sets forth by level within the fair value hierarchy securities
owned and securities sold, not yet purchased as of March 31, 2010:





Level 1
                                        
                                        
                                        Level 2
                                        
                                        
                                        Level 3
                                        
                                        
                                        Total(in
      thousands)Securities
      owned:Corporate
      stocks and options
                                        
                                        $
                                        6,588
                                        
                                        
                                        $
                                        479
                                        
                                        
                                        $
                                        461
                                        
                                        
                                        $
                                        7,528Corporate
      bond
                                        
                                        
                                        -
                                        
                                        
                                        
                                        791
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        791Limited
      partnerships
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        20,447
                                        
                                        
                                        
                                        20,447Warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,793
                                        
                                        
                                        
                                        15
                                        
                                        
                                        
                                        1,808Total
      securities owned
                                        
                                        $
                                        6,588
                                        
                                        
                                        $
                                        3,063
                                        
                                        
                                        $
                                        20,923
                                        
                                        
                                        $
                                        30,574Securities
      sold, not yet purchased:Corporate
      stocks and options
                                        
                                        $
                                        5,672
                                        
                                        
                                        $
                                        205
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        5,877Total
      securities sold, not yet purchased
                                        
                                        $
                                        5,672
                                        
                                        
                                        $
                                        205
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        5,877





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,
2010:





Limited
                                              
                                              
                                              
                                              
                                              
                                              Equities
      andPartnerships
                                              
                                              
                                              Warrants
                                              
                                              
                                              Options
                                              
                                              
                                              Total(in
      thousands)Balance,
      beginning of period
                                              
                                              $
                                              13,253
                                              
                                              
                                              $
                                              5
                                              
                                              
                                              $
                                              426
                                              
                                              
                                              $
                                              13,684Cumulative
      effect of adoption ofa new accounting
      principle
                                              
                                              
                                              4,650
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4,650Realized
      gains
                                              
                                              
                                              118
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              118Unrealized
      gains relatingto securities still held atthe reporting
      date
                                              
                                              
                                              2,846
                                              
                                              
                                              
                                              10
                                              
                                              
                                              
                                              35
                                              
                                              
                                              
                                              2,891Purchases,
      issuances, andsettlements
                                              
                                              
                                              (420
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (420
                                              )Balance,
      end of period
                                              
                                              $
                                              20,447
                                              
                                              
                                              $
                                              15
                                              
                                              
                                              $
                                              461
                                              
                                              
                                              $
                                              20,923





Transfers
between levels of the fair value hierarchy are recognized on the actual date of
the event or circumstances that caused the transfer, which generally coincides
with the Company’s quarterly valuation process. There were no significant
transfers into or out of Level 1, Level 2, or Level 3 of the fair value
hierarchy during the three months ended March 31, 2010.





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





Three Months EndedMarch 31, 2010Equity in IncomePrincipal
                              
                              
                              (Loss)of LimitedTransactions
                              
                              
                              Partnerships(in thousands)Unrealized
      gains (losses) relating to securities still held at the reporting
      date
                              
                              $
                              (15
                              )
                              
                              $
                              2,906





12


At March
31, 2010, the Company had $304,000 and $1.2 million in securities owned that are
valued using the equity method and at cost basis, respectively.





4.
            RECEIVABLES





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(in
      thousands)Notes
      Receivable:Nonaffiliates
                    
                    $
                    6,199
                    
                    
                    $
                    6,127Employees
      and executives
                    
                    
                    2,575
                    
                    
                    
                    2,670Other
      affiliates
                    
                    
                    9,643
                    
                    
                    
                    8,556Receivables
      from affiliated limited partnerships
                    
                    
                    694
                    
                    
                    
                    337Receivables
      from other affiliates
                    
                    
                    2,729
                    
                    
                    
                    2,946Receivable
      from Endowment Advisers
                    
                    
                    64,658
                    
                    
                    
                    65,398Receivables
      from broker-dealers
                    
                    
                    2,116
                    
                    
                    
                    1,112Receivables
      from customers
                    
                    
                    22,500
                    
                    
                    
                    22,569Current
      tax receivable
                    
                    
                    6,477
                    
                    
                    
                    5,901Allowances
      for bad debts
                    
                    
                    (2,556
                    )
                    
                    
                    (2,544
                    )Receivables,
      net
                    
                    $
                    115,035
                    
                    
                    $
                    113,072





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





5.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS, NET





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





Three Months Ended March 31, 2010Amortizable Intangible Assets:
                  
                  
                  Total OtherCovenants Not
                  
                  
                  Customer
                  
                  
                  
                  
                  
                  IntangibleGoodwill
                  
                  
                  Trade Names
                  
                  
                  To Compete
                  
                  
                  Relationships
                  
                  
                  Subtotal
                  
                  
                  Assets(in thousands)Balance,
      beginning of period
                  
                  $
                  73,455
                  
                  
                  $
                  18,422
                  
                  
                  $
                  3,683
                  
                  
                  $
                  10,093
                  
                  
                  $
                  13,776
                  
                  
                  $
                  32,198Acquisition
      of IFS
                  
                  
                  409
                  
                  
                  
                  166
                  
                  
                  
                  22
                  
                  
                  
                  767
                  
                  
                  
                  789
                  
                  
                  
                  955Amortization
      of other intangible assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (217
                  )
                  
                  
                  (228
                  )
                  
                  
                  (445
                  )
                  
                  
                  (445
                  )Balance,
      end of period
                  
                  $
                  73,864
                  
                  
                  $
                  18,588
                  
                  
                  $
                  3,488
                  
                  
                  $
                  10,632
                  
                  
                  $
                  14,120
                  
                  
                  $
                  32,708





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


13


The
goodwill impairment charges recognized in the period ended March 31, 2009
reflect the market deterioration experienced in 2008 and during the first
quarter of 2009.  The amount of the impairment losses was determined
based on the calculation process specified in FASB ASC Topic 350, Intangibles – Goodwill and
Other, which compared carrying value to the estimated fair value of
assets and liabilities.  Factors considered in determining fair value
include, among other things, the Company’s market capitalization as determined
by quoted market prices for its common stock and the value of the Company’s
reporting units.  The Company uses several methods to value its
reporting units, including discounted cash flows, comparisons with valuations of
public companies in the same industry, and multiples of assets under
management.





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





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





As of
March 31, 2010, the remaining weighted-average amortization period was 4.07
years for covenants not to compete and 11.96 years for customer relationships
included in the table above.





6.
            BORROWINGS





In May
2009, the Company borrowed $25.0 million under a credit agreement with a bank,
the proceeds of which were used to complete the EFA acquisition.  The
credit agreement matures on October 31, 2012 and bears interest at the greater
of the prime rate or 5%.  Principal of $595,000 plus interest is
payable monthly.  The credit agreement is secured by substantially all
of the assets of the Company.  The credit agreement contains various
covenants customary for transactions of this type including the requirement that
the Company maintain minimum financial ratios, net worth, liquid assets, and
cash balances, as well as minimum assets under management, and meet monthly,
quarterly, and annual reporting requirements.  The credit agreement
also contains covenants that restrict the ability of the Company, among other
things, to incur indebtedness, pay dividends or distributions, make capital
expenditures and other restricted payments, including investments, and
consummate asset sales.  At March 31, 2010, the Company was in
compliance with all covenants.





7.
            INCOME
      TAXES





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





Three Months EndedMarch 31,2010
                    
                    
                    2009(in
      thousands)Expected
      federal tax at statutory rate of 34%
                    
                    $
                    1,084
                    
                    
                    $
                    (5,521
                    )State
      and other income taxes
                    
                    
                    156
                    
                    
                    
                    (230
                    )Total
                    
                    $
                    1,240
                    
                    
                    $
                    (5,751
                    )





In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.  The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.  Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment.  Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible
differences.


14


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 2006.  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 2006.





8.
            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, 2010:





WeightedNumber
                  
                  
                  Averageof Shares
                  
                  
                  Exercise PriceOutstanding
      at January 1, 2010
                  
                  
                  601,141
                  
                  
                  $
                  9.95Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (9,000
                  )
                  
                  
                  4.52Settled
                  
                  
                  (140,000
                  )
                  
                  
                  4.44Cancelled/Forfeited
                  
                  
                  (58,334
                  )
                  
                  
                  6.70Outstanding
      at March 31, 2010
                  
                  
                  393,807
                  
                  
                  
                  11.83Options
      exercisable at March 31, 2010
                  
                  
                  393,807
                  
                  
                  
                  11.83Incentive
      award shares available for grant at March 31, 2010
                  
                  
                  2,771,286





During
the three months ended March 31, 2010, 9,000 options were exercised for which
the Company received proceeds of $41,000.  No options were exercised
during the three months ended March 31, 2009.  The Company recognized
pretax compensation expense of $31,000 during the three months ended March 31,
2009 related to stock options.  No such expense was recognized during
the three months ended March 31, 2010.  There was no unrecognized
stock-based compensation expense related to stock options at March 31,
2010.


15


The
following table summarizes certain information related to restricted common
stock grants at March 31, 2010.





WeightedAverageNumber of
                  
                  
                  Grant DateShares
                  
                  
                  Fair ValueNonvested
      at January 1, 2010
                  
                  
                  490,076
                  
                  
                  $
                  8.17Nonvested
      at March 31, 2010
                  
                  
                  488,083
                  
                  
                  
                  7.33For
      the three months ended March 31, 2010:Granted
                  
                  
                  120,817
                  
                  
                  
                  5.60Vested
                  
                  
                  117,377
                  
                  
                  
                  9.04Forfeited
                  
                  
                  5,433
                  
                  
                  
                  7.96





Employees
deferred compensation of $10,000 during the three months ended March 31, 2009
that was used to purchase restricted common stock.  No such
compensation was deferred during the three months ended March 31,
2010.  The Company recognized pretax compensation expense of $592,000
and $658,000 during the three months ended March 31, 2010 and 2009,
respectively, related to its restricted common stock plan.  At March
31, 2010, total unrecognized compensation cost, net of estimated forfeitures,
related to nonvested restricted stock was $2.2 million and is expected to be
recognized over the next 5.0 years.





9.
            TREASURY
      STOCK





On
November 6, 2007, the Company’s board of directors approved a program to
repurchase up to 1,000,000 shares of the Company’s common
stock.  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 367,798 shares of its common stock at
an average price of $5.14 per share during the three months ended March 31, 2010
related to this program.


16


10.
            EARNINGS
      (LOSS) PER COMMON SHARE





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





Three
      Months Ended March 31,2010
                    
                    
                    2009(in
      thousands, except per share amounts)Income
      (loss) from continuing operations, net of income taxes
                    
                    $
                    1,947
                    
                    
                    $
                    (10,486
                    )Loss
      from discontinued operations, net of income taxes
                    
                    
                    (112
                    )
                    
                    
                    (2,358
                    )Net
      earnings (loss) attributable to the Company
                    
                    $
                    1,835
                    
                    
                    $
                    (12,844
                    )Basic
      earnings (loss) per common share:Continuing
      operations
                    
                    $
                    0.07
                    
                    
                    $
                    (0.38
                    )Discontinued
      operations
                    
                    
                    (0.01
                    )
                    
                    
                    (0.09
                    )Net
      earnings (loss)
                    
                    $
                    0.06
                    
                    
                    $
                    (0.47
                    )Diluted
      earnings (loss) per common share:Continuing
      operations
                    
                    $
                    0.07
                    
                    
                    $
                    (0.38
                    )Discontinued
      operations
                    
                    
                    (0.01
                    )
                    
                    
                    (0.09
                    )Net
      earnings (loss)
                    
                    $
                    0.06
                    
                    
                    $
                    (0.47
                    )Weighted
      average number of common shares outstanding:Basic
                    
                    
                    29,915
                    
                    
                    
                    27,567Potential
      dilutive effect of stock-based awards
                    
                    
                    5
                    
                    
                    
                    -Diluted
                    
                    
                    29,920
                    
                    
                    
                    27,567





Outstanding
stock options of 365,000 and 660,000 for the three months ended March 31, 2010
and 2009, respectively, have not been included in diluted earnings per common
share because to do so would have been antidilutive for the periods
presented.  Warrants outstanding at March 31, 2010 to purchase shares
of common stock in an aggregate value of up to $7.5 million at an exercise price
of $5.75 per common share have also not been included in diluted earnings per
common share because to do so would have been antidilutive for the
period.  There were no warrants outstanding at March 31,
2009.





11.
            COMMITMENTS
      AND CONTINGENCIES





The
Company has issued letters of credit in the amounts of $250,000, $245,000,
$230,000, $230,000, and $96,000 to the owners of five of the offices that we
lease to secure payment of our lease obligations for those
facilities.





The
Company has 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.


17


In the
normal course of business, the Company enters into underwriting
commitments.  There were no firm underwriting commitments open at
March 31, 2010.





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





In July
2008, the Dallas regional office of the Financial Industry Regulatory Authority
(“FINRA”)
conducted a routine examination of SMH’s broker-dealer
activities.  SMH received an examination report on December 31, 2008,
which identified a number of deficiencies in SMH’s operations.  In
April 2009, SMH resolved half of the deficiencies noted through a compliance
conference procedure. The remaining deficiencies are subject to possible
enforcement action by FINRA. SMH has not received a Wells notice from FINRA with
respect to the deficiencies, which is a formal notice from FINRA that it intends
to take enforcement action. SMH is in communication with the FINRA staff to
resolve the matter.  However, there is no assurance that a prompt
resolution can be reached or that the ultimate impact on SMH and the Company
will not be material.





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





In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH alleging common law fraud, statutory fraud in a stock transaction,
violations of the Texas Securities Act, and negligent misrepresentation in
connection with the plaintiffs’ purchase of $2.0 million in Ronco convertible
preferred stock. On March 17, 2009, a third purchaser of Ronco convertible
preferred stock filed a complaint against SMH. The claims are similar to the
above referenced case. The third purchaser invested $1.9 million in Ronco
convertible preferred stock.  In addition, in July 2009, the
Bankruptcy Trustee filed a derivative action on behalf of the shareholders of
Ronco against two former directors of Ronco (who were employees of SMH) for
negligently authorizing the closing of the purchase of the assets of Ronco
Marketing Corp. in breach of their fiduciary duties of care and loyalty and
against SMH for negligent misrepresentation, breach of fiduciary duties, breach
of contract, and violation of the Texas Fraudulent Transfer Act. No amount of
damages is alleged. SMH believes it has valid defenses to all claims made by the
plaintiffs.  However, there is no assurance that SMH will successfully
defend such claims.  On April 23, 2010, one of these complaints was
settled in favor of SMH on all 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.  At March 31, 2010, the
Company had $1.2 million accrued for legal proceedings which is included in
“Accounts payable and accrued liabilities” in the Condensed Consolidated Balance
Sheet.





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


18


12.
            BUSINESS
      SEGMENT INFORMATION





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





In
December 2009, the Company completed the sale of its Capital Markets Business
which consisted of our investment banking, and most of our New York
institutional trading, sales, and research businesses (excluding The Juda Group
and the Concept Capital division).  As a result of this transaction,
management realigned its reportable segments to reflect its remaining operations
and the Capital Markets segment was renamed the Institutional Services
segment.  Prior period amounts were reclassified to reflect the new
reportable segments.





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





The
Institutional Services segment generally provides corporate financing services
to its institutional client base.  These services are provided through
two divisions:  (i) institutional brokerage and (ii) prime brokerage
services.





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





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





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




19




The
following summarizes certain financial information of each reportable business
segment for the three months ended March 31, 2010 and 2009,
respectively.  SMHG does not analyze asset information in all business
segments.
 
 Three Months EndedMarch 31,2010
                          
                          
                          2009(in
      thousands)Revenue:Wealth
      Management
                          
                          $
                          30,644
                          
                          
                          $
                          21,336Institutional
      Services:Institutional
      brokerage
                          
                          
                          1,023
                          
                          
                          
                          1,312Prime
      brokerage services
                          
                          
                          13,178
                          
                          
                          
                          14,440Institutional
      Services Total
                          
                          
                          14,201
                          
                          
                          
                          15,752Corporate
      Support and Other
                          
                          
                          2,215
                          
                          
                          
                          (1,230
                          )Total
                          
                          $
                          47,060
                          
                          
                          $
                          35,858Income
      (loss) from continuing operations before equity in income (loss) of
      limited partnerships and income taxes:Wealth
      Management
                          
                          $
                          8,508
                          
                          
                          $
                          5,728Institutional
      Services:Institutional
      brokerage
                          
                          
                          (139
                          )
                          
                          
                          (240
                          )Prime
      brokerage services
                          
                          
                          (630
                          )
                          
                          
                          327Institutional
      Services Total
                          
                          
                          (769
                          )
                          
                          
                          87Corporate
      Support and Other
                          
                          
                          (6,567
                          )
                          
                          
                          (20,502
                          )Total
                          
                          $
                          1,172
                          
                          
                          $
                          (14,687
                          )Equity
      in income (loss) of limited partnerships:Wealth
      Management
                          
                          $
                          721
                          
                          
                          $
                          (748
                          )Institutional
      Services:Institutional
      brokerage
                          
                          
                          -
                          
                          
                          
                          -Prime
      brokerage services
                          
                          
                          -
                          
                          
                          
                          -Institutional
      Services Total
                          
                          
                          -
                          
                          
                          
                          -Corporate
      Support and Other
                          
                          
                          2,505
                          
                          
                          
                          250Total
                          
                          $
                          3,226
                          
                          
                          $
                          (498
                          )Income
      (loss) from continuing operations before income taxes:Wealth
      Management
                          
                          $
                          9,229
                          
                          
                          $
                          4,980Institutional
      Services:Institutional
      brokerage
                          
                          
                          (139
                          )
                          
                          
                          (240
                          )Prime
      brokerage services
                          
                          
                          (630
                          )
                          
                          
                          327Institutional
      Services Total
                          
                          
                          (769
                          )
                          
                          
                          87Corporate
      Support and Other
                          
                          
                          (4,062
                          )
                          
                          
                          (20,252
                          )Total
                          
                          $
                          4,398
                          
                          
                          $
                          (15,185
                          )Net
      income attributable to the noncontrolling interest:Wealth
      Management
                          
                          $
                          (1,211
                          )
                          
                          $
                          (1,052
                          )Institutional
      Services:Institutional
      brokerage
                          
                          
                          -
                          
                          
                          
                          -Prime
      brokerage services
                          
                          
                          -
                          
                          
                          
                          -Institutional
      Services Total
                          
                          
                          -
                          
                          
                          
                          -Corporate
      Support and Other
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          (1,211
                          )
                          
                          $
                          (1,052
                          )
  20
 
 13. 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 Three Months Ended March 31,2010
                          
                          
                          2009(in
      thousands)Cash
      payment (refund) for income taxes, net
                          
                          $
                          313
                          
                          
                          $
                          (19
                          )Cash
      paid for interest
                          
                          
                          234
                          
                          
                          
                          -Noncash
      investing activities:Cumulative
      effect of adoption of a new accounting principle
                          
                          
                          560
                          
                          
                          
                          -Noncash
      financing activities:Change
      in dividends declared not yet paid
                          
                          
                          2
                          
                          
                          
                          2
 
 14. 
RELATED PARTY TRANSACTIONS
 
 The
Company had receivables from related parties totaling $15.6 million at March 31,
2010, primarily consisting of $2.0 million of advances to unconsolidated related
entities to fund operating expenses, $2.6 million of notes receivable from
employees and consultants representing loans made to induce the employees and
consultants to affiliate with the Company, and $694,000 of management fees
receivable from the limited partnerships that the Company
manages.  The March 31, 2010 balance also includes a $8.0 million note
issued by Madison Williams to the Company in connection with the Capital Markets
transaction and a $1.2 million note issued by Concept Capital Holdings to the
Company in connection with the planned separation of the Concept Capital
division.
 
 15. 
DISCONTINUED OPERATIONS
 
 During
the first quarter of 2009, SMH closed three retail offices.  This
decision was made due to the offices’ inability to achieve sufficient revenue to
offset their costs.  The results of operations for these offices have
been reclassified as discontinued operations for all periods
presented.
 
 During
the fourth quarter of 2009, SMH contributed to Madison Williams the Capital
Markets Business in exchange for a 17.5% Class A membership interest in Madison
Williams, cash, and a note issued by Madison Williams to the
Company.  The results of operations for the Capital Markets Business
have been reclassified as discontinued operations for all periods
presented.
 
 A summary
of selected financial information of discontinued operations is as follows for
the three months ended March 31, 2010 and 2009:
 
 Three Months Ended March 31,2010
                    
                    
                    2009(in thousands)Operating
      activities:Revenue
                    
                    $
                    27
                    
                    
                    $
                    5,623Expenses
                    
                    
                    211
                    
                    
                    
                    9,534Loss
      from discontinued operations before income taxes
                    
                    
                    (184
                    )
                    
                    
                    (3,911
                    )Benefit
      for income taxes
                    
                    
                    (72
                    )
                    
                    
                    (1,553
                    )Loss
      from discontinued operations
                    
                    $
                    (112
                    )
                    
                    $
                    (2,358
                    )
  21
  Major
classes of assets and liabilities of the offices and the Capital Markets
Business accounted for as discontinued operations in the accompanying Condensed
Consolidated Balance Sheets at March 31, 2010 and December 31, 2009 were as
follows:
 
 March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(in
      thousands)Furniture,
      equipment, and leasehold improvements, net
                    
                    $
                    158
                    
                    
                    $
                    179Total
      assets of discontinued operations
                    
                    $
                    158
                    
                    
                    $
                    179Total
      liabilities of discontinued operations
                    
                    $
                    79
                    
                    
                    $
                    89
  22
  Item
2.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 Special
Cautionary Notice Regarding Forward-Looking Statements
 
 This
quarterly report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements may relate to such matters as anticipated financial
performance, future revenue or earnings, business prospects, projected ventures,
new products, anticipated market performance, and similar matters. We caution
you that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to (1) trading volume in the
securities markets; (2) volatility of the securities markets and interest rates;
(3) changes in regulatory requirements that could affect the demand for our
services or the cost of doing business; (4) general economic conditions, both
domestic and foreign, especially in the regions where we do business; (5)
changes in the rate of inflation and related impact on securities markets; (6)
competition from existing financial institutions and other new participants in
the securities markets; (7) legal developments affecting the litigation
experience of the securities industry; (8) successful implementation of
technology solutions; (9) changes in valuations of our trading and warrant
portfolios resulting from mark-to-market adjustments; (10) dependence on key
personnel; (11) demand for our services; and (12) litigation and securities law
liabilities. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2009.  The Company does not
undertake to publicly update or revise any forward-looking
statements.
 
 The
following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and their related notes.
 
 Overview
 
 The
Company is a holding company that, through its subsidiaries and affiliates,
provides wealth management and institutional services to a large and diversified
group of clients and customers, including individuals, corporations, and
financial institutions. A summary of these services follows:
 
 Our Wealth Management segment
provides investment advisory, wealth and investment management, and financial
planning services to high net worth and mass affluent individuals and
institutions, including investment strategies and alternatives, tax efficient
estate and financial planning, trusts, and agent/fiduciary investment management
services, throughout their financial life cycle, as well as private client
brokerage services. In addition, we provide specialized wealth management
products and services in specific investment styles to individuals,
corporations, and institutions both through internal marketing efforts and
externally through formal sub-advisory relationships and other distribution
arrangements with third parties.
 
 Our
Institutional Services segment provides institutional equity brokerage and prime
brokerage services to institutional clients, and third party management of a
portion of our assets.
 
 Institutional Brokerage
provides institutional equity brokerage and hedge funds research to a broad
array of institutions, including banks, retirement funds, mutual funds,
endowments, investment advisors, and insurance companies.
 
 Prime Brokerage Servicesprovides trade execution, clearing, bookkeeping, reporting, custodial,
securities borrowing, financing, research, and fund raising to hedge fund
clients.  The Company maintains a small number of asset management
accounts on behalf of individual asset managers through this
division.  The Washington Research Group provides research, sales, and
trading services to a broad range of institutional investors.
  23
  We are
exposed to volatility and trends in the general securities market and the
economy.  Due to the downturn in the market and the economic recession
that began during the second half of 2008, client assets declined during the
last half of 2008 and into the first quarter of 2009.  However, during
the second quarter of 2009, the market began to improve and client assets have
recovered resulting in, among other things, higher fee and commission
revenue.  Client assets were as follows:
 
 Client Assets(1)(in millions)December
      31, 2008
                        
                        $
                        8,627March
      31, 2009
                        
                        
                        8,501June
      30, 2009
                        
                        
                        9,534September
      30, 2009
                        
                        
                        10,595December
      31, 2009
                        
                        
                        11,273March 31, 2010
                        
                        
                        11,821____________
  (1)Client
      assets include the gross value of assetsunder
      management directly or via outside managersand
      assets held in brokerage accounts for clients byoutside
      clearing firms.
  The
second six months of 2008 and the first quarter of 2009 was a very challenging
environment for the capital markets given the unprecedented events on Wall
Street that led to increased uncertainty and turmoil in the United States
economy and global financial markets.  We made the necessary
adjustments to our business and adapted to the current
environment.  We focused on the following items:
 
 §
              preserving
      capital and retaining key people in order to emerge as a strong player
      once market stability returns;
 
 §
              reducing
      compensation and non-compensation expenses in order to operate on a
      positive cash basis;
 
 §
              closing
      offices that have been
unprofitable;
 
 §
              exiting
      business units that are subject to revenue and profit volatility;
      and
 
 §
              acquiring
      wealth management businesses that enhance or complement our existing
      franchise value.
 
 Components
of Revenue and Expenses
 
 Revenue. Our revenue is
comprised primarily of (1) fees from asset-based advisory services, wealth
management, and financial planning services, (2) commission revenue from wealth
advisory, prime and institutional brokerage transactions, and (3) principal
transactions.  We also earn interest on cash held and receive
dividends from the equity and fixed income securities held in our corporate
capital accounts, receive sales credits from third party placement agreements,
earn fees through the sale of insurance products, and have realized and
unrealized gains (or losses) on securities in our inventory
account.
 
 Expenses.Our expenses
consist of (1) compensation and benefits, (2) floor brokerage, exchange, and
clearance fees, and (3) other expenses. Compensation and benefits have both a
variable component, based on revenue production, and a fixed component. The
variable component includes institutional and retail sales commissions, bonuses,
overrides, and other incentives. Wealth advisory and institutional commissions
are based on competitive commission schedules. The fixed component includes
administrative and executive salaries, payroll taxes, employee benefits, and
temporary employee costs. Compensation and benefits is our largest expense item
and includes wages, salaries, and benefits. During the first quarter of 2010,
compensation and benefits represented 64.4% of total expenses and 62.8% of total
revenue, compared to 45.6% of total expenses and 64.3% of total revenue during
the first quarter of 2009. The increase in compensation and benefits as a
percentage of expenses is principally due to $14.9 million of goodwill and other
intangible assets impairment charges recognized in the first quarter of
2009.  The decrease in compensation and benefits as a percentage of
total revenue is principally due to a decrease in revenue in our prime brokerage
services division which has a higher payout than our other business
lines.
  24
  Floor
brokerage, exchange, and clearance fees include clearing and trade execution
costs associated with the retail, prime, and institutional brokerage business.
 The Company clears its transactions through several clearing firms,
including Pershing, an affiliate of The Bank of New York Mellon, Goldman Sachs
Execution & Clearing, L.P., Ridge Clearing & Outsourcing Solutions,
Inc., First Clearing Corporation, and J.P. Morgan Clearing Corp.
 
 Other
expenses include (1) communications and data processing expenses, such as
third-party systems, data, and software providers, (2) occupancy expenses, such
as rent and utility charges for facilities, (3) interest expense, (4) goodwill
and other intangible assets impairment charges, (5) amortization of other
intangible assets, and (6) other general and administrative
expenses.
 
 Results
of Operations
 
 Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
 
 On April
1, 2009, the Company increased its ownership of Edelman Financial Advisors, LLC
(“EFA”) from 10% to
76% which required a change in our method of accounting for EFA’s results to
consolidation from the cost method.  During August 2009, EFA was
merged with and into another Edelman subsidiary.  Edelman opened six
new offices in September 2009 and an additional four new offices during the
three months ended March 31, 2010.
 
 Total
revenue was $47.1 million for the first quarter of 2010 compared to $35.9
million for the same quarter in 2009, an increase of $11.2 million, or 31.2%,
reflecting increases of $7.7 million in investment advisory and related services
revenue, $1.2 million in investment banking revenue, and $958,000 in commission
revenue.  Total expenses for the first quarter of 2010 decreased $4.7
million, or 9.2%, to $45.9 million from $50.5 million in the same quarter of the
previous year principally due to $14.9 million in goodwill and other intangible
assets impairment charges that were recognized in the first quarter of
2009.  The decrease in expenses related to the 2009 impairment charges
was partially offset by increased employee compensation and benefits,
communications and data processing costs, and other general and administrative
expenses.  Equity in income (loss) of limited partnerships increased
to $3.2 million for the first quarter of 2010 compared to $(498,000) for the
first quarter of 2009, reflecting an increase in the fair value of our
investment in PTC Houston Management due to a change in the ownership
structure.  Income (loss) from continuing operations, net of income
taxes, was $1.9 million, or $0.07 per diluted common share, for the first
quarter of 2010 compared to $(10.5) million, or $(0.38) per diluted common
share, for the first quarter of 2009.
 
 Revenue
from investment advisory and related services increased to $21.9 million in the
first quarter of 2010 from $14.2 million in the same quarter of 2009 as a result
of an increase in client assets.  Commission revenue increased to
$11.4 million in the first quarter of 2010 from $10.4 million for the same
period in 2009 as a result of an increase in trading volume in the Wealth
Management segment.  Investment banking revenue increased to $1.5
million during the first quarter of 2010 from $280,000 in the same period of
2009 due to an increase in sales credits earned from investment banking
transactions.  Principal transactions revenue increased from $6.3
million for the first quarter of 2009 to $6.7 million for the first quarter of
2010 as the result of an increase in the value of the Company’s investments,
partially offset by a decrease in proprietary trading
activities.  Other income increased from $2.1 million during the first
quarter of 2009 to $2.8 million during the same period in 2010 reflecting an
increase of $839,000 in hedge fund servicing revenue and third-party marketing
fees partially offset by a decrease of $146,000 in insurance
commissions.
  25
  During
the three months ended March 31, 2010, employee compensation and benefits
increased to $29.5 million from $23.1 million in the same period last year
principally due to higher commission expense related to higher revenue and to
additional personnel related to the EFA acquisition and the Edelman
expansion.  During the three months ended March 31, 2010, floor
brokerage, exchange, and clearance fees decreased to $1.2 million from $1.7
million in the same period last year due to a decrease in clearance fees in the
institutional brokerage division due to lower trading volume.  These
declines are largely the result of the growth in electronic trading strategy
execution software that replaces, in some cases, the role of traditional
traders.  Communications and data processing costs increased to $3.0
million in the first quarter of 2010 compared to $2.3 million in the same period
last year due to higher clearing firm service fees resulting from the increase
in trading volume in the Wealth Management segment and additional customer
accounts related to the EFA acquisition and the Edelman
expansion.  Occupancy costs increased to $3.3 million in the first
quarter of 2010 compared to $2.8 million in the first quarter of 2009 due to the
Edelman expansion.  Interest expense increased to $460,000 for the
first quarter of 2010 compared to $180,000 in the first quarter of 2009 due to
the funding of a credit facility during the second quarter of
2009.  The Company recognized goodwill and other intangible assets
impairment charges of $14.9 million in first quarter of 2009.  No such
charge was recognized in the first quarter of 2010.  Amortization of
other intangible assets increased to $445,000 for the first quarter of 2010
compared to $209,000 for the first quarter of 2009 due to the acquisition of the
additional 66% membership interest in EFA.  Other general and
administrative expenses increased to $7.8 million during the first quarter of
2010 from $5.4 million in the first quarter of 2009 due to an increase in
advertising and other expenses related to the acquisition of EFA and to the
Edelman expansion.
 
 Our
effective tax rate from continuing operations was 38.9% for the three months
ended March 31, 2010 compared to 35.4% for the three months ended March 31,
2009.  The effective tax rate exceeds the federal statutory income tax
rate primarily as a result of state income taxes and certain nondeductible
expenses.
 
 During
the first quarter of 2009, the Company closed three retail
offices.  The decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs.  During the fourth
quarter of 2009, the Company completed its sale of most of its capital markets
businesses.  The Company recorded a net loss from discontinued
operations of $112,000 in the first quarter of 2010 compared to $2.4 million in
the first quarter of 2009 related to the closed offices and the sale of the
capital markets business.
 
 Results
by Segment
 
 Wealth
Management
 
 Three Months Ended March 31,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    30,644
                    
                    
                    $
                    21,336Income
      from continuing operations before income taxes
                    
                    $
                    9,229
                    
                    
                    $
                    4,980
 
 Revenue
from wealth management increased to $30.6 million from $21.3 million and income
from continuing operations before income taxes increased to $9.2 million from
$5.0 million.  On April 1, 2009, the Company increased its ownership
of EFA from 10% to 76% which required a change in our method of accounting for
EFA’s results to consolidation from the cost method.  Edelman opened
six new offices in September 2009 and an additional four new offices during the
three months ended March 31, 2010.  Investment advisory and related
services fees increased to $21.7 million from $14.2 million reflecting an
increase in the size of our client portfolios primarily due to improvement in
the general securities market and the economy.  Selling concessions
increased to $1.1 million from $215,000 as a result of an increase in investment
banking transactions.  Total expenses increased to $22.1 million from
$15.6 million due to higher employee compensation and occupancy costs associated
with the EFA acquisition, the Edelman expansion, and the increase in
revenue.  Equity in income (loss) of limited partnerships increased to
$721,000 from $(748,000). The increase in equity in income (loss) of limited
partnerships is attributable to an increase in the value of the limited
partnerships we manage.
  26
  Institutional
Services
 
 Institutional
Brokerage
 
 Three Months Ended March 31,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    1,023
                    
                    
                    $
                    1,312Loss
      from continuing operations before income taxes
                    
                    $
                    (139
                    )
                    
                    $
                    (240
                    )
 
 Revenue
from institutional brokerage decreased to $1.0 million from $1.3 million and
loss from continuing operations before income taxes decreased to $(139,000) from
$(240,000).  Commission revenue decreased to $897,000 from $1.1
million reflecting a decline in the number of shares traded.  Total
expenses decreased to $1.2 million from $1.6 million due to decreased employee
compensation related to the lower revenue.
 
 Prime Brokerage
Services
 
 Three Months Ended March 31,2010
                      
                      
                      2009(in
      thousands)Revenue
                      
                      $
                      13,178
                      
                      
                      $
                      14,440Income
      (loss) from continuing operations before income
taxes
                      
                      $
                      (630
                      )
                      
                      $
                      327
  Revenue
from prime brokerage services decreased to $13.2 million from $14.4 million and
income (loss) from continuing operations before income taxes decreased to a loss
of $630,000 from income of $327,000.  Principal transactions revenue
decreased to $4.9 million from $7.6 million reflecting a decrease of $1.5
million in proprietary trading revenue and a decrease in revenue earned from the
sale of fixed income products.  The decline in principal transactions
was partially offset by a $508,000 increase in commissions revenue mainly
related to the addition of the Washington Research Group during the second
quarter of 2009.  Total expenses decreased to $13.8 million from $14.1
million due to a $467,000 decrease in exchange clearing fees.
 
 Corporate
Support and Other
 
 Three Months Ended March 31,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    2,215
                    
                    
                    $
                    (1,230
                    )Loss
      from continuing operations before income taxes
                    
                    $
                    (4,062
                    )
                    
                    $
                    (20,252
                    )
 
 Revenue
from corporate support and other increased to $2.2 million from $(1.2) million
and loss from continuing operations before income taxes decreased to $4.1
million from $20.3 million.  Revenue from principal transactions,
which consists of changes in the values of our investment portfolios, increased
to $1.2 million from a loss of $1.8 million.  Total expenses decreased
to $8.8 million from $19.3 million due to $14.9 million of goodwill and other
intangible assets impairment charges recognized in 2009.  This
decrease was partially offset by an increase in the provision for bad
debts.  The deconsolidation of one of the investment partnerships that
we manage and the fair value measurement of that investment resulted in equity
in income of limited partnerships of $2.5 million during the first quarter of
2010.
  27
  Liquidity
and Capital Resources
 
 The
Company’s funding needs consist of (1) funds necessary to maintain current
operations, (2) capital expenditure requirements, including funds needed for the
Edelman expansion, (3) debt repayment, and (4) funds used for
acquisitions.
 
 We intend
to satisfy our funding needs with our own capital resources, consisting largely
of internally generated earnings and liquid assets, and with borrowings from
outside parties.  At March 31, 2010, we had $40.3 million in cash and
cash equivalents, which together with receivables from broker-dealers and
clearing organizations, deposits with clearing organizations, and marketable
securities owned represented 16.8% of our total assets at the end of the first
quarter.
 
 Receivables
turnover, calculated as annualized revenue divided by average receivables, was
1.6 for the three months ended March 31, 2010 compared to 1.2 for the same
period in the prior year.  The increase in the receivables turnover
was the result of an increase in investment advisory revenue that is typically
collected as earned.  The allowance for doubtful accounts as a
percentage of receivables was 2.2% at March 31, 2010 and December 31,
2009.
 
 For the
three months ended March 31, 2010, net cash provided by operations was $2.9
million versus net cash used in operations of $10.4 million during the same
period in 2009.  Marketable securities owned decreased by $8.9 million
during the first three months of 2010, securities sold, not yet purchased
decreased by $2.5 million and payables to broker-dealers and clearing
organizations decreased by $7,000.  The change in marketable
securities owned, securities sold, not yet purchased, and payables to
broker-dealers and clearing organizations is primarily due to the Company’s
securities managed by third party asset managers.  The Company’s
portfolio includes both long and short equity positions.  Our asset
managers generally seek to generate profits based on trading spreads, rather
than through speculation on the direction of the market and employ hedging
strategies designed to insulate the net value of our portfolios from
fluctuations in the general level of interest rates and equity price
variances.  We finance a portion of our positions through our clearing
broker-dealers.
 
 Not
readily marketable securities owned, primarily investments in limited
partnerships, were $24.2 million at March 31, 2010 compared to $22.8 million at
December 31, 2009.  This increase is the result of changes in the
values of our investment portfolios.  These limited partnerships
typically have a ten-year life.
 
 Capital
expenditures for the first three months of 2010 were $891,000, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for the Edelman expansion.
 
 SMH is
subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC
rule 15c3-1), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1 (and the rule of the “applicable” exchange also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed 10 to 1).  At March 31, 2010, SMH had net
capital, as defined, of $16.9 million, which was $16.3 million in excess of its
required net capital of $635,000.
 
 In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be.  Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved.
  28
  Critical
Accounting Policies/Estimates
 
 Goodwill and Other Intangible
Assets.  Goodwill represents the excess of the aggregate
purchase price over the fair value of the net assets acquired in a business
combination.  Goodwill is reviewed for impairment at least annually in
accordance with the provisions of FASB ASC Topic 350, Intangibles – Goodwill and
Other.  ASC Topic 350 requires that goodwill be tested for
impairment between annual test dates if an event or changing circumstances
indicate that it is more likely than not that the fair value of the reporting
unit is below its carrying amount.  The goodwill impairment test is a
two-step test.  Under the first step, the fair value of the reporting
unit is compared with its carrying value (including goodwill and other
intangible assets).  If the fair value of the reporting unit is less
than its carrying value, an indication of goodwill impairment exists for the
reporting unit and the enterprise must perform step two of the impairment test
(measurement).  Under step two, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill.  The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB ASC Topic
805, Business
Combinations.  The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill.
 
 Factors
considered in determining fair value include, among other things, the Company’s
market capitalization as determined by quoted market prices for its common stock
and the value of the Company’s reporting units.  The Company uses
several methods to value its reporting units, including discounted cash flows,
comparisons with valuations of public companies in the same industry, and
multiples of assets under management.  If the fair value of the
reporting unit exceeds its carrying value, step two does not need to be
performed.
 
 In
performing the first step of the goodwill impairment test, the estimated fair
values of the reporting units were developed using the methods listed
above.  When performing the discounted cash flow analysis, the Company
utilized observable market data to the extent available.  Future cash
flow projections are based primarily on actual results and, at April 30, 2009,
include negative future cash flows for one reporting unit.  This
reporting unit has no recorded goodwill.  For the February 28, 2009
and April 30, 2009 goodwill analyses, the cash flow estimates reflect zero
growth for all projected future periods.  The discount rates utilized
in this analysis ranged from 11% to 20%.  The Company also calculates
estimated fair values of the reporting units utilizing multiples of earnings,
book value, and, when applicable, assets under management of the reporting
unit.  The estimated fair value using these techniques is compared
with the carrying value of the reporting unit to determine if there is an
indication of impairment.
 
 The
Company performed an update of its April 30, 2008 review for goodwill impairment
as of February 28, 2009 due to deterioration in overall macroeconomic conditions
and the extended decline in the Company’s stock price.  This review
was performed using the methodology described above.  Future cash flow
projections were based primarily on actual results with budgeted cash flow
projections used for one reporting unit.  When performing the February
28, 2009 discounted cash flow analysis, no future negative cash flows were
projected.  This assessment resulted in the recognition of a goodwill
impairment charge of $13.8 million at two reporting units:  Edelman -
$13.0 million and Kissinger - $837,000.
 
 With the
Company’s common stock price at extraordinary lows, management analyzed the
estimated fair values of the reporting units in relation to our market
capitalization.  The sum of the estimated fair values of the Company’s
reporting units was greater than the market value of the Company’s common
stock.  Based upon an analysis of historical acquisitions of financial
services companies similar to ours, we believe the excess of approximately 40%
represents a reasonable control premium in a hypothetical acquisition of the
Company.
  29
  Remaining
amounts of goodwill at March 31, 2010 were as follows:  Edelman -
$67.2 million, Kissinger - $2.4 million, Dickenson - $2.1 million, SMH Colorado
- $1.5 million, Leonetti - $225,000, and IFS $409,000.  Future
goodwill impairment tests may result in a future charge to
earnings.
 
 Other
intangible assets consist primarily of customer relationships and trade names
acquired in business combinations.  Other intangible assets acquired
that have indefinite lives (trade names) are not amortized but are tested for
impairment annually, or if certain circumstances indicate a possible impairment
may exist.  Certain other intangible assets acquired (customer
relationships and covenants not to compete) are amortized on a straight line
basis over their estimated useful lives and tested for impairment if certain
circumstances indicate an impairment may exist.  Other intangible
assets are tested for impairment by comparing expected future cash flows to the
carrying amount of the intangible assets.  The Company recognized a
trade name impairment of $1.1 million during the quarter ended March 31,
2009.
  30
  Item
3.  Quantitative and
Qualitative Disclosures About Market Risk
 
 Market
Risk
 
 During
the three months ended March 31, 2010, 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, 2009.
 
 Our
financial services business is affected by general economic
conditions.  Our revenue relating to asset-based advisory services and
managed accounts are typically from fees based on the market value of assets
under management.
 
 At March
31, 2010, securities owned by the Company were $32.0 million, including $7.8
million in marketable securities, $21.9 million representing the Company’s
investments in limited partnerships, and $2.3 million representing other not
readily marketable securities.
 
 We do not
act as dealer, trader, or end-user of complex derivative contracts such as
swaps, collars, and caps.  However, SMH does act as a dealer and
trader of mortgage-derivative securities, called collateralized mortgage
obligations (CMOs or REMICs).  Mortgage-derivative securities
redistribute the risks associated with their underlying mortgage collateral by
redirecting cash flows according to specific formulas or algorithms to various
tranches or classes designed to meet specific investor objectives.
 
 There are
market, credit and counterparty, and liquidity risks associated with our market
making, principal trading, merchant banking, arbitrage, and underlying
activities.  We may experience significant losses if the value of our
marketable security positions deteriorates.
 
 Item 4.Controls and
Procedures
 
 Our
management, including our Chief Executive Officer and Chief Financial Officer,
has conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as
of the end of the fiscal period covered by this report.  Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in ensuring
that the information required to be disclosed in the reports we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission (“SEC”) and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.  There have been no changes made in our internal controls
over financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
  31
  PART
II.   OTHER INFORMATION
 
 Item
1.  Legal
Proceedings
 
 Many
aspects of our business involve substantial risks of liability. In the normal
course of business, we have been and in the future may be named as defendant or
co-defendant in lawsuits and arbitration proceedings involving primarily claims
for damages. We are also involved in a number of regulatory matters arising out
of the conduct of our business. There can be no assurance that these matters
will not have a material adverse effect on our results of operations in any
future period and a significant judgment could have a material adverse impact on
our consolidated financial position, results of operations, and cash flows. In
addition to claims for damages and monetary sanctions that may be made against
us, we incur substantial costs in investigating and defending claims and
regulatory matters.
 
 In July
2008, the Dallas regional office of FINRA conducted a routine examination of
SMH’s broker-dealer activities.  SMH received an examination report on
December 31, 2008, which identified a number of deficiencies in SMH’s
operations.  In April 2009, SMH resolved half of the deficiencies
noted through a compliance conference procedure. The remaining deficiencies are
subject to possible enforcement action by FINRA. SMH has not received a Wells
notice from FINRA with respect to the deficiencies, which is a formal notice
from FINRA that it intends to take enforcement action. SMH is in communication
with the FINRA staff to resolve the matter.  However, there is no
assurance that a prompt resolution can be reached or that the ultimate impact on
SMH and the Company will not be material.
 
 In May
2005, SMH acted as placement agent for a private placement of $50.0 million in
convertible preferred stock of Ronco Corporation, a company involved in direct
response marketing. Subsequent to the offering, Ronco experienced financial
difficulties and ultimately filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale
of substantially all of Ronco’s assets in August 2007, and the case was
converted to a liquidation under Chapter 7.
 
 In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH, US
Special Opportunities Trust PLC and Renaissance US Growth Investment Trust PLC
vs. Sanders Morris Harris Inc., 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 their purchase of $2.0 million in Ronco
convertible preferred stock. On March 17, 2009, a third purchaser of Ronco
convertible preferred stock filed a complaint against SMH, Palisades Master Fund, L.P.
and PEF Advisors, LLC vs. Sanders Morris Harris Inc., in the 11th
Judicial District Court of Harris County, Texas.  The claims are
similar to the above referenced case.  Palisades Master Fund, L.P.
invested $1.9 million in Ronco convertible preferred stock. In addition, in July
2009, the Bankruptcy Trustee filed a derivative action on behalf of the
shareholders of Ronco against two former directors of Ronco (who were employees
of SMH) for negligently authorizing the closing of the purchase of the assets of
Ronco Marketing Corp. in breach of their fiduciary duties of care and loyalty
and against SMH for negligent misrepresentation, breach of fiduciary duties,
breach of contract, and violation of the Texas Fraudulent Transfer Act, Diane Weil, Solely in Her
Capacity as Trustee of Ronco Corporation and Ronco Marketing Corporation vs. A.
Emerson Martin II, Gregg Mockenhaupt, and Sanders Morris Harris Inc., in
the 190th Judicial District Court of Harris County, Texas. No amount of damages
is alleged. SMH has filed an answer and special exceptions in each of these
cases and believes it has valid defenses to all claims made by the
plaintiffs.  However, there is no assurance that the Company will
successfully defend such claims.  On April 23, 2010, following a
two-week trial, in the case of US Special Opportunities
Trust PLC and Renaissance US Growth Investment Trust PLC vs. Sanders Morris
Harris Inc., the jury returned a defense verdict in favor of SMH on all
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.
  32
  Item
1A.  Risk
Factors
 
 There
have been no material changes in the Company’s risk factors from those disclosed
in the Annual Report on Form 10-K for the year ended December 31,
2009.
 
 Item
2.  Unregistered
Sales of Equity Securities and Use of Proceeds
 
 Total number ofTotal
                    
                    
                    
                    
                    
                    shares purchased
                    
                    
                    Maximum number ofnumber of
                    
                    
                    Average
                    
                    
                    as part of publicly
                    
                    
                    shares that may yetshares
                    
                    
                    price paid
                    
                    
                    announced plans
                    
                    
                    be purchased underPeriod
                    
                    purchased
                    
                    
                    per share
                    
                    
                    or programs (1)
                    
                    
                    the plans or programsJanuary
      1 to January 31, 2010
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -February
      1 to February 28, 2010
                    
                    
                    5,685
                    
                    
                    
                    5.11
                    
                    
                    
                    5,685
                    
                    
                    
                    677,832March
      1 to March 31, 2010
                    
                    
                    362,113
                    
                    
                    
                    5.14
                    
                    
                    
                    362,113
                    
                    
                    
                    315,719Total
                    
                    
                    367,798
                    
                    
                    $
                    5.14
                    
                    
                    
                    367,798
                    
                    
                    
                    315,719
 
 (1)
              The
      Company announced a share repurchase program on November 7, 2007 to
      purchase up to 1.0 million shares of  the Company's shares of
      common stock.
 
 Item
5. Other
Information
 
 None.
  33
  Item
6.  Exhibits
 
 INDEX
TO EXHIBITS
 
 ExhibitNumber
                  
                  Description3.1
                  
                  Articles
      of Incorporation of the Company, as amended (Filed as Exhibit 3.1 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2001
      (File No. 000-30066), and incorporated herein by
    reference).3.2
                  
                  Amended
      and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended September 30, 2007
      (File No. 000-30066), and incorporated herein by
    reference).†10.01
                  
                  Sanders
      Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as Appendix
      A to the Definitive Proxy Statement on Schedule 14A of the Company dated
      May 3, 2002 (File No. 000-30066), and incorporated herein by
      reference).†10.02
                  
                  Sanders
      Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2001 (File No. 000-30066), and incorporated herein by
      reference).†10.03
                  
                  Form
      of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
      10.03 to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.04
                  
                  Form
      of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed as
      Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.05
                  
                  Employment
      Agreement dated as of May 10, 2005, between The Edelman Financial Center,
      LLC and Fredric M. Edelman.  (Filed as Exhibit 10.05 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).†10.06
                  
                  Sanders
      Morris Harris Group Inc. 2009 Management Incentive
      Program.  (Filed as Exhibit 10.06 to the Company’s Annual Report
      on Form 10-K for the year ended December 31, 2009 (File No. 000-30066),
      and incorporated herein by reference).†10.07
                  
                  Sanders
      Morris Harris Group Inc. 2009 Supplemental Bonus Plan.  (Filed
      as Exhibit 10.06 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.08
                  
                  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).
  34
 
 10.09
                  
                  Eleventh
      Amendment to Lease Agreement dated as of December 21, 2006, between Texas
      Tower Limited and Sanders Morris Harris Inc. (Filed as Exhibit 10.06 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007 (File No. 000-30066), and incorporated herein by
      reference).10.10
                  
                  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).10.11
                  
                  Contribution
      Agreement dated as of April 28, 2003, by and between Salient Partners,
      L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas limited
      partnership, Salient Capital, L.P., a Texas limited partnership, Salient
      Partners GP, LLC, a Texas limited liability company, John A. Blaisdell,
      Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag
      Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc. (Filed
      as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007 (File No. 000-30066), and incorporated herein by
      reference).10.12
                  
                  Agreement
      to Retire Partnership Interest and Second Amendment to the Limited
      Partnership Agreement of Endowment Advisers, L.P. dated as of August 29,
      2008, among Sanders Morris Harris Group Inc. and Endowment Advisers, L.P.,
      The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC, and
      their respective partners and members (Filed as Exhibit 99.2 to the
      Company’s Current Report on Form 8-K dated August 29, 2008 (File No.
      000-30066), and incorporated herein by reference).10.13
                  
                  Letter
      agreement dated as of January 1, 2009, among Sanders Morris Harris Group,
      Inc., Fredric M. Edelman, and Edward Moore  (Filed as Exhibit
      99.2 to the Company’s Current Report on Form 8-K dated January 29, 2009
      (File No. 000-30066), and incorporated herein by
    reference).10.14
                  
                  Credit
      Agreement dated as of May 11, 2009, between Sanders Morris Harris Group
      Inc. and Prosperity Bank.  (Filed as Exhibit 10.08 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).10.15
                  
                  First
      Amendment to Credit Agreement dated as of June 23, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.09 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.16
                  
                  Second
      Amendment to Credit Agreement dated as of July 15, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.17
                  
                  Third
      Amendment to Credit Agreement dated as of September 15, 2009, between
      Sanders Morris Harris Group Inc. and Prosperity Bank. (Filed
      as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2009 (File No. 000-30066), and incorporated
      herein by reference).10.18
                  
                  Fourth
      Amendment to Credit Agreement dated as of September 30, 2009, between
      Sanders Morris Harris Group Inc. and Prosperity Bank. (Filed
      as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2009 (File No. 000-30066), and incorporated
      herein by reference).*31.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.*31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.*32.1
                  
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*32.2
                  
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.
 
 *        Filed
herewith.
 †        Management
contract or compensation plan or arrangement.
  35
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 SANDERS
      MORRIS HARRIS GROUP INC.By:
                /s/ GEORGE L. BALLGeorge
      L. BallChief
      Executive OfficerBy:
                /s/ RICK BERRYRick
      BerryChief
      Financial Officer
 
 Date:     May
10, 2010
  36