**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-Q**


**(Mark
      one)**




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




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




**OR**




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




**Commission
      File No. 0-30066**




**SANDERS
      MORRIS HARRIS GROUP INC.**




(Exact
      name of registrant as specified in its charter)




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


**(713)
      993-4610**


(Registrant’s
      telephone number, including area code)




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




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


Large
                  accelerated filer o
              Accelerated
                  filer xNon-accelerated
                  filer o
              Smaller
                  reporting company o




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




As
      of
      August 8, 2008, the registrant had 27,988,195 outstanding shares of common
      stock, par value $0.01 per share.










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





**INDEX**





Page**PART
                I.FINANCIAL
                INFORMATION**Item 1.
            Financial
                Statements
            2Condensed
                Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December
                31, 2007
            2Condensed
                Consolidated Statements of Income for the Three and Six Months Ended
                June
                30, 2008 and 2007 (unaudited)
            3Condensed
                Consolidated Statement of Changes in Shareholders' Equity for the
                Six
                Months Ended June 30, 2008 (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2008 and 2007 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6Item 2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item 3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item 4.
            Controls
                and Procedures
            29**PART
                II.OTHER
                INFORMATION**Item 1.
            Legal
                Proceedings
            30Item 1A.
            Risk
                Factors
            30Item 2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            31Item 4.
            Submission
                of Matters to a Vote of Security Holders
            31Item 5.
            Other
                Information
            31Item 6.
            Exhibits
            32


1


**PART
      I. FINANCIAL INFORMATION**





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





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


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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


(in
      thousands, except share and per share amounts)





**June
                30,**
            
            **December
                31,****2008**
            
            **2007**(unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            20,087
            
            $
            46,503Receivables,
                net of allowance of $3,353 and $2,330, respectivelyBroker-dealers
                and clearing organizations
            
            
            478
            
            
            232Customers
            
            
            26,047
            
            
            25,147Related
                parties
            
            
            9,706
            
            
            14,676Other
            
            
            1,094
            
            
            4,408Deposits
                with clearing organizations
            
            
            1,060
            
            
            1,095Securities
                owned
            
            
            78,519
            
            
            84,898Securities
                available for sale
            
            
            721
            
            
            759Furniture,
                equipment, and leasehold improvements, net
            
            
            20,915
            
            
            16,613Other
                assets and prepaid expenses
            
            
            1,867
            
            
            2,329Goodwill,
                net
            
            
            134,852
            
            
            88,461Other
                intangible assets, net
            
            
            13,128
            
            
            6,427Total
                assets
            
            $
            308,474
            
            $
            291,548**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                payable and accrued liabilities
            
            $
            26,892
            
            $
            29,523Borrowings
            
            
            450
            
            
            200Deferred
                tax liability, net
            
            
            492
            
            
            137Securities
                sold, not yet purchased
            
            
            8,861
            
            
            15,432Payable
                to broker-dealers and clearing organizations
            
            
            3,017
            
            
            2,973Total
                liabilities
            
            
            39,712
            
            
            48,265Commitments
                and contingenciesMinority
                interests
            
            
            17,947
            
            
            20,105Shareholders'
                equity:Preferred
                stock, $0.10 par value; 10,000,000 sharesauthorized;
                no shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $0.01 par value; 100,000,000 sharesauthorized;
                29,039,105 and 25,765,806 shares issued,respectively
            
            
            290
            
            
            258Additional
                paid-in capital
            
            
            230,778
            
            
            204,596Retained
                earnings
            
            
            26,011
            
            
            23,422Accumulated
                other comprehensive income
            
            
            157
            
            
            161Treasury
                stock, at cost, 1,049,085 and 929,285 shares, respectively
            
            
            (6,421
            )
            
            (5,259
            )Total
                shareholders' equity
            
            
            250,815
            
            
            223,178Total
                liabilities and shareholders' equity
            
            $
            308,474
            
            $
            291,548





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


2





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


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


(in
      thousands, except per share amounts)


(unaudited)





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenue:Investment
                advisory and related services
            
            $
            22,591
            
            $
            17,010
            
            $
            43,448
            
            $
            31,870Commissions
            
            
            14,628
            
            
            13,808
            
            
            28,617
            
            
            27,326Investment
                banking
            
            
            6,660
            
            
            9,086
            
            
            9,025
            
            
            19,245Principal
                transactions
            
            
            8,275
            
            
            2,776
            
            
            10,992
            
            
            6,098Interest
                and dividends
            
            
            1,003
            
            
            1,958
            
            
            2,173
            
            
            3,898Other
                income
            
            
            3,554
            
            
            1,559
            
            
            7,272
            
            
            3,243Total
                revenue
            
            
            56,711
            
            
            46,197
            
            
            101,527
            
            
            91,680Expenses:Employee
                compensation and benefits
            
            
            29,147
            
            
            27,236
            
            
            57,585
            
            
            53,752Floor
                brokerage, exchange, and clearance fees
            
            
            1,389
            
            
            1,876
            
            
            2,846
            
            
            3,381Communications
                and data processing
            
            
            3,240
            
            
            2,861
            
            
            6,118
            
            
            5,131Occupancy
            
            
            3,345
            
            
            2,936
            
            
            6,551
            
            
            5,967Interest
            
            
            6
            
            
            9
            
            
            11
            
            
            21Amortization
                of intangible assets
            
            
            234
            
            
            139
            
            
            403
            
            
            139Other
                general and administrative
            
            
            8,166
            
            
            8,708
            
            
            15,328
            
            
            14,381Total
                expenses
            
            
            45,527
            
            
            43,765
            
            
            88,842
            
            
            82,772Income
                before equity in income of limited partnerships,minority
                interests, and income taxes
            
            
            11,184
            
            
            2,432
            
            
            12,685
            
            
            8,908Equity
                in income of limited partnerships
            
            
            4,501
            
            
            3,902
            
            
            2,752
            
            
            3,587Income
                before minority interests and income taxes
            
            
            15,685
            
            
            6,334
            
            
            15,437
            
            
            12,495Minority
                interests in net income of consolidated companies
            
            
            (5,371
            )
            
            (4,521
            )
            
            (8,472
            )
            
            (6,360
            )Income
                before income taxes
            
            
            10,314
            
            
            1,813
            
            
            6,965
            
            
            6,135Provision
                for income taxes
            
            
            4,122
            
            
            708
            
            
            2,880
            
            
            2,289Net
                income
            
            $
            6,192
            
            $
            1,105
            
            $
            4,085
            
            $
            3,846Earnings
                per common share:Basic
            
            $
            0.23
            
            $
            0.04
            
            $
            0.16
            
            $
            0.16Diluted
            
            $
            0.23
            
            $
            0.04
            
            $
            0.16
            
            $
            0.15Weighted
                average common shares outstanding:Basic
            
            
            26,760
            
            
            24,731
            
            
            25,739
            
            
            24,671Diluted
            
            
            26,918
            
            
            25,075
            
            
            25,932
            
            
            25,007




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


3




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


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


**For
      the six months ended June 30, 2008**


(in
      thousands, except share and per share amounts)


(unaudited)





**Amounts**
            
            
            
            **Shares**Common
                stock:Balance,
                beginning of period
            
            $
            258
            
            
            
            
            
            25,765,806Stock
                issued for acquisitions
            
            
            28
            
            
            
            
            
            2,859,996Stock
                issued pursuant to employee benefit plan
            
            
            4
            
            
            
            
            
            413,303Balance,
                end of period
            
            
            290
            
            
            
            
            
            29,039,105Additional
                paid-in capital:Balance,
                beginning of period
            
            
            204,596Stock
                issued for acquisitions
            
            
            23,905Stock
                issued pursuant to employee benefit plan; including tax
                benefit
            
            
            841Stock-based
                compensation expense
            
            
            1,436Balance,
                end of period
            
            
            230,778Retained
                earnings:Balance,
                beginning of period
            
            
            23,422Cumulative
                effect of adoption of a new accounting principle
            
            
            893Cash
                dividends ($0.09 per share)
            
            
            (2,389
            )Net
                income
            
            
            4,085
            
            
            4,085Balance,
                end of period
            
            
            26,011
            
            
            4,085Accumulated
                other comprehensive income (loss):Balance,
                beginning of period
            
            
            161Net
                change in unrealized appreciationon
                securities available for sale
            
            
            (5
            )
            
            (5
            )Income
                tax benefit on change in unrealizedappreciation
                on securities available for sale
            
            
            1
            
            
            1Balance,
                end of period
            
            
            157
            
            
            (4
            )Comprehensive
                income
            
            
            
            
            
            4,081Treasury
                stock:Balance,
                beginning of period
            
            
            (5,259
            )
            
            
            
            
            (929,285
            )Acquisition
                of treasury stock
            
            
            (1,162
            )
            
            
            
            
            (119,800
            )Balance,
                end of period
            
            
            (6,421
            )
            
            
            
            
            (1,049,085
            )Total
                shareholders' equity and common shares outstanding
            
            $
            250,815
            
            
            
            
            
            27,990,020





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


4




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


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**For
      the six months ended June 30, 2008 and 2007**


(in
      thousands)


(unaudited)


**2008**
              
              **2007**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              4,085
              
              $
              3,846Adjustments
                  to reconcile net income to net cash provided byoperating
                  activities:Realized
                  gain on securities available for sale
              
              
              -
              
              
              (1
              )(Gain)
                  loss on sales of assets
              
              
              89
              
              
              (3
              )Depreciation
              
              
              1,995
              
              
              1,647Provision
                  for bad debts
              
              
              805
              
              
              3,047Stock-based
                  compensation expense
              
              
              1,436
              
              
              1,193Amortization
                  of intangible assets
              
              
              403
              
              
              139Deferred
                  income taxes
              
              
              354
              
              
              (661
              )Equity
                  in income of limited partnerships
              
              
              (2,752
              )
              
              (3,587
              )Minority
                  interests in net income of consolidated companies
              
              
              8,472
              
              
              6,360Unrealized
                  and realized (gain) loss on not readily marketablesecurities
                  owned, net
              
              
              (954
              )
              
              1,525Not
                  readily marketable securities owned received for paymentof
                  investment banking fees
              
              
              (581
              )
              
              (1,181
              )Net
                  change in:Receivables
              
              
              6,343
              
              
              (11,601
              )Deposits
                  with clearing organizations
              
              
              35
              
              
              (7
              )Marketable
                  securities owned
              
              
              5,264
              
              
              3,340Other
                  assets and prepaid expenses
              
              
              161
              
              
              (382
              )Accounts
                  payable and accrued liabilities
              
              
              (3,056
              )
              
              (4,375
              )Securities
                  sold, not yet purchased
              
              
              (6,571
              )
              
              (2,330
              )Payable
                  to broker-dealers and clearing organizations
              
              
              44
              
              
              10,029Net
                  cash provided by operating activities
              
              
              15,572
              
              
              6,998CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (6,544
              )
              
              (1,662
              )Acquisitions,
                  net of cash acquired of $126and
                  $59, respectively
              
              
              (29,058
              )
              
              (4,649
              )Purchases
                  of not readily marketable securities owned
              
              
              (205
              )
              
              (24,376
              )Proceeds
                  from sales of not readily marketable securities owned
              
              
              6,500
              
              
              5,679Proceeds
                  from sales and maturities of securities available for sale
              
              
              33
              
              
              333Proceeds
                  from sales of assets
              
              
              158
              
              
              35Net
                  cash used in investing activities
              
              
              (29,116
              )
              
              (24,640
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Purchases
                  of treasury stock
              
              
              (1,162
              )
              
              -Proceeds
                  from shares issued pursuant to employee benefit plan
              
              
              659
              
              
              302Tax
                  benefit of stock options exercised
              
              
              186
              
              
              86Proceeds
                  from borrowings
              
              
              250
              
              
              145Repayment
                  of borrowings
              
              
              -
              
              
              (500
              )Investments
                  by minority interests
              
              
              -
              
              
              40Distributions
                  to minority interests
              
              
              (10,553
              )
              
              (5,367
              )Payments
                  of cash dividends
              
              
              (2,252
              )
              
              (2,214
              )Net
                  cash used in financing activities
              
              
              (12,872
              )
              
              (7,508
              )Net
                  decrease in cash and cash equivalents
              
              
              (26,416
              )
              
              (25,150
              )CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              46,503
              
              
              68,861CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              20,087
              
              $
              43,711




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


5


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


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(unaudited)





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





*Nature
      of Operations*




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





*Principles
      of Consolidation*




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





In
      management's opinion, the unaudited condensed consolidated financial statements
      include all adjustments necessary for a fair presentation of our consolidated
      financial position at June 30, 2008 and December 31, 2007, our consolidated
      results of operations for the three and six months ended June 30, 2008 and
      2007,
      our consolidated changes in shareholders’ equity for the six months ended June
      30, 2008, and our consolidated cash flows for the six months ended June 30,
      2008
      and 2007. All adjustments are of a normal and recurring nature. Interim results
      are not necessarily indicative of results for a full year.





These
      financial statements and notes should be read in conjunction with the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2007.





*Management’s
      Estimates*





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





*Recent
      Accounting Pronouncements*





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


6





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





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





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interest in Consolidated Financial Statements, an amendment of ARB Statement
      No. 51* .
      SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, *Consolidated
      Financial Statements* ,
      to
      establish accounting and reporting standards for the non-controlling interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies
      that a non-controlling interest in a subsidiary, which is sometimes referred
      to
      as minority interest, is an ownership interest in the consolidated entity that
      should be reported as a component of equity in the consolidated financial
      statements. Among other requirements, SFAS No. 160 requires consolidated net
      income to be reported at amounts that include the amounts attributable to both
      the parent and the non-controlling interest. It also requires disclosure, on
      the
      face of the consolidated income statement, of the amounts of consolidated net
      income attributable to the parent and to the non-controlling interest.
      SFAS No. 160 is effective for the Company on January 1, 2009. At June
      30, 2008, the Company had $17.9 million in minority interests that would be
      reported as a component of equity under the requirements of SFAS No.
      160.




*Reclassifications*




Certain
      reclassifications have been made to the 2007 condensed consolidated financial
      statements to conform them to the 2008 presentation. These reclassifications
      had
      no effect on net income or stockholders’ equity.





**2.** **ACQUISITIONS**





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





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


7





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





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





On
      May
      10, 2005, the Company acquired a 51% interest in Edelman, one of the leading
      financial planning firms in the country. Edelman, based in Fairfax, Virginia,
      manages approximately $3.6 billion in assets. 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.





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





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




**June
                  30, 2008**
              
              **December
                  31, 2007****Sold,
                  Not Yet**
              
              
              
              **Sold,
                  Not Yet****Owned**
              
              **Purchased**
              
              **Owned**
              
              **Purchased**(in
                  thousands)Marketable:Corporate
                  stocks and options
              
              $
              18,984
              
              $
              8,861
              
              $
              23,799
              
              $
              15,432Total
                  marketable
              
              
              18,984
              
              
              8,861
              
              
              23,799
              
              
              15,432Not
                  readily marketable:Limited
                  partnerships
              
              
              49,547
              
              
              -
              
              
              53,012
              
              
              -Warrants
              
              
              9,430
              
              
              -
              
              
              5,649
              
              
              -Equities
                  and options
              
              
              558
              
              
              -
              
              
              2,438
              
              
              -Total
                    not readily marketable
              
              
              59,535
              
              
              -
              
              
              61,099
              
              
              -Total
              
              $
              78,519
              
              $
              8,861
              
              $
              84,898
              
              $
              15,432





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


8





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





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





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





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





A
      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.


9




A
        financial instrument’s level within the fair value hierarchy is based on the
        lowest level of any input that is significant to the fair value
        measurement.
 
 The
        following table sets forth by level within the fair value hierarchy securities
        owned and securities sold, not yet purchased as of June 30, 2008:
 
 **Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3**
              
              **Total**(in
                  thousands)Securities
                  owned
              
              $
              18,618
              
              $
              8,816
              
              $
              51,085
              
              $
              78,519Securities
                  sold, not yet purchased
              
              
              8,661
              
              
              200
              
              
              -
              
              
              8,861
 
 The
        following table sets forth a summary of changes in the fair value of the
        Company’s level 3 securities owned for the three and six months ended June 30,
        2008:
 
 **Level 3 Securities Owned****Three Months Ended**
              
              **Six Months Ended****June 30, 2008**
              
              **June 30, 2008**(in
                  thousands)Balance,
                  beginning of period
              
              $
              53,776
              
              $
              55,880Realized
                  losses
              
              
              (175
              )
              
              (175
              )Unrealized
                  gains relating to securities still held at the reporting
                  date
              
              
              3,859
              
              
              1,540Purchases,
                  issuances, and settlements
              
              
              (6,375
              )
              
              (6,160
              )Balance,
                  end of period
              
              $
              51,085
              
              $
              51,085
  10
  Net
        unrealized gains for level 3 securities owned are a component of “Principal
        transactions” and “Equity in income of limited partnerships” in the Condensed
        Consolidated Statements of Income as follows:
 
 **Three Months Ended**
              
              **Six Months Ended****June 30, 2008**
              
              **June 30, 2008****Equity in Income**
              
              
              
              **Equity in Income****Principal**
              
              **of Limited**
              
              **Principal**
              
              **of Limited****Transactions**
              
              **Partnerships**
              
              **Transactions**
              
              **Partnerships**(in thousands)Unrealized gains relating
                  to securities still held at the reporting date
              
              $
              826
              
              $
              3,033
              
              $
              256
              
              $
              1,284
 
 **4.**
              **SECURITIES
                  AVAILABLE FOR SALE**
 
 Securities
        available for sale at June 30, 2008 were as follows:
 
 **Amortized**
              
              **Gross
                  Unrealized**
              
              **Estimated****Cost**
              
              **Gains**
              
              **Losses**
              
              **Fair
                  Value**(in
                  thousands)U.S.
                  government and agency obligation
              
              $
              100
              
              $
              2
              
              $
              -
              
              $
              102Marketable
                  equity securities
              
              
              359
              
              
              260
              
              
              -
              
              
              619Total
              
              $
              459
              
              $
              262
              
              $
              -
              
              $
              721
 
 The
        contractual maturity of the debt security available for sale at June 30,
        2008
        was as follows:
 
 **Amortized**
              
              **Estimated****Cost**
              
              **Fair Value**(in
                  thousands)Over
                  25 years
              
              $
              100
              
              $
              102
 
 
 The
        following table sets forth by level within the fair value hierarchy securities
        available for sale as of June 30, 2008:
 
 **Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3**
              
              **Total**(in
                  thousands)Securities
                  available for sale
              
              $
              619
              
              $
              102
              
              $
              -
              
              $
              721
 
 Gross
        realized gains on sales of securities available for sale were $1,000 for
        the six
        months ended June 30, 2007. No such gains were recorded for the six months
        ended
        June 30, 2008. No realized losses on securities available for sale were recorded
        for the six months ended June 30, 2008 and 2007.
 
 **5.**
              **BORROWINGS**
 
 During
        May 2005, the Company entered into a $15.0 million revolving credit facility
        with a bank. In May 2008, this credit agreement was amended to decrease the
        revolving credit facility to the lesser of $5.0 million or the loan value
        of
        certain collateral pledged to secure the revolving credit facility. The line
        of
        credit expires on May 31, 2009, unless extended. Borrowings under the line
        of
        credit bear interest at LIBOR plus 200 basis points. Interest is payable
        quarterly on this line of credit. The credit facility is secured by a pledge
        of
        ownership interests in three of the Company’s subsidiaries. Debt covenants
        require the Company to maintain certain debt to EBITDA and liquidity to funded
        debt ratios, as well as minimum assets under management. At June 30, 2008,
        the
        Company was in compliance with all covenants. The line of credit has a
        commitment fee of 1/8% per annum. There was no outstanding balance on the
        line
        of credit at June 30, 2008. The amount of available borrowings under the
        line of
        credit, which is reduced by letters of credit issued by the Company, was
        $3.8
        million at June 30, 2008.
  11
 
 During
        December 2005, Salient entered into a $2.5 million revolving credit facility
        with a bank. In April 2008, this credit agreement was amended to increase
        the
        revolving credit facility to $5.0 million. The line of credit expires in
        March
        2009. Borrowings under the line of credit bear interest at LIBOR plus 165
        basis
        points. The interest rate of Salient’s borrowings ranged from 4.03% to 6.51%
        during 2008 and was 4.13% at June 30, 2008. Interest is payable quarterly
        on
        this line of credit. The credit facility is unsecured and not subject to
        financial covenants; however, payment is guaranteed by SMHG and the principals
        of Salient. The outstanding balance on the line of credit was $450,000 at
        June
        30, 2008.
 
 **6.**
              **INCOME
                  TAXES**
 
 The
        difference between the effective tax rate reflected in the provision for
        income
        taxes and the statutory federal rate is analyzed as follows:
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**(in
                  thousands)Expected
                  federal tax at statutory rate of 34% for 2008 and 35% for
                  2007
              
              $
              3,507
              
              $
              634
              
              $
              2,368
              
              $
              2,147State
                  and other income taxes
              
              
              615
              
              
              74
              
              
              512
              
              
              142Total
              
              $
              4,122
              
              $
              708
              
              $
              2,880
              
              $
              2,289
 
 The
        Company files income tax returns in the U.S. federal jurisdiction. The Company
        is no longer subject to U.S. federal income tax examination by the taxing
        authorities for years before 2004. The Company files in several state tax
        jurisdictions. The Company is no longer subject to state income tax examination
        by the taxing authorities for years before 2004.
  12
 
 **7.**
                  **ACCOUNTING
                      FOR STOCK-BASED COMPENSATION
                      PLANS**
 
 The
            Company has two types of stock-based compensation awards: (1) stock options
            and
            (2) restricted common stock.
  The
            following table sets forth pertinent information regarding stock option
            transactions for the six months ended June 30, 2008:
 
 **Weighted****Number**
              
              **Average****of
                  Shares**
              
              **Exercise Price**Outstanding
                  at January 1, 2008
              
              
              856,385
              
              $
              8.30Granted
              
              
              50,000
              
              
              8.17Exercised
              
              
              (121,044
              )
              
              4.82Outstanding
                  at June 30, 2008
              
              
              785,341
              
              
              8.83Options
                  exercisable at June 30, 2008
              
              
              687,008
              
              
              8.26Incentive
                  award shares available for grant at June 30, 2008
              
              
              2,652,499
 
 
 During
        the six months ended June 30, 2008 and 2007, 121,044 and 37,500 options were
        exercised for which the Company received proceeds of $583,000 and $176,000,
        respectively. The Company recognized pretax compensation expense of $96,000
        and
        $85,000 during the six months ended June 30, 2008 and 2007, respectively,
        related to stock options. The portion of stock-based compensation expense
        related to stock options that was unrecognized at June 30, 2008 was
        $197,000.
 
 The
        following table summarizes certain information related to restricted common
        stock grants at June 30, 2008:
  **Weighted****Average****Number of**
              
              **Grant Date****Shares**
              
              **Fair Value**Nonvested
                  at January 1, 2008
              
              
              526,741
              
              $
              13.39Nonvested
                  at June 30, 2008
              
              
              685,929
              
              
              11.48For
                  the six months ended June 30, 2008:Granted
              
              
              293,733
              
              
              8.76Vested
              
              
              133,071
              
              
              13.08Forfeited
              
              
              1,474
              
              
              9.99
 
 Employees
        deferred compensation of $76,000 and $126,000 during the six months ended
        June
        30, 2008 and 2007, respectively, that was used to purchase restricted common
        stock. The Company recognized pretax compensation expense of $1.3 million
        and
        $1.1 million during the six months ended June 30, 2008 and 2007, respectively,
        related to its restricted common stock plan. At June 30, 2008, total
        unrecognized compensation cost, net of estimated forfeitures, related to
        nonvested restricted stock was $5.6 million.
 
 **8.**
              **TREASURY
                  STOCK**
 
 On
        November 6, 2007, the Company’s board of directors approved a program to
        repurchase up to 1,000,000 shares of the Company’s common stock. Under the
        program, shares are repurchased in the open market or privately negotiated
        transactions from time to time at prevailing market prices. Such repurchases
        are
        accounted for using the cost method. The Company repurchased 119,800 shares
        of
        its common stock during the six months ended June 30, 2008 related to this
        program.
  13
 
 **9.**
              **EARNINGS
                  PER COMMON SHARE**
 
 Basic
        and
        diluted earnings per common share computations for the periods indicated
        were as
        follows:
 
 **Three Months Ended June 30,**
              
              **Six Months Ended June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**(in
                  thousands, except per share amounts)Net
                  income
              
              $
              6,192
              
              $
              1,105
              
              $
              4,085
              
              $
              3,846Earnings
                  per common share:Basic
              
              $
              0.23
              
              $
              0.04
              
              $
              0.16
              
              $
              0.16Diluted
              
              $
              0.23
              
              $
              0.04
              
              $
              0.16
              
              $
              0.15Weighted
                  average number of common shares outstanding:Basic
              
              
              26,760
              
              
              24,731
              
              
              25,739
              
              
              24,671Incremental
                  common shares issuable under stock option plan, net
              
              
              158
              
              
              344
              
              
              193
              
              
              336Diluted
              
              
              26,918
              
              
              25,075
              
              
              25,932
              
              
              25,007
 
 Outstanding
        stock options of 360,000 and 230,000 for the three months ended June 30,
        2008
        and 2007, respectively, and 310,000 and 305,000 for the six months ended
        June
        30, 2008 and 2007, respectively, have not been included in diluted earnings
        per
        common share because to do so would have been antidilutive for the periods
        presented.
 
 **10.**
              **COMMITMENTS
                  AND CONTINGENCIES**
 
 The
        Company has issued letters of credit in the amounts of $630,000, $245,000,
        $230,000, $144,000, and $92,000 to the owners of five of the offices that
        we
        lease to secure payment of our lease obligations for those facilities. The
        Company has issued a letter of credit in the amount of $100,000 to secure
        the
        payment of the deductible portion of the Company’s workers compensation
        insurance policy.
 
 In
        December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
        LLC (“EFA”) to expand the Edelman financial platform into additional markets
        outside the Washington, D.C. metropolitan area. The Company owns a 10%
        membership interest in EFA. We committed to initially loan EFA up to $20.0
        million to cover its start-up expenses of which $10.0 million has been advanced
        and subsequently repaid. Mr. Edelman has guaranteed repayment of the EFA
        obligation to the extent of funds that will be owed to him by the Company
        in
        connection with the purchase of Edelman. There was no outstanding balance
        on the
        Company’s loan to EFA at June 30, 2008. EFA has entered into an agreement with
        Radio Networks, LLC, an affiliate of ABC, Inc. and The Walt Disney Company,
        to
        nationally syndicate Mr. Edelman’s weekly radio program. The program is being
        syndicated into sixteen additional markets, including Albuquerque, Atlanta,
        Baltimore, Chicago, Columbus, Dallas, Detroit, Houston, Los Angeles, Miami,
        New
        York City, Orlando, Phoenix, Portland, Oregon, San Diego, and San
        Francisco.
 
 On
        May 9,
        2008, the Company received notice from the management group of Salient Partners,
        L.P. (“Salient Partners”) and The Endowment Fund GP, L.P. (“TEF GP”), the
        general partner, and The Endowment Fund Management, LLC (“TEF LLC”), the
        investment advisor, of The Endowment Master Fund, L.P. and The Endowment
        Registered Fund, L.P., initiating a process under which they have the option,
        if
        they so elect, to acquire SMHG’s interest in Salient Partners, TEF GP, and TEF
        LLC. The process for determining the price is described below. The parties
        did
        not agree on a price within the 30-day period described below and a process
        of
        determining the price through independent appraisers has commenced and is
        ongoing.
  14
 
 Pursuant
        to the terms of (a) the Contribution Agreement dated as of April 28, 2003,
        among
        the Company and the other owners of Salient Partners (the “Salient Owners”),
        pursuant to which Salient Partners was formed, and (b) the Contribution and
        Option Agreement dated as of April 28, 2003, among the Company, the Salient
        Owners, and MWY Consulting, LLC, pursuant to which the Company acquired an
        interest in TEF GP, TEF LLC, and Endowment Advisers, L.P. (“EA LP”), subsequent
        to May 1, 2008, the Company and the Salient Owners have the right, at any
        time,
        exercisable by written notice to the other party to buy each other’s ownership
        interests in Salient Partners, TEF GP, TEF LLC, and EA LP. Under the procedure
        established by the agreements, following the giving of notice of an offer,
        the
        parties have 30 days to arrive at a mutually agreeable price. If the parties
        cannot agree on a price within such 30-day period, the price based on the
        fair
        market value of Salient Partners, TEF GP, TEF LLC, and EA LP, will be determined
        by independent appraisers selected by the parties. Following determination
        of
        the price, the Salient Owners have the first right exercisable within ten
        days
        following the price determination to exercise their right to buy the Company’s
        interest in Salient Partners, TEF GP, TEF LLC, and EA LP from the Company.
        The
        purchase price is payable 50% in cash and the balance in the form of a
        promissory note maturing three years following its date of issuance and bearing
        interest at the prime rate. If the Salient Owners do not exercise their right
        to
        purchase the Company’s interest in Salient Partners, TEF GP, TEF LLC, and EA LP,
        the Company has the right to purchase the Salient Owners’ interests in such
        entities. If the Company exercises its right to purchase the Salient Owners’
interest, certain principals of Salient Partners are obligated to enter into
        employment agreements with the Company with a minimum term of two-years (which
        shall contain a coterminous non-compete provision) with compensation and
        upon
        terms mutually acceptable to the parties (but in no event with compensation
        less
        than that which is being received by a principal at such time). In the event
        of
        a sale, the Company would be obligated to fund an incentive plan payable
        to
        employees of Salient in an amount dependant upon the purchase price. If
        following commencement of the process neither party exercises its right to
        purchase the other parties’ interest, the ownership would remain the same with
        the purchase right exercisable again at a future date by either party.
 
 The
        Company has uncommitted financing arrangements with clearing brokers that
        finance our customer accounts, certain broker-dealer balances, and firm trading
        positions. Although these customer accounts and broker-dealer balances are
        not
        reflected on the consolidated balance sheet for financial reporting purposes,
        the Company has generally agreed to indemnify these clearing brokers for
        losses
        they may sustain in connection with the accounts, and therefore retains risk
        on
        these accounts. The Company is required to maintain certain cash or securities
        on deposit with our clearing brokers.
 
 In
        the
        normal course of business, the Company enters into underwriting commitments.
        There were no firm underwriting commitments open at June 30, 2008.
 
 Many
        aspects of our business involve substantial risks of liability. In the normal
        course of business, we have been and in the future may be named as defendant
        or
        co-defendant in lawsuits and arbitration proceedings involving primarily
        claims
        for damages. We are also involved in a number of regulatory matters arising
        out
        of the conduct of our business. There can be no assurance that these matters
        will not have a material adverse effect on our results of operations in any
        future period and a significant judgment could have a material adverse impact
        on
        our consolidated financial position, results of operations, and cash flows.
        In
        addition to claims for damages and monetary sanctions that may be made against
        us, we incur substantial costs in investigating and defending claims and
        regulatory matters.
 
 In
        May
        2005, SMH acted as placement agent for a private placement of $50.0 million
        in
        convertible preferred stock of Ronco Corporation, a company involved in direct
        response marketing. Subsequent to the offering, Ronco experienced financial
        difficulties and ultimately filed a voluntary petition under Chapter 11 of
        the
        Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale
        of substantially all of Ronco’s assets in August 2007, and the case has been
        converted to liquidation under Chapter 7. It is unlikely that there will
        be any
        distribution to its unsecured creditors or equity security holders.  In
        2007, SMH wrote off a $3.0 million subordinated working capital loan that
        it
        made to Ronco in 2006.  SMH is a defendant in one proceeding related to
        Ronco.
  15
 
 On
        May
        23, 2007, two purchasers of Ronco convertible preferred stock filed a complaint
        against SMH, US Special Opportunities Trust PLC and Renaissance US Growth
        Investment Trust PLC, Case No. 07-04837, in the 193rd Judicial District Court,
        Dallas County, Texas, alleging common law fraud, statutory fraud in a stock
        transaction, violations of the Texas Securities Act, and negligent
        misrepresentation in connection with the plaintiffs’ purchase of $2.0 million in
        Ronco convertible preferred stock. SMH has filed an answer and special
        exceptions. SMH believes it has valid defenses to all claims made by the
        plaintiffs. However, there is no assurance that the Company will successfully
        defend such claims.
 
 In
        view
        of the inherent difficulty of predicting the outcome of legal proceedings,
        particularly where the plaintiffs seek substantial or indeterminate damages
        or
        where novel legal theories or a large number of parties are involved, we
        cannot
        state with confidence what the eventual outcome of currently pending matters
        will be, what the timing of the ultimate resolution of these matters will
        be, or
        what the eventual result in each pending matter will be.  Based on
        currently available information, we have established reserves for certain
        litigation matters and our management does not believe that resolution of
        any
        matter will have a material adverse effect on our liquidity or financial
        position although, depending on our results for a particular period, an adverse
        determination could have a material effect on quarterly or annual operating
        results in the period in which it is resolved.
 
 The
        Company and its subsidiaries have obligations under operating leases that
        expire
        through 2018 with initial noncancelable terms in excess of one year.
 
 **11.**
              **BUSINESS
                  SEGMENT INFORMATION**
 
 SMHG
        has
        two operating segments, Asset/Wealth Management and Capital Markets, and
        one
        non-operating segment, Corporate Support and Other. The business segments
        are
        based upon factors such as the services provided and distribution channels
        served. Certain services are provided to customers through more than one
        of our
        business segments.
 
 The
        Asset/Wealth Management segment provides investment advisory, wealth and
        investment management, financial planning, and trust services to institutional
        and individual clients. It earns an advisory fee based on such factors as
        the
        amount of assets under management and the type of services provided. The
        Asset/Wealth Management segment may also earn commission revenue from the
        sale
        of equity, fixed income, mutual fund, and annuity products; and sales credits
        from the distribution of investment banking issues. In addition, performance
        fees may be earned for exceeding performance benchmarks for the investment
        portfolios in the limited partnerships that we manage. The Asset/Wealth
        Management segment also earns revenue from net interest on customers’ margin
        loan and credit account balances and sales credits from the distribution
        of
        investment banking products.
 
 The
        Capital Markets segment generally provides corporate financing services to
        its
        institutional client base. These services are provided through three divisions:
        (i) investment banking, (ii) institutional brokerage, and (iii) prime brokerage
        services.
 
 ·
              The
                  Investment Banking division provides corporate securities underwriting,
                  private financings, and financial advisory services. The Company
                  participates in corporate securities distributions as a manager,
                  co-manager, or member of an underwriting syndicate or of a selling
                  group
                  in public offerings managed by other underwriters. Fees earned
                  for our
                  role as an advisor, manager, or underwriter are included in the
                  investment
                  banking business. Sales credits associated with the distribution
                  of
                  investment banking products are reported in the Institutional Brokerage
                  segment or the Asset/Wealth Management segment depending on the
                  relevant
                  distribution channel.
 
 ·
              The
                  Institutional Brokerage division distributes equity and fixed income
                  products through its distribution network to its institutional
                  clients.
                  Institutional revenue consists of commissions and principal credits
                  earned
                  on transactions in customer brokerage accounts, net interest on
                  customers’
                  margin loan and credit account balances, and sales credits from
                  the
                  distribution of investment banking
                  products.
  16
  ·
              The
                  Prime Brokerage Services division provides trade execution, clearing,
                  custody, and other back-office services to hedge funds and other
                  professional traders. Prime broker revenue consists of commissions
                  and
                  principal credits earned on equity and fixed income transactions,
                  interest
                  income from securities lending services to customers, and net interest
                  on
                  customers’ margin loan and credit account
                  balances.
 
 The
        Corporate Support and Other segment includes realized and unrealized gains
        and
        losses on the Company’s investment portfolios, and interest and dividends earned
        on our cash and securities positions. Unallocated corporate revenue and expenses
        are included in Corporate Support and Other. Gains and losses from sports
        representation and management services performed by SSG are included in
        Corporate Support and Other.
  17
 
 The
        following summarizes certain financial information of each reportable business
        segment for the three and six months ended June 30, 2008 and 2007, respectively.
        SMHG does not analyze asset information in all business segments.
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**(in
                  thousands)Revenue:Asset/Wealth
                  Management
              
              $
              31,918
              
              $
              26,021
              
              $
              62,537
              
              $
              49,705Capital
                  Markets:Investment
                  banking
              
              
              4,742
              
              
              6,580
              
              
              5,398
              
              
              13,804Institutional
                  brokerage
              
              
              4,981
              
              
              3,721
              
              
              8,738
              
              
              8,365Prime
                  brokerage services
              
              
              10,664
              
              
              8,802
              
              
              21,184
              
              
              17,671Capital
                  Markets Total
              
              
              20,387
              
              
              19,103
              
              
              35,320
              
              
              39,840Corporate
                  Support and Other
              
              
              4,406
              
              
              1,073
              
              
              3,670
              
              
              2,135Total
              
              $
              56,711
              
              $
              46,197
              
              $
              101,527
              
              $
              91,680Income
                  (loss) before equity in income (loss) of limited partnerships,
                  minority
                  interests, and income taxes:Asset/Wealth
                  Management
              
              $
              9,605
              
              $
              6,773
              
              $
              18,801
              
              $
              13,205Capital
                  Markets:Investment
                  banking
              
              
              542
              
              
              1,634
              
              
              (2,630
              )
              
              3,205Institutional
                  brokerage
              
              
              382
              
              
              185
              
              
              373
              
              
              811Prime
                  brokerage services
              
              
              940
              
              
              936
              
              
              1,447
              
              
              2,009Capital
                  Markets Total
              
              
              1,864
              
              
              2,755
              
              
              (810
              )
              
              6,025Corporate
                  Support and Other
              
              
              (285
              )
              
              (7,096
              )
              
              (5,306
              )
              
              (10,322
              )Total
              
              $
              11,184
              
              $
              2,432
              
              $
              12,685
              
              $
              8,908Equity
                  in income (loss) of limited partnerships:Asset/Wealth
                  Management
              
              $
              4,395
              
              $
              3,907
              
              $
              4,858
              
              $
              3,319Capital
                  Markets:Investment
                  banking
              
              
              -
              
              
              -
              
              
              -
              
              
              -Institutional
                  brokerage
              
              
              -
              
              
              -
              
              
              -
              
              
              -Prime
                  brokerage services
              
              
              -
              
              
              -
              
              
              -
              
              
              -Capital
                  Markets Total
              
              
              -
              
              
              -
              
              
              -
              
              
              -Corporate
                  Support and Other
              
              
              106
              
              
              (5
              )
              
              (2,106
              )
              
              268Total
              
              $
              4,501
              
              $
              3,902
              
              $
              2,752
              
              $
              3,587Minority
                  interests in net income of consolidated companies:Asset/Wealth
                  Management
              
              $
              (5,371
              )
              $
              (4,521
              )
              $
              (8,472
              )
              $
              (6,360
              )Capital
                  Markets:Investment
                  banking
              
              
              -
              
              
              -
              
              
              -
              
              
              -Institutional
                  brokerage
              
              
              -
              
              
              -
              
              
              -
              
              
              -Prime
                  brokerage services
              
              
              -
              
              
              -
              
              
              -
              
              
              -Capital
                  Markets Total
              
              
              -
              
              
              -
              
              
              -
              
              
              -Corporate
                  Support and Other
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              (5,371
              )
              $
              (4,521
              )
              $
              (8,472
              )
              $
              (6,360
              )Income
                  (loss) before income taxes:Asset/Wealth
                  Management
              
              $
              8,629
              
              $
              6,159
              
              $
              15,187
              
              $
              10,164Capital
                  Markets:Investment
                  banking
              
              
              542
              
              
              1,634
              
              
              (2,630
              )
              
              3,205Institutional
                  brokerage
              
              
              382
              
              
              185
              
              
              373
              
              
              811Prime
                  brokerage services
              
              
              940
              
              
              936
              
              
              1,447
              
              
              2,009Capital
                  Markets Total
              
              
              1,864
              
              
              2,755
              
              
              (810
              )
              
              6,025Corporate
                  Support and Other
              
              
              (179
              )
              
              (7,101
              )
              
              (7,412
              )
              
              (10,054
              )Total
              
              $
              10,314
              
              $
              1,813
              
              $
              6,965
              
              $
              6,135
  18
  **12.**
              **SUPPLEMENTAL
                  CASH FLOW INFORMATION**
 
 **Six Months Ended June 30,****2008**
              
              **2007**(in
                  thousands)Cash
                  payment for income taxes, net
              
              $
              556
              
              $
              3,748Cash
                  paid for interest
              
              
              9
              
              
              16Noncash
                  investing activities:Acquisitions:Receivables
              
              
              10
              
              
              -Accounts
                  payable and accrued liabilities
              
              
              (290
              )
              
              -Minority
                  interests
              
              
              77
              
              
              -Common
                  stock
              
              
              (23,933
              )
              
              -Noncash
                  financing activities:Dividends
                  declared not yet paid
              
              
              1,259
              
              
              1,112
 
 **13.**
              **RELATED
                  PARTIES**
 
 The
        Company had receivables from related parties totaling $9.7 million at June
        30,
        2008, primarily consisting of $4.5 million of advances to unconsolidated
        related
        entities to fund operating expenses, $3.9 million of notes receivable from
        employees and consultants representing loans made to induce the employees
        and
        consultants to affiliate with the Company, and $715,000 of management fees
        receivable from the limited partnerships that the Company manages.
  19




**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; and (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, 2007. The Company does not undertake
      to publicly update or revise any forward-looking statements.





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





**Overview**





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





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





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




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





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





20


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





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





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





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





**Components
      of Revenue and Expenses**





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





*Expenses.* Our
      expenses consist of (1) compensation and benefits, (2) floor brokerage,
      exchange, and clearance fees, and (3) other expenses. Compensation and benefits
      have both a variable component, based on revenue production, and a fixed
      component. The variable component includes institutional and retail sales
      commissions, bonuses, overrides, and other incentives. Wealth advisory and
      institutional commissions are based on competitive commission schedules.
      Employees of the investment banking group and the research group receive a
      salary and discretionary bonuses as compensation. The fixed component includes
      administrative and executive salaries, payroll taxes, employee benefits, and
      temporary employee costs. Compensation and benefits is our largest expense
      item
      and includes wages, salaries, and benefits. During the second quarter of 2008,
      compensation and benefits represented 64.0% of total expenses and 51.4% of
      total
      revenue, compared to 62.2% of total expenses and 59.0% of total revenue during
      the second quarter of 2007. During the first six months of 2008, compensation
      and benefits represented 64.8% of total expenses and 56.7% of total revenue,
      compared to 64.9% of total expenses and 58.6% of total revenue for the same
      period in 2007.





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





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





21


**Results
      of Operations**





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





Total
      revenue was $56.7 million for the second quarter of 2008 compared to $46.2
      million for the same quarter in 2007, an increase of $10.5 million, or 22.8%,
      primarily reflecting increases in revenue from investment advisory and related
      services and principal transactions revenue partially offset by a decrease
      in
      investment banking revenue. Total expenses for the second quarter of 2008
      increased $1.7 million, or 4.0%, to $45.5 million from $43.8 million in the
      same
      quarter of the previous year principally due to higher employee compensation
      and
      benefits due to the revenue growth in the asset/wealth management segment.
      Equity in income of limited partnerships increased to $4.5 million for the
      second quarter of 2008 compared to $3.9 million for the second quarter of 2007,
      primarily due to an increase in the value of the investment portfolio of one
      of
      the limited partnerships that we manage. Net income was $6.2 million, or $0.23
      per diluted common share, for the second quarter of 2008 compared to net income
      of $1.1 million, or $0.04 per diluted common share, for the second quarter
      of
      2007.





Revenue
      from investment advisory and related services increased to $22.6 million in
      the
      second quarter of 2008 from $17.0 million in the same quarter of 2007, primarily
      due to higher assets under management at Salient, as well as the acquisitions
      of
      Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a retail
      branch in Boca Raton, Florida. Commission revenue increased to $14.6 million
      in
      the second quarter of 2008 from $13.8 million for the same period in 2007,
      primarily as a result of an increase in trading volume in the asset/wealth
      management segment. Investment banking revenue decreased to $6.7 million during
      the second quarter of 2008 from $9.1 million in the same period of 2007,
      principally due to decreases in private placement income and merger and
      acquisition fees. Principal transactions revenue increased from $2.8 million
      for
      the second quarter of 2007 to $8.3 million for the second quarter of 2008,
      primarily as the result of an increase in the value of our investment
      portfolios. Also, principal transactions revenue from the sale of fixed income
      products increased to $3.4 million during the second quarter of 2008 from $1.1
      million in the same period of 2007. Interest and dividend income decreased
      to
      $1.0 million in the second quarter of 2008 from $2.0 million in the same period
      last year due to a decrease in the amount of money in the firm’s accounts that
      are earning interest income and a decline in interest rates. Other income
      increased from $1.6 million during the second quarter of 2007 to $3.6 million
      during the same period in 2008 reflecting growth in hedge fund servicing revenue
      and third-party marketing fees.





During
      the three months ended June 30, 2008, employee compensation and benefits
      increased to $29.1 million from $27.2 million in the same period last year
      due
      to higher employee compensation and benefits resulting from the revenue growth
      in the asset/wealth management segment. During the three months ended June
      30,
      2008, floor brokerage, exchange, and clearance fees decreased to $1.4 million
      from $1.9 million in the same period last year as the result of lower trading
      volume in the proprietary trading operations of our Concept Capital division.
      Communications and data processing costs increased to $3.2 million in the second
      quarter of 2008 from $2.9 million in the same period last year, primarily due
      to
      higher clearing firm service fees. Occupancy costs were $3.3 million in the
      second quarter of 2008 compared to $2.9 million in the second quarter of 2007
      due to an increase in the amount of rental space occupied by Salient, the
      addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening
      of a
      new retail branch in Boca Raton, Florida. Amortization of intangible assets
      increased to $234,000 for the second quarter of 2008 compared to $139,000 for
      the second quarter of 2007 due to the addition of Rikoon, Dickenson, Leonetti,
      and Miller-Green. Other general and administrative expenses decreased to $8.2
      million during the second quarter of 2008 from $8.7 million in the second
      quarter of last year. The decrease in other general and administrative expenses
      was primarily due to a decrease in the provision for bad debts which was
      partially offset by increases in outside sales commissions and legal
      expenses.





Our
      effective tax rate was 40.0% for the three months ended June 30, 2008 compared
      to 39.1% for the three months ended June 30, 2007. The effective tax rate
      exceeds the federal statutory income tax rate primarily as a result of state
      income taxes and certain nondeductible expenses.





22


RESULTS BY
      SEGMENT





**Asset/Wealth
      Management**





**Three Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            31,918
            
            $
            26,021Income
                before income taxes
            
            $
            8,629
            
            $
            6,159





Revenue
      from asset/wealth management increased to $31.9 million from $26.0 million
      and
      income before income taxes increased to $8.6 million from $6.2 million.
      Investment advisory and related services revenue increased to $22.6 million
      from
      $17.0 million, primarily due to higher assets under management at Salient,
      as
      well as the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green,
      and
      the opening of a retail branch in Boca Raton, Florida. Total expenses increased
      to $22.3 million from $19.2 million, primarily due to increased employee
      compensation related to the higher revenue. Asset/wealth management also
      experienced increases in occupancy costs, outside sales commissions, and legal
      expenses. Equity in income of limited partnerships increased to $4.4 million
      from $3.9 million, principally due to an increase in the value of the investment
      portfolio of one of the limited partnerships that we manage. Minority interests
      in net income of consolidated subsidiaries, which reduces the Company’s pretax
      income, increased to $5.4 million from $4.5 million, principally due to
      increases in the values of the investment portfolios of the limited
      partnerships.




**Capital
      Markets**





*Investment*  *Banking*





**Three Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            4,742
            
            $
            6,580Income
                before income taxes
            
            $
            542
            
            $
            1,634





Revenue
      from investment banking decreased to $4.7 million from $6.6 million and income
      before income taxes decreased to $542,000 from $1.6 million. The revenue
      decrease is due to decreases in private placement income and merger and
      acquisition fees caused by weakness in the financial markets that has adversely
      affected the volume and timing of our clients’ investment banking transactions.
      Total expenses decreased to $4.2 million from $4.9 million. The decrease in
      expenses is attributable to decreased employee compensation, which is partially
      tied to revenue.





*Institutional
      Brokerage*





**Three Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            4,981
            
            $
            3,721Income
                before income taxes
            
            $
            382
            
            $
            185





23


Revenue
      from institutional brokerage increased to $5.0 million from $3.7 million and
      income before income taxes increased to $382,000 from $185,000. Commission
      revenue increased to $3.9 million from $2.4 million reflecting a $1.3 million
      increase in commissions from the sale of collateralized debt obligations in
      our
      fixed income division. Total expenses increased to $4.6 million from $3.5
      million, primarily due to increased employee compensation related to the higher
      revenue.





*Prime
      Brokerage Services*





**Three Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            10,664
            
            $
            8,802Income
                before income taxes
            
            $
            940
            
            $
            936





Revenue
      from prime brokerage services increased to $10.7 million from $8.8 million
      and
      income before income taxes increased to $940,000 from $936,000. Principal
      transactions revenue increased to $3.3 million from $1.6 million reflecting
      an
      increase in revenue earned from the sale of fixed income products. In addition,
      commission revenue and third-party marketing fees increased to $6.7 million
      from
      $6.1 million reflecting growth in hedge fund servicing revenue. Total expenses
      increased to $9.7 million from $7.9 million reflecting increased compensation
      and outside sales commissions related to the increased revenue.





**Corporate
      Support and Other**





**Three Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            4,406
            
            $
            1,073Loss
                before income taxes
            
            $
            (179
            )
            $
            (7,101
            )





Revenue
      from corporate support and other increased to $4.4 million from $1.1 million
      and
      the loss before income taxes decreased to $179,000 from $7.1 million. Revenue
      from principal transactions, which consists principally of changes in the values
      of our investment portfolios, increased to $3.7 million from a loss of $25,000.
      Total expenses decreased to $4.7 million from $8.2 million, primarily due to
      a
      $3.0 million provision for bad debts related to a note receivable that was
      recorded in the second quarter of 2007. Equity in income (loss) of limited
      partnerships increased to income of $106,000 from a loss of $5,000, principally
      due to an increase in the value
      of
      our direct investment in one limited partnership. This increase was partially
      offset by a decrease in the value of our direct investment in another limited
      partnership.





*Six
      Months Ended June 30, 2008 Compared to Six Months Ended June 30,
      2007*





Total
      revenue was $101.5 million for the six months ended June 30, 2008 compared
      to
      $91.7 million for the same period in 2007, an increase of $9.8 million, or
      10.7%, primarily reflecting increases in revenue from investment advisory and
      related services and principal transactions revenue partially offset by a
      decline in investment banking revenue. Total expenses for the six months ended
      June 30, 2008 increased $6.0 million, or 7.3%, to $88.8 million from $82.8
      million in the same period of the previous year, principally due to higher
      employee compensation and benefits due to the revenue growth in the asset/wealth
      management segment. Also, communications and data processing expense increased
      primarily due to higher clearing firm service fees. Equity in income of limited
      partnerships was $2.8 million for the six months ended June 30, 2008 compared
      to
      $3.6 million for the same period in 2007, principally due to a smaller increase
      in the value of our investments in limited partnerships in 2008 compared to
      2007. Net income was $4.1 million, or $0.16 per diluted common share, for the
      six months ended June 30, 2008 compared to net income of $3.8 million, or $0.15
      per diluted common share, for the same period in 2007.





24


Revenue
      from investment advisory and related services increased to $43.4 million for
      the
      six months ended June 30, 2008 from $31.9 million in the same period of 2007,
      primarily due to the conversion of Edelman’s assets under management from a
      commission-based to a fee-based compensation structure and to the addition
      of
      assets under management at Salient. Additionally, the acquisitions of Rikoon,
      Dickenson, Leonetti, and Miller-Green, and the opening of a retail branch in
      Boca Raton, Florida, contributed to the growth in investment advisory fee
      revenue. Commission revenue increased to $28.6 million for the six months ended
      June 30, 2008 from $27.3 million for the same period in 2007, primarily as
      a
      result of an increase in trading volume in the asset/wealth management division.
      Investment banking revenue decreased to $9.0 million for the six months ended
      June 30, 2008 from $19.2 million in the same period of 2007, principally due
      to
      decreases in private placement income and merger and acquisition fees. Principal
      transactions revenue increased from $6.1 million for the six months ended June
      30, 2007 to $11.0 million for the same period in 2008, primarily as the result
      of increases in the value of our investment portfolios. Also, principal
      transactions revenue from the sale of fixed income products increased to $5.7
      million for the six months ended June 30, 2008 from $2.7 million for the same
      period of 2007. Interest and dividend income decreased to $2.2 million for
      the
      six months ended June 30, 2008 from $3.9 million in the same period last year
      due to a decrease in the amount of money in the firm’s accounts that are earning
      interest income and a decline in interest rates. Other income increased from
      $3.2 million for the six months ended June 30, 2007 to $7.3 million during
      the
      same period in 2008 reflecting growth in hedge fund servicing revenue and
      third-party marketing fees.





During
      the six months ended June 30, 2008, employee compensation and benefits increased
      to $57.6 million from $53.8 million in the same period last year due to higher
      employee compensation and benefits resulting from the revenue growth in the
      asset/wealth management segment. Floor brokerage, exchange, and clearance fees
      decreased to $2.8 million for the six months ended June 30, 2008 from $3.4
      million in the same period in 2007 reflecting lower clearing and execution
      costs
      resulting from a decline in trading volume. Communications and data processing
      costs increased to $6.1 million for the six months ended June 30, 2008 from
      $5.1
      million in the same period last year, primarily due to higher clearing firm
      service fees. Occupancy costs were $6.6 million for the six months ended June
      30, 2008 compared to $6.0 million in the same period of 2007 due to an increase
      in the amount of rental space occupied by SMH and Salient, the addition of
      Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a new retail
      branch in Boca Raton, Florida. Interest expense decreased to $11,000 for the
      six
      months ended June 30, 2008 from $21,000 for the same period in 2007.
      Amortization of intangible assets increased to $403,000 for the six months
      ended
      June 30, 2008 compared to $139,000 for the same period in 2007 due to the
      addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Other general and
      administrative expenses increased to $15.3 million during the six months ended
      June 30, 2008 from $14.4 million in the same period of last year. The increase
      in other general and administrative expenses was primarily due to increases
      in
      outside sales commissions and legal expenses partially offset by a decrease
      in
      the provision for bad debts.





Our
      effective tax rate was 41.3% for the six months ended June 30, 2008 compared
      to
      37.3% for the six months ended June 30, 2007. The effective tax rate exceeds
      the
      federal statutory income tax rate primarily as a result of state income taxes
      and certain nondeductible expenses.





25


RESULTS BY
      SEGMENT





**Asset/Wealth
      Management**





**Six Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            62,537
            
            $
            49,705Income
                before income taxes
            
            $
            15,187
            
            $
            10,164





Revenue
      from asset/wealth management increased to $62.5 million from $49.7 million
      and
      income before income taxes increased to $15.2 million from $10.2 million.
      Investment advisory and related services revenue increased to $43.4 million
      from
      $31.7 million, primarily due to the conversion of Edelman’s assets under
      management from a commission-based to a fee-based compensation structure and
      to
      the addition of assets under management at Salient. Additionally, the
      acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening
      of a retail branch in Boca Raton, Florida, contributed to the growth in
      investment advisory fee revenue. Commission revenue increased to $11.2 million
      from $10.1 million, primarily as a result of an increase in trading volume.
      Total expenses increased to $43.7 million from $36.5 million, primarily due
      to
      increased employee compensation related to the higher revenue. Asset/wealth
      management also experienced increases in occupancy costs, outside sales
      commissions, and legal expenses. Equity in income of limited partnerships
      increased to $4.9 million from $3.3 million, principally due to an increase
      in
      the value of the investment portfolio of one of the limited partnerships that
      we
      manage. Minority interests in net income of consolidated subsidiaries, which
      reduces the Company’s pretax income, increased to $8.5 million from $6.4
      million, principally due to increases in the values of the investment portfolios
      of the limited partnerships.




**Capital
      Markets**





*Investment*  *Banking*





**Six Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            5,398
            
            $
            13,804Income
                (loss) before income taxes
            
            $
            (2,630
            )
            $
            3,205








Revenue
      from investment banking decreased to $5.4 million from $13.8 million and income
      (loss) before income taxes decreased to a loss of $2.6 million from income
      of
      $3.2 million. The revenue decrease is due to decreases in private placement
      income and merger and acquisition fees caused by weakness in the financial
      markets that has adversely affected the volume and timing of our clients’
investment banking transactions. Total expenses decreased to $8.0 million from
      $10.6 million. The decrease in expenses is attributable to decreased employee
      compensation, which is partially tied to revenue.




26




*Institutional
      Brokerage*


**Six Months Ended June 30,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              8,738
              
              $
              8,365Income
                  before income taxes
              
              $
              373
              
              $
              811




Revenue
      from institutional brokerage increased to $8.7 million from $8.4 million and
      income before income taxes decreased to $373,000 from $811,000. Commission
      revenue increased to $6.7 million from $5.5 million reflecting a $2.0 million
      increase in commissions from the sale of collateralized debt obligations in
      our
      fixed income division. This increase was partially offset by a decline in the
      number of shares traded in our institutional equity division. This decline
      is
      largely the result of the growth in electronic trading strategy execution
      software that replaces, in some cases, the role of traditional traders.
      Additionally, sales credits from syndicate and investment banking activities
      declined to $453,000 from $1.4 million reflecting a lower volume of offerings
      sold by the institutional division. Total expenses increased to $8.4 million
      from $7.6 million, primarily due to increased employee compensation related
      to
      the higher commission revenue.





*Prime
      Brokerage Services*


**Six Months Ended June 30,****2008**
              
              **2007**(in
                  thousands)Revenue
              
              $
              21,184
              
              $
              17,671Income
                  before income taxes
              
              $
              1,447
              
              $
              2,009


Revenue
      from prime brokerage services increased to $21.2 million from $17.7 million
      and
      income before income taxes decreased to $1.4 million from $2.0 million.
      Commission revenue and third-party marketing fees increased to $14.2 million
      from $11.6 million reflecting growth in hedge fund servicing revenue. In
      addition, principal transactions revenue increased to $6.0 million from $4.1
      million reflecting an increase in revenue earned from the sale of fixed income
      products. Total expenses increased to $19.7 million from $15.7 million
      reflecting increased compensation and outside sales commissions related to
      the
      increased revenue.





**Corporate
      Support and Other**





**Six
                Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Revenue
            
            $
            3,670
            
            $
            2,135Loss
                before income taxes
            
            $
            (7,412
            )
            $
            (10,054
            )





Revenue
      from corporate support and other increased to $3.7 million from $2.1 million
      and
      the loss before income taxes decreased to $7.4 million from $10.1 million.
      Revenue from principal transactions, which consists principally of changes
      in
      the values of our investment portfolios, increased to a gain of $2.3 million
      from a loss of $259,000. Interest and dividend income decreased to $1.2 million
      from $2.0 million due to a decrease in the amount of money in the firm’s
      accounts that are earning interest income and a decline in interest rates.
      Total
      expenses decreased to $9.0 million from $12.5 million, primarily due to a $3.0
      million provision for bad debts related to a note receivable that was recorded
      in the second quarter of 2007. Equity in income (loss) of limited partnerships
      decreased to a loss of $2.1 million from income of $268,000, principally due
      to
      a decrease in the value of our direct investment in one limited
      partnership.




27




**Liquidity
      and Capital Resources**





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





At
      June
      30, 2008, we had $20.1 million in cash and cash equivalents, which together
      with
      receivables from broker-dealers and clearing organizations, deposits with
      clearing organizations, marketable securities owned, and securities available
      for sale represented 13.4% of our total assets at the end of the second quarter.





Receivables
      turnover, calculated as annualized revenue divided by average receivables,
      was
      four for the six months ended June 30, 2008 compared to five for the same period
      in the prior year. The decrease in the receivables turnover is due to an
      increase in average receivables from related parties that typically mature
      in
      one to five years. The allowance for doubtful accounts as a percentage of
      receivables was 8.2% at June 30, 2008 compared to 5.0% at December 31, 2007.
      The
      increase in the allowance for doubtful accounts as a percentage of receivables
      was the result of a $805,000 provision for bad debts related to uncollectible
      receivables recorded in the first six months of 2008.





For
      the
      six months ended June 30, 2008, net cash provided by operations totaled $15.6
      million versus net cash provided by operations of $7.0 million during the same
      period in 2007. Marketable securities owned decreased by $5.3 million during
      the
      first six months of 2008, securities sold, not yet purchased decreased by $6.6
      million, and payables to broker-dealers and clearing organizations increased
      by
      $44,000. The change in marketable securities owned, securities sold, not yet
      purchased, and payables to broker-dealers and clearing organizations is
      primarily due to the trading portfolios of our proprietary trading operations.
      The Company’s proprietary trading operations carry both long and short equity
      securities. These trading operations generally seek to generate profits based
      on
      trading spreads, rather than through speculation on the direction of the market.
      We employ hedging strategies designed to insulate the net value of our trading
      inventories from fluctuations in the general level of interest rates and equity
      price variances. We finance a portion of our trading positions through our
      clearing broker-dealers.





Not
      readily marketable securities owned, primarily investments in limited
      partnerships, were $59.5 million at June 30, 2008 compared to $61.1 million
      at
      December 31, 2007. This decrease is the result of net dispositions of investment
      positions as well as changes in the values of our investment portfolios.
      Management believes its investment in limited partnerships is a critical part
      of
      its capital market investing activities that has historically generated
      favorable returns for the Company. These limited partnerships typically have
      a
      ten-year life.





Capital
      expenditures for the first six months of 2008 were $6.5 million, mainly for
      the
      purchase of leasehold improvements, furniture, and computer equipment and
      software necessary for our growth.





At
      June
      30, 2008, SMH, our registered broker-dealer subsidiary, was in compliance with
      the net capital requirements of the Securities and Exchange Commission's Uniform
      Net Capital Rules and had capital in excess of the required minimum. Salient
      Trust Co., LTA was in compliance with the Texas Department of Banking net
      capital requirements and had capital in excess of the required minimum.





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




28




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





**Market
      Risk**





During
      the six months ended June 30, 2008, there have been no material changes to
      the
      information contained in Part II, Item 7A of the Company’s Annual Report on Form
      10-K for the year ended December 31, 2007.





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





At
      June
      30, 2008, securities owned by the Company were recorded at a fair value of
      $78.5
      million, including $19.0 million in marketable securities, $49.5 million
      representing the Company’s investments in limited partnerships, and $10.0
      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.





At
      June
      30, 2008, Salient had securities available for sale with a fair value of
      $721,000. These securities have an original cost of $459,000 and are subject
      to
      equity price risk. At June 30, 2008, the unrealized increase in fair value
      totaling $262,000, less tax of $105,000, has been included as a separate
      component of shareholders’ equity.




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





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




29




**PART
      II. OTHER INFORMATION**





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





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





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





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





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





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





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





30




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





On
      May
      12, 2008, the Company issued an aggregate of 2,673,429 unregistered shares
      of
      common stock to The Edelman Financial Center, Inc. and Ric Edelman as partial
      consideration for the purchase of an additional 25% member interest in The
      Edelman Financial Center, LLC. The shares were valued at $22.2 million, or
      $8.30
      per share. In addition to the shares, The Edelman Financial Center, Inc. and
      Ric
      Edelman received a cash payment of $22.2 million. The shares were issued by
      the
      Company without registration under the Securities Act of 1933 pursuant to and
      in
      reliance on Section 4(2) of such Act, relating to transactions not involving
      a
      public offering, and Regulation D thereunder.





**Item
      4.** ***Submission
      of Matters to a Vote of Security Holders***





On
      May
      22, 2008, the Company held its annual meeting of shareholders to elect nine
      directors to the Company’s Board of Directors, each for a term of one year, and
      to ratify the appointment of KPMG LLP as the Company’s independent registered
      public accountants for fiscal 2008.





At
      the
      annual meeting, each nominee was elected and the results of the votes were
      as
      follows:





**Number of**
            
            **Number of**
            
            **Number of**
            
            **Number of****Shares**
            
            **Shares**
            
            **Shares**
            
            **Broker****Voted For**
            
            **Voted Against**
            
            **Withheld**
            
            **Non-Votes**George
                L. Ball
            
            
            22,827,114
            
            
            -
            
            
            243,928
            
            
            -Richard
                E. Bean
            
            
            22,862,036
            
            
            -
            
            
            209,006
            
            
            -Charles
                W. Duncan III
            
            
            22,861,836
            
            
            -
            
            
            209,206
            
            
            -Scott
                B. McClelland
            
            
            22,861,836
            
            
            -
            
            
            209,206
            
            
            -Ben
                T. Morris
            
            
            22,367,118
            
            
            -
            
            
            703,924
            
            
            -Dr.
                Albert W. Niemi, Jr.
            
            
            22,740,394
            
            
            -
            
            
            330,648
            
            
            -Nolan
                Ryan
            
            
            22,859,073
            
            
            -
            
            
            211,969
            
            
            -Don
                A. Sanders
            
            
            22,861,346
            
            
            -
            
            
            209,696
            
            
            -W.
                Blair Waltrip
            
            
            22,791,836
            
            
            -
            
            
            279,206
            
            
            -





At
      the
      annual meeting, the appointment of KPMG LLP as the Company’s independent
      registered public accountants for fiscal 2008 was also approved. A total of
      22,968,222 votes were cast in favor of such proposal with 91,074 votes cast
      against the proposal and 11,746 votes abstaining from voting on the
      proposal.





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





None.





31




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





**INDEX
      TO EXHIBITS**





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




*32.2
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002._______________*Filed
              herewith.†Management
              contract or compensation plan or
              arrangement.




33




**SIGNATURES**





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




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





Date:  August
      11, 2008





34