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, 2009




OR




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




Commission
File No. 000-30066




SANDERS
MORRIS HARRIS GROUP INC.


(Exact
name of registrant as specified in its charter)




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




(713)
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   ̈
No




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




Large
      accelerated filer   ̈
                Accelerated
      filerxNon-accelerated
      filer   ̈
                Smaller
      reporting company  ̈




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




As of August 7, 2009, the registrant
had 28,428,787 outstanding shares of common stock, par value $0.01 per
share.










SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES





INDEX





PagePART
      I. FINANCIAL
      INFORMATIONItem
      1.
                          Financial
      Statements
                          2Condensed
      Consolidated Balance Sheets as of June 30, 2009 (unaudited) andDecember
      31, 2008
                          2Condensed
      Consolidated Statements of Operations for the Three and Six Months EndedJune
      30, 2009 and 2008 (unaudited)
                          3Condensed
      Consolidated Statement of Changes in Equity for the Six MonthsEnded
      June 30, 2009 (unaudited)
                          4Condensed
      Consolidated Statements of Cash Flows for the Six MonthsEnded
      June 30, 2009 and 2008 (unaudited)
                          5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                          6Item
      2.
                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          22Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          33Item
      4.
                          Controls
      and Procedures
                          33PART II. OTHER
      INFORMATIONItem
      1.
                          Legal
      Proceedings
                          34Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          35Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          35Item
      5.
                          Other
      Information
                          35Item
      6.
                          Exhibits
                          36




1


PART
I.   FINANCIAL INFORMATION





Item
1.  Financial
Statements




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


As
of June 30, 2009 and December 31, 2008


(in
thousands, except share and per share amounts)





June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(unaudited)ASSETSCash
      and cash equivalents
                  
                  $
                  40,590
                  
                  
                  $
                  30,224Receivables,
      net of allowance of $2,816 and $1,470, respectivelyBroker-dealers
      and clearing organizations
                  
                  
                  2,044
                  
                  
                  
                  254Customers
                  
                  
                  20,163
                  
                  
                  
                  16,344Related
      parties
                  
                  
                  10,372
                  
                  
                  
                  8,417Other
                  
                  
                  85,762
                  
                  
                  
                  89,847Deposits
      with clearing organizations
                  
                  
                  1,594
                  
                  
                  
                  1,062Securities
      owned
                  
                  
                  43,947
                  
                  
                  
                  54,559Furniture,
      equipment, and leasehold improvements, net
                  
                  
                  17,883
                  
                  
                  
                  18,859Other
      assets and prepaid expenses
                  
                  
                  2,778
                  
                  
                  
                  2,261Goodwill,
      net
                  
                  
                  85,371
                  
                  
                  
                  63,078Other
      intangible assets, net
                  
                  
                  11,044
                  
                  
                  
                  12,565Total
      assets
                  
                  $
                  321,548
                  
                  
                  $
                  297,470LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued liabilities
                  
                  $
                  36,454
                  
                  
                  $
                  36,644Borrowings
                  
                  
                  23,809
                  
                  
                  
                  -Subordinated
      promissory note
                  
                  
                  10,000
                  
                  
                  
                  -Deferred
      tax liability, net
                  
                  
                  11,448
                  
                  
                  
                  14,532Securities
      sold, not yet purchased
                  
                  
                  21,981
                  
                  
                  
                  12,884Payable
      to broker-dealers and clearing organizations
                  
                  
                  17
                  
                  
                  
                  2,051Total
      liabilities
                  
                  
                  103,709
                  
                  
                  
                  66,111Commitments
      and contingenciesEquity:Preferred
      stock, $0.10 par value; 10,000,000 shares authorized; no shares issued and
      outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.01 par value; 100,000,000 shares authorized; 29,495,931 and
      29,207,962 shares issued, respectively
                  
                  
                  295
                  
                  
                  
                  292Additional
      paid-in capital
                  
                  
                  236,177
                  
                  
                  
                  234,578Accumulated
      deficit
                  
                  
                  (19,744
                  )
                  
                  
                  (5,895
                  )Treasury
      stock, at cost, 1,055,894 and 1,049,085 shares,
    respectively
                  
                  
                  (6,449
                  )
                  
                  
                  (6,421
                  )Total
      Sanders Morris Harris Group Inc. shareholders' equity
                  
                  
                  210,279
                  
                  
                  
                  222,554Noncontrolling
      interest
                  
                  
                  7,560
                  
                  
                  
                  8,805Total
      equity
                  
                  
                  217,839
                  
                  
                  
                  231,359Total
      liabilities and equity
                  
                  $
                  321,548
                  
                  
                  $
                  297,470





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


2




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except per share amounts)


(unaudited)





Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue:Investment
      advisory and related services
                    
                    $
                    17,291
                    
                    
                    $
                    20,306
                    
                    
                    $
                    31,481
                    
                    
                    $
                    39,040Commissions
                    
                    
                    12,386
                    
                    
                    
                    13,808
                    
                    
                    
                    24,063
                    
                    
                    
                    27,290Investment
      banking
                    
                    
                    4,118
                    
                    
                    
                    5,467
                    
                    
                    
                    6,027
                    
                    
                    
                    6,567Principal
      transactions
                    
                    
                    16,025
                    
                    
                    
                    8,182
                    
                    
                    
                    24,743
                    
                    
                    
                    10,784Interest
      and dividends
                    
                    
                    2,769
                    
                    
                    
                    988
                    
                    
                    
                    5,397
                    
                    
                    
                    2,134Other
      income
                    
                    
                    2,486
                    
                    
                    
                    3,396
                    
                    
                    
                    4,563
                    
                    
                    
                    6,984Total
      revenue
                    
                    
                    55,075
                    
                    
                    
                    52,147
                    
                    
                    
                    96,274
                    
                    
                    
                    92,799Expenses:Employee
      compensation and benefits
                    
                    
                    36,501
                    
                    
                    
                    26,082
                    
                    
                    
                    64,782
                    
                    
                    
                    51,408Floor
      brokerage, exchange, and clearance fees
                    
                    
                    1,640
                    
                    
                    
                    1,327
                    
                    
                    
                    3,438
                    
                    
                    
                    2,730Communications
      and data processing
                    
                    
                    2,923
                    
                    
                    
                    3,053
                    
                    
                    
                    5,570
                    
                    
                    
                    5,764Occupancy
                    
                    
                    3,438
                    
                    
                    
                    2,994
                    
                    
                    
                    6,915
                    
                    
                    
                    5,861Interest
                    
                    
                    640
                    
                    
                    
                    -
                    
                    
                    
                    820
                    
                    
                    
                    -Goodwill
      and other intangible assets impairment charges
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,928
                    
                    
                    
                    -Amortization
      of other intangible assets
                    
                    
                    209
                    
                    
                    
                    234
                    
                    
                    
                    418
                    
                    
                    
                    403Other
      general and administrative
                    
                    
                    6,843
                    
                    
                    
                    7,413
                    
                    
                    
                    13,061
                    
                    
                    
                    13,877Total
      expenses
                    
                    
                    52,194
                    
                    
                    
                    41,103
                    
                    
                    
                    109,932
                    
                    
                    
                    80,043Income
      (loss) from continuing operations before equity in income of limited
      partnerships and income taxes
                    
                    
                    2,881
                    
                    
                    
                    11,044
                    
                    
                    
                    (13,658
                    )
                    
                    
                    12,756Equity
      in income of limited partnerships
                    
                    
                    1,486
                    
                    
                    
                    4,831
                    
                    
                    
                    988
                    
                    
                    
                    3,271Income
      (loss) from continuing operations before income taxes
                    
                    
                    4,367
                    
                    
                    
                    15,875
                    
                    
                    
                    (12,670
                    )
                    
                    
                    16,027Provision
      (benefit) for income taxes
                    
                    
                    1,282
                    
                    
                    
                    4,345
                    
                    
                    
                    (5,191
                    )
                    
                    
                    3,323Income
      (loss) from continuing operations, net of income taxes
                    
                    
                    3,085
                    
                    
                    
                    11,530
                    
                    
                    
                    (7,479
                    )
                    
                    
                    12,704Loss
      from discontinued operations, net of tax
                    
                    
                    (460
                    )
                    
                    
                    (273
                    )
                    
                    
                    (1,688
                    )
                    
                    
                    (666
                    )Net
      income (loss)
                    
                    
                    2,625
                    
                    
                    
                    11,257
                    
                    
                    
                    (9,167
                    )
                    
                    
                    12,038Less:  Net
      income attributable to the noncontrolling interest
                    
                    
                    (1,092
                    )
                    
                    
                    (5,065
                    )
                    
                    
                    (2,144
                    )
                    
                    
                    (7,953
                    )Net
      income (loss) attributable to Sanders Morris Harris Group
    Inc.
                    
                    $
                    1,533
                    
                    
                    $
                    6,192
                    
                    
                    $
                    (11,311
                    )
                    
                    $
                    4,085Basic
      earnings (loss) per common share:Continuing
      operations
                    
                    $
                    0.07
                    
                    
                    $
                    0.24
                    
                    
                    $
                    (0.35
                    )
                    
                    $
                    0.18Discontinued
      operations
                    
                    
                    (0.02
                    )
                    
                    
                    (0.01
                    )
                    
                    
                    (0.06
                    )
                    
                    
                    (0.02
                    )Net
      earnings (loss)
                    
                    $
                    0.05
                    
                    
                    $
                    0.23
                    
                    
                    $
                    (0.41
                    )
                    
                    $
                    0.16Diluted
      earnings (loss) per common share:Continuing
      operations
                    
                    $
                    0.07
                    
                    
                    $
                    0.24
                    
                    
                    $
                    (0.35
                    )
                    
                    $
                    0.18Discontinued
      operations
                    
                    
                    (0.02
                    )
                    
                    
                    (0.01
                    )
                    
                    
                    (0.06
                    )
                    
                    
                    (0.02
                    )Net
      earnings (loss)
                    
                    $
                    0.05
                    
                    
                    $
                    0.23
                    
                    
                    $
                    (0.41
                    )
                    
                    $
                    0.16Weighted
      average common shares outstanding:Basic
                    
                    
                    27,733
                    
                    
                    
                    26,760
                    
                    
                    
                    27,619
                    
                    
                    
                    25,739Diluted
                    
                    
                    28,338
                    
                    
                    
                    26,918
                    
                    
                    
                    27,619
                    
                    
                    
                    25,932Amounts
      attributable to Sanders Morris Harris Group Inc. common
      shareholders:Income
      (loss) from continuing operations, net of tax
                    
                    $
                    1,993
                    
                    
                    $
                    6,465
                    
                    
                    $
                    (9,623
                    )
                    
                    $
                    4,751Discontinued
      operations, net of tax
                    
                    
                    (460
                    )
                    
                    
                    (273
                    )
                    
                    
                    (1,688
                    )
                    
                    
                    (666
                    )Net
      income (loss)
                    
                    $
                    1,533
                    
                    
                    $
                    6,192
                    
                    
                    $
                    (11,311
                    )
                    
                    $
                    4,085





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


3


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


For
the six months ended June 30, 2009


(in
thousands, except share and per share amounts)


(unaudited)





Amounts
                            
                            
                            SharesCommon
      stock:Balance,
      beginning of period
                            
                            $
                            292
                            
                            
                            
                            29,207,962Stock
      issued pursuant to employee benefit plan
                            
                            
                            3
                            
                            
                            
                            287,969Balance,
      end of period
                            
                            
                            295
                            
                            
                            
                            29,495,931Additional
      paid-in capital:Balance,
      beginning of period
                            
                            
                            234,578Stock
      issued pursuant to employee benefit plan; including tax
      benefit
                            
                            
                            47Tax
      adjustment related to employee benefit plan
                            
                            
                            (691
                            )Stock-based
      compensation expense
                            
                            
                            2,243Balance,
      end of period
                            
                            
                            236,177Accumulated
      deficit:Balance,
      beginning of period
                            
                            
                            (5,895
                            )Cash
      dividends ($0.09 per share)
                            
                            
                            (2,538
                            )Net
      loss attributable to Sanders Morris Harris Group Inc.
                            
                            
                            (11,311
                            )Balance,
      end of period
                            
                            
                            (19,744
                            )Treasury
      stock:Balance,
      beginning of period
                            
                            
                            (6,421
                            )
                            
                            
                            (1,049,085
                            )Acquisition
      of treasury stock
                            
                            
                            (28
                            )
                            
                            
                            (6,809
                            )Balance,
      end of period
                            
                            
                            (6,449
                            )
                            
                            
                            (1,055,894
                            )Noncontrolling
      interest:Balance,
      beginning of period
                            
                            
                            8,805Purchase
      of membership interest from noncontrolling interest
                            
                            
                            (184
                            )Contributions
                            
                            
                            20Distributions
                            
                            
                            (3,225
                            )Net
      income attributable to the noncontrolling interest
                            
                            
                            2,144Balance,
      end of period
                            
                            
                            7,560Total
      equity and common shares outstanding
                            
                            $
                            217,839
                            
                            
                            
                            28,440,037





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


4


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





Six
      Months EndedJune
      30,2009
                                
                                
                                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                
                                $
                                (9,167
                                )
                                
                                $
                                12,038Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Loss
      on sales of assets
                                
                                
                                12
                                
                                
                                
                                89Depreciation
                                
                                
                                2,114
                                
                                
                                
                                1,995Provision
      for bad debts
                                
                                
                                24
                                
                                
                                
                                805Stock-based
      compensation expense
                                
                                
                                2,243
                                
                                
                                
                                1,436Goodwill
      and other intangible assets impairment charges
                                
                                
                                14,928
                                
                                
                                
                                -Amortization
      of other intangible assets
                                
                                
                                418
                                
                                
                                
                                403Deferred
      income taxes
                                
                                
                                (3,084
                                )
                                
                                
                                354Equity
      in income of limited partnerships
                                
                                
                                (988
                                )
                                
                                
                                (3,271
                                )Unrealized
      and realized (gain) loss on not readily marketable securities owned,
      net
                                
                                
                                586
                                
                                
                                
                                (954
                                )Not
      readily marketable securities owned received for payment of investment
      banking fees
                                
                                
                                -
                                
                                
                                
                                (581
                                )Net
      change in:Receivables
                                
                                
                                (2,086
                                )
                                
                                
                                6,343Deposits
      with clearing organizations
                                
                                
                                (532
                                )
                                
                                
                                35Marketable
      securities owned
                                
                                
                                7,454
                                
                                
                                
                                6,302Other
      assets and prepaid expenses
                                
                                
                                (486
                                )
                                
                                
                                161Accounts
      payable and accrued liabilities
                                
                                
                                (3,129
                                )
                                
                                
                                (3,056
                                )Securities
      sold, not yet purchased
                                
                                
                                9,097
                                
                                
                                
                                (6,571
                                )Payable
      to broker-dealers and clearing organizations
                                
                                
                                (2,034
                                )
                                
                                
                                44Net
      cash provided by operating activities
                                
                                
                                15,370
                                
                                
                                
                                15,572CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                
                                
                                (768
                                )
                                
                                
                                (6,544
                                )Acquisitions,
      net of cash acquired of $210 and $126, respectively
                                
                                
                                (25,324
                                )
                                
                                
                                (29,058
                                )Purchases
      of not readily marketable securities owned
                                
                                
                                (209
                                )
                                
                                
                                (205
                                )Proceeds
      from sales of not readily marketable securities owned
                                
                                
                                3,769
                                
                                
                                
                                6,500Proceeds
      from sales and maturities of securities available for sale
                                
                                
                                -
                                
                                
                                
                                33Proceeds
      from sales of assets
                                
                                
                                131
                                
                                
                                
                                158Net
      cash used in investing activities
                                
                                
                                (22,401
                                )
                                
                                
                                (29,116
                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchases
      of treasury stock
                                
                                
                                (28
                                )
                                
                                
                                (1,162
                                )Proceeds
      from shares issued pursuant to employee benefit plan
                                
                                
                                48
                                
                                
                                
                                659Tax
      benefit of stock options exercised
                                
                                
                                2
                                
                                
                                
                                186Tax
      adjustment related to employee benefit plan
                                
                                
                                (691
                                )
                                
                                
                                -Proceeds
      from borrowings
                                
                                
                                25,000
                                
                                
                                
                                250Repayment
      of borrowings
                                
                                
                                (1,191
                                )
                                
                                
                                -Contributions
      by noncontrolling interest
                                
                                
                                20
                                
                                
                                
                                -Distributions
      to noncontrolling interest
                                
                                
                                (3,225
                                )
                                
                                
                                (10,553
                                )Payments
      of cash dividends
                                
                                
                                (2,538
                                )
                                
                                
                                (2,252
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                17,397
                                
                                
                                
                                (12,872
                                )Net
      increase (decrease) in cash and cash equivalents
                                
                                
                                10,366
                                
                                
                                
                                (26,416
                                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                
                                
                                30,224
                                
                                
                                
                                46,503CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                
                                $
                                40,590
                                
                                
                                $
                                20,087





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


5


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            BASIS
      OF PRESENTATION





Nature
of Operations




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





Principles
of Consolidation




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





In
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, 2009 and December 31, 2008, our consolidated
results of operations for the three and six months ended June 30, 2009 and 2008,
our consolidated changes in equity for the six months ended June 30, 2009, and
our consolidated cash flows for the six months ended June 30, 2009 and
2008.  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, 2008.





Management’s
Estimates





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





Fair
Values of Financial Instruments





The fair
values of cash and cash equivalents, receivables, accounts payable and accrued
liabilities, borrowings, and payables to broker-dealers approximate cost due to
the short period of time to maturity.  Securities owned and securities
sold, not yet purchased are carried at their fair values.


6


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.





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 in
subsidiaries. It also requires disclosure, on the face of the consolidated
income statement, of the amounts of consolidated net income attributable to the
parent and to the non-controlling interest in subsidiaries. SFAS No. 160
was effective for the Company on January 1, 2009.  Shareholders’
equity changed due to the application of SFAS No. 160.  Noncontrolling
interest, formerly presented as minority interests outside of shareholders’
equity, is now included in equity.





In April
2009, FASB Staff Position (“FSP”) No. FAS 157-4,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, was
issued.  FSP No. FAS 157-4 provides additional guidance for estimating
fair value in accordance with SFAS No. 157, Fair Value Measurements, when
volume and level of activity for the asset or liability have significantly
decreased.  FSP No. FAS 157-4 was effective for the Company for the
interim period ending June 30, 2009 and did not have a material impact on the
Company’s consolidated financial statements.





In April
2009, FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, was issued to amend the
other-than-temporary impairment guidance in U.S. generally accepted accounting
principles for debt securities making the guidance more operational and
improving the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. FSP No. FAS 115-2 and
FAS 124-2 was effective for the Company for the interim period ending June 30,
2009 and did not have a material impact on the Company’s consolidated financial
statements.





In April
2009, FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, was issued.  FSP No. FAS 107-1 and
APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require an entity to provide disclosures about
the fair value of financial instruments in interim financial information and
amends Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial information at interim
reporting periods.  FSP No. FAS 107-1 and APB 28-1 was effective for
the Company for the interim period ending June 30, 2009 and did not have a
material impact on the Company’s consolidated financial
statements.


7


In May
2009, the FASB issued SFAS No. 165, Subsequent
Events.  SFAS No. 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or available to be
issued.  SFAS No. 165 defines (i) the period after the balance sheet
date during which a reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet
date.  SFAS No. 165 was effective for the Company for the interim
period ending June 30, 2009 and did not have a material impact on the Company’s
consolidated financial statements.





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140.  SFAS
No. 166 amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, to
enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets.  SFAS No. 166 eliminates the
concept of a “qualifying special-purpose entity” and changes the requirements
for derecognizing financial assets.  SFAS No. 166 also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period.  SFAS No. 166 will be effective January
1, 2010 and is not expected to have a material impact on the Company’s
consolidated financial statements.





In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R).  SFAS No. 167 amends FIN No. 46 (Revised December
2003), Consolidation of
Variable Interest Entities, to change how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated.  The determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance.  SFAS No. 167 requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements.  SFAS No. 167 will be
effective January 1, 2010 and is not expected to have a material impact on the
Company’s consolidated financial statements.





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
Replacement of FASB Statement No. 162.  SFAS No. 168 replaces
SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles, and establishes the FASB
Accounting Standards Codification (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in
conformity with generally accepted accounting principles.  Rules and
interpretative releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative guidance
for SEC registrants.  All guidance contained in the Codification
carries an equal level of authority.  All non-grandfathered, non-SEC
accounting literature not included in the Codification is superseded and deemed
non-authoritative.  SFAS No. 168 will be effective for the Company for
the interim period ending September 30, 2009 and is only expected to impact the
Company’s disclosures requiring Codification references.





2.
            ACQUISITIONS





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


8


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





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





On May
10, 2005, the Company acquired a 51% interest in Edelman, one of the leading
financial planning firms in the country.  Edelman, based in Fairfax,
Virginia, manages approximately $3.1 billion in assets.  On May 12,
2008, the Company purchased an additional 25% membership interest in
Edelman.  The Company paid an amount determined based upon Edelman’s
2007 pretax income (the “Second Tranche Consideration”).  The Second
Tranche Consideration of $44.4 million, which was paid in a combination of cash
and the Company’s common stock, has been recorded as goodwill.





In
December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
LLC (“EFA”) to expand the Edelman financial platform into additional markets
outside the Washington, D.C. metropolitan area.  In exchange for a 10%
membership interest in EFA, we initially committed to loan EFA up to $20.0
million to cover its start-up expenses of which $10.0 million was advanced and
subsequently repaid.  On April 1, 2009, the Company acquired an
additional 66% membership interest in EFA for an aggregate consideration of
$25.5 million in cash and a subordinated promissory note in the principal amount
of $10.0 million.  Under the terms of the EFA acquisition agreement,
the earlier loan agreement was terminated.  The consideration exceeded
the fair market value of identifiable net tangible assets by $36.1 million,
which has been recorded as goodwill.  The purchase price allocation
associated with this acquisition is preliminary and the Company is in the
process of identifying other intangible assets that may be related to this
business.  During the six months ended June 30, 2009, the Company
recorded $938,000 of compensation expense and $447,000 of interest costs
associated with the EFA acquisition which is included in the accompanying
Condensed Consolidated Statements of Operations.


9





3.
            SECURITIES
      OWNED AND SECURITIES SOLD, NOT YET
PURCHASED





Securities
owned and securities sold, not yet purchased as of June 30, 2009 and December
31, 2008 were as follows:





June 30, 2009
                                        
                                        
                                        December 31, 2008Sold, Not Yet
                                        
                                        
                                        
                                        
                                        
                                        Sold, Not YetOwned
                                        
                                        
                                        Purchased
                                        
                                        
                                        Owned
                                        
                                        
                                        Purchased(in
      thousands)Marketable:Corporate
      stocks and options
                                        
                                        $
                                        12,731
                                        
                                        
                                        $
                                        21,981
                                        
                                        
                                        $
                                        21,877
                                        
                                        
                                        $
                                        12,803Corporate
      bond
                                        
                                        
                                        789
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        81Total
      marketable
                                        
                                        
                                        13,520
                                        
                                        
                                        
                                        21,981
                                        
                                        
                                        
                                        21,877
                                        
                                        
                                        
                                        12,884Not
      readily marketable:Limited
      partnerships
                                        
                                        
                                        27,485
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        29,356
                                        
                                        
                                        
                                        -Warrants
                                        
                                        
                                        2,247
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,316
                                        
                                        
                                        
                                        -Equities
      and options
                                        
                                        
                                        695
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,010
                                        
                                        
                                        
                                        -Total
      not readily marketable
                                        
                                        
                                        30,427
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        32,682
                                        
                                        
                                        
                                        -Total
                                        
                                        $
                                        43,947
                                        
                                        
                                        $
                                        21,981
                                        
                                        
                                        $
                                        54,559
                                        
                                        
                                        $
                                        12,884





Securities
not readily marketable include investment securities (a) for which there is no
market on a securities exchange or no independent publicly quoted market, (b)
that cannot be publicly offered or sold unless registration has been effected
under the Securities Act of 1933 or other applicable securities acts, or (c)
that cannot be offered or sold because of other arrangements, restrictions, or
conditions applicable to the securities or to the company.  Not
readily marketable securities consist of investments in limited partnerships,
equities, options, and warrants.  In accordance with EITF D-46, Accounting for Limited Partnership
Investments, direct investments in limited partnerships are accounted for
using the equity method. Proprietary investments in limited partnerships held by
the Company’s
broker-dealer subsidiary are accounted for at fair value.





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.


10


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





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





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





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





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





The
following table sets forth by level within the fair value hierarchy securities
owned and securities sold, not yet purchased as of June 30, 2009:





Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  Total(in
      thousands)Securities
      owned
                  
                  $
                  12,315
                  
                  
                  $
                  3,441
                  
                  
                  $
                  12,582
                  
                  
                  $
                  28,338Securities
      sold, not yet purchased
                  
                  
                  21,957
                  
                  
                  
                  24
                  
                  
                  
                  -
                  
                  
                  
                  21,981




11




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,
2009:





Level
      3 Securities OwnedThree
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30, 2009
                    
                    
                    June
      30, 2009(in
      thousands)Balance,
      beginning of period
                    
                    $
                    12,616
                    
                    
                    $
                    13,423Realized
      gains (losses)
                    
                    
                    (15
                    )
                    
                    
                    19Unrealized
      gains (losses) relating to securities still held at the reporting
      date
                    
                    
                    60
                    
                    
                    
                    (133
                    )Purchases,
      issuances, and settlements
                    
                    
                    (79
                    )
                    
                    
                    (727
                    )Balance,
      end of period
                    
                    $
                    12,582
                    
                    
                    $
                    12,582





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




Three
      Months Ended
                        
                        
                        Six
      Months EndedJune
      30, 2009
                        
                        
                        June
      30, 2009Principal
                          Transactions
                        
                        
                        Equity
      in Income
                          of
      Limited
                          Partnerships
                        
                        
                        Principal
                          Transactions
                        
                        
                        Equity
      in Income
                          of
      Limited
                          Partnerships(in
      thousands)Unrealized
      gains (losses) relating to securities still held at the reporting
      date
                        
                        $
                        (36
                        )
                        
                        $
                        96
                        
                        
                        $
                        (156
                        )
                        
                        $
                        23




At June
30, 2009, the Company had $13.3 million and $2.3 million in securities owned
that are valued in accordance with EITF D-46, Accounting for Limited Partnership
Investments, and at cost basis, respectively.





Sale of Interests in Salient
Partners and Endowment Advisers





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


12





4.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS, NET





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





Six
      Months Ended June 30, 2009Amortizable
      Intangible Assets:
                    
                    
                    Total
      OtherCovenants
      Not
                    
                    
                    Customer
                    
                    
                    
                    
                    
                    IntangibleGoodwill
                    
                    
                    Trade
      Names
                    
                    
                    To
      Compete
                    
                    
                    Relationships
                    
                    
                    Subtotal
                    
                    
                    Assets(in
      thousands)Balance,
      beginning of period
                    
                    $
                    63,078
                    
                    
                    $
                    4,526
                    
                    
                    $
                    450
                    
                    
                    $
                    7,589
                    
                    
                    $
                    8,039
                    
                    
                    $
                    12,565Acquisition
      of EFA
                    
                    
                    36,083
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Leonetti
      purchase price adjustment
                    
                    
                    34
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Impairment
      charges
                    
                    
                    (13,824
                    )
                    
                    
                    (1,104
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,104
                    )Amortization
      of other intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (102
                    )
                    
                    
                    (315
                    )
                    
                    
                    (417
                    )
                    
                    
                    (417
                    )Balance,
      end of period
                    
                    $
                    85,371
                    
                    
                    $
                    3,422
                    
                    
                    $
                    348
                    
                    
                    $
                    7,274
                    
                    
                    $
                    7,622
                    
                    
                    $
                    11,044





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





The
goodwill impairment charges totaling $13.8 million reflect additional impairment
due to continued market deterioration during the first quarter of
2009.  The losses reflect impairments at two reporting units: Edelman
in the amount of $13.0 million and Kissinger in the amount of
$837,000.  The amount of the impairment losses was determined based on
the calculation process specified in SFAS No. 142, Goodwill and Other Intangible
Assets, which compared carrying value to the estimated fair value of
assets and liabilities.  Factors considered in determining fair value
in accordance with SFAS No. 142 include, among other things, the Company’s
market capitalization as determined by quoted market prices for its common stock
and the value of the Company’s reporting units.  The Company uses
several methods to value its reporting units, including discounted cash flows,
comparisons with valuations of public companies in the same industry, and
multiples of assets under management.





Other
intangible assets consist primarily of customer relationships and trade names
acquired in purchase business combinations.  Other intangible assets
acquired that have indefinite lives (trade names) are not amortized but are
tested for impairment annually or if certain circumstances indicate a possible
impairment may exist.  Certain other intangible assets acquired
(customer relationships and covenants not to compete) are amortized over their
estimated useful lives and tested for impairment if certain circumstances
indicate an impairment may exist.  During the first quarter of 2009,
the Company recognized a trade name impairment of $1.1 million.





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





5.
            BORROWINGS





In May
2009, the Company borrowed $25.0 million under a credit agreement with a bank
for the EFA acquisition.  The credit agreement matures on October 31,
2012 and bears interest at the greater of the prime rate or
5%.  Principal of $595,000 plus interest is payable
monthly.  The credit agreement is secured by substantially all of the
assets of the Company.  The credit agreement contains various
covenants customary for transactions of this type including the requirement that
the Company maintain minimum financial ratios, net worth, liquid assets, and
cash balances, as well as minimum assets under management, and meet monthly,
quarterly, and annual reporting requirements.  The credit agreement
also contains covenants that restrict the ability of the Company, among other
things, to incur indebtedness, pay dividends or distributions, make capital
expenditures and other restricted payments, including investments, and
consummate asset sales.  At June 30, 2009, the Company was in
compliance with all covenants.


13


6.
            INCOME
      TAXES





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





Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      thousands)Expected
      federal tax at statutory rate of 34%
                    
                    $
                    1,113
                    
                    
                    $
                    3,675
                    
                    
                    $
                    (5,037
                    )
                    
                    $
                    2,745State
      and other income taxes
                    
                    
                    169
                    
                    
                    
                    670
                    
                    
                    
                    (154
                    )
                    
                    
                    578Total
                    
                    $
                    1,282
                    
                    
                    $
                    4,345
                    
                    
                    $
                    (5,191
                    )
                    
                    $
                    3,323





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





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, 2009:




WeightedNumber
                    
                    
                    Averageof
      Shares
                    
                    
                    Exercise
      PriceOutstanding
      at January 1, 2009
                    
                    
                    660,307
                    
                    
                    $
                    9.56Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    (7,500
                    )
                    
                    
                    4.44Outstanding
      at June 30, 2009
                    
                    
                    652,807
                    
                    
                    
                    9.62Options
      exercisable at June 30, 2009
                    
                    
                    611,141
                    
                    
                    
                    9.44Incentive
      award shares available for grant at June 30, 2009
                    
                    
                    2,440,711





During
the six months ended June 30, 2009 and 2008, 7,500 and 121,044 options were
exercised for which the Company received proceeds of $33,000 and $583,000,
respectively.  The Company recognized pretax compensation expense of
$31,000 and $96,000 during the six months ended June 30, 2009 and 2008,
respectively, related to stock options.  The portion of stock-based
compensation expense related to stock options that was unrecognized at June 30,
2009 was $25,000 and is expected to be recognized over a weighted average period
of 0.51 years.


14


The
following table summarizes certain information related to restricted common
stock grants at June 30, 2009:





WeightedAverageNumber of
                  
                  
                  Grant DateShares
                  
                  
                  Fair ValueNonvested
      at January 1, 2009
                  
                  
                  683,116
                  
                  
                  $
                  11.06Nonvested
      at June 30, 2009
                  
                  
                  681,878
                  
                  
                  
                  8.46For
      the six months ended June 30, 2009:Granted
                  
                  
                  287,139
                  
                  
                  
                  4.66Vested
                  
                  
                  281,710
                  
                  
                  
                  10.58Forfeited
                  
                  
                  6,667
                  
                  
                  
                  8.97




Employees
deferred compensation of $20,000 and $76,000 during the six months ended June
30, 2009 and 2008, respectively, that was used to purchase restricted common
stock.  The Company recognized pretax compensation expense of $2.2
million and $1.3 million during the six months ended June 30, 2009 and 2008,
respectively, related to its restricted common stock plan.  At June
30, 2009, total unrecognized compensation cost, net of estimated forfeitures,
related to nonvested restricted stock was $3.8 million and is expected to be
recognized over the next 3.5 years.





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 6,809 shares of its common stock at
an average price of $4.16 per share during the six months ended June 30, 2009
related to this program.




15




9.
            EARNINGS
      (LOSS) PER COMMON SHARE





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





Three Months Ended June 30,
                                    
                                    
                                    Six Months Ended June 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008(in
      thousands, except per share amounts)Income
      (loss) from continuing operations, net of tax
                                    
                                    $
                                    1,993
                                    
                                    
                                    $
                                    6,465
                                    
                                    
                                    $
                                    (9,623
                                    )
                                    
                                    $
                                    4,751Loss
      from discontinued operations, net of tax
                                    
                                    
                                    (460
                                    )
                                    
                                    
                                    (273
                                    )
                                    
                                    
                                    (1,688
                                    )
                                    
                                    
                                    (666
                                    )Net
      earnings (loss) attributable to the Company
                                    
                                    $
                                    1,533
                                    
                                    
                                    $
                                    6,192
                                    
                                    
                                    $
                                    (11,311
                                    )
                                    
                                    $
                                    4,085Basic
      earnings (loss) per common share:Continuing
      operations
                                    
                                    $
                                    0.07
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    $
                                    (0.35
                                    )
                                    
                                    $
                                    0.18Discontinued
      operations
                                    
                                    
                                    (0.02
                                    )
                                    
                                    
                                    (0.01
                                    )
                                    
                                    
                                    (0.06
                                    )
                                    
                                    
                                    (0.02
                                    )Net
      earnings (loss)
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    0.23
                                    
                                    
                                    $
                                    (0.41
                                    )
                                    
                                    $
                                    0.16Diluted
      earnings (loss) per common share:Continuing
      operations
                                    
                                    $
                                    0.07
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    $
                                    (0.35
                                    )
                                    
                                    $
                                    0.18Discontinued
      operations
                                    
                                    
                                    (0.02
                                    )
                                    
                                    
                                    (0.01
                                    )
                                    
                                    
                                    (0.06
                                    )
                                    
                                    
                                    (0.02
                                    )Net
      earnings (loss)
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    0.23
                                    
                                    
                                    $
                                    (0.41
                                    )
                                    
                                    $
                                    0.16Weighted
      average number of common shares outstanding:Basic
                                    
                                    
                                    27,733
                                    
                                    
                                    
                                    26,760
                                    
                                    
                                    
                                    27,619
                                    
                                    
                                    
                                    25,739Potential
      dilutive effect of stock-based awards
                                    
                                    
                                    605
                                    
                                    
                                    
                                    158
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    193Diluted
                                    
                                    
                                    28,338
                                    
                                    
                                    
                                    26,918
                                    
                                    
                                    
                                    27,619
                                    
                                    
                                    
                                    25,932




Outstanding
stock options of 448,807 and 360,000 for the three months ended June 30, 2009
and 2008, respectively, and 458,807 and 310,000 for the six months ended June
30, 2009 and 2008, 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 $420,000, $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
January 2009, the Company and SMH entered into a Contribution Agreement with Pan
Asia China Commerce Corp. (“PAC3”), Siwanoy Capital, LLC (“Siwanoy”) and Siwanoy
Securities, LLC (“New BD”), pursuant to which (a) PAC3 agreed to subscribe
for and purchase a 40% Class A membership interest in Siwanoy in exchange
for a cash payment and note and (b) SMH agreed to contribute to New BD the
assets, properties, working capital, and rights related and/or pertaining to its
investment banking, institutional trading (including equity sales and fixed
income sales), New York trading, and research businesses (excluding The Juda
Group and the Concept Capital divisions) (the “Capital Markets Business”),
including a specified amount of working capital (as adjusted for any profits or
losses incurred in the Capital Markets Business between January 1, 2009,
and the date of closing) less (i) the value of the accounts receivable
contributed to Siwanoy, (ii) the value of the certain assets in SMH’s New
Orleans, Louisiana office, (iii) the value of certain money security
deposits and any advance payments, and (iv) the value of certain securities
to be mutually agreed upon by the parties in exchange for a 20% Class A
Membership Interest in Siwanoy, cash, and a note issued by Siwanoy to the
Company. Current members of management of the Capital Markets Business will
retain the remaining 40% membership interest in Siwanoy. The transaction is
expected to close following the filing with and approval by the Financial
Industry Regulatory Authority (“FINRA”) of a new member application by the New
BD, which is anticipated to be in the third quarter of
2009.   For the six months ended June 30, 2009, the Capital
Markets Business revenue was $12.3 million and expenses were $14.5
million.




16




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, 2009.





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 was
converted to a liquidation under Chapter 7.





In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH alleging common law fraud, statutory fraud in a stock transaction,
violations of the Texas Securities Act, and negligent misrepresentation in
connection with the plaintiffs’ purchase of $2.0 million in Ronco convertible
preferred stock. On March 17, 2009, a third purchaser of Ronco convertible
preferred stock filed a complaint against SMH. The claims are similar to the
above referenced case. The third purchaser invested $1.9 million in Ronco
convertible preferred stock.  In addition, in July 2009, the
Bankruptcy Trustee filed a derivative action on behalf of the shareholders of
Ronco against two former directors of Ronco (who were employees of SMH) for
negligently authorizing the closing of the purchase of the assets of Ronco
Marketing Corp. in breach of their fiduciary duties of care and loyalty and
against SMH for negligent misrepresentation, breach of fiduciary duties, breach
of contract, and violation of the Texas Fraudulent Transfer Act. No amount of
damages is alleged. SMH believes it has valid defenses to all claims made by the
plaintiffs.  However, there is no assurance that SMH will successfully
defend such claims.





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.




17




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





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





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





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





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





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




18




The
following summarizes certain financial information of each reportable business
segment for the three and six months ended June 30, 2009 and 2008,
respectively.  SMHG does not analyze asset information in all business
segments.





Three Months Ended
                                                                                      
                                                                                      
                                                                                      Six Months EndedJune 30,
                                                                                      
                                                                                      
                                                                                      June 30,2009
                                                                                      
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      
                                                                                      2009
                                                                                      
                                                                                      
                                                                                      2008(in
      thousands)Revenue:Asset/Wealth
      Management
                                                                                      
                                                                                      $
                                                                                      24,397
                                                                                      
                                                                                      
                                                                                      $
                                                                                      27,354
                                                                                      
                                                                                      
                                                                                      $
                                                                                      45,739
                                                                                      
                                                                                      
                                                                                      $
                                                                                      53,809Capital
      Markets:Investment
      banking
                                                                                      
                                                                                      
                                                                                      2,500
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,742
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,003
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,398Institutional
      brokerage
                                                                                      
                                                                                      
                                                                                      5,926
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,981
                                                                                      
                                                                                      
                                                                                      
                                                                                      11,072
                                                                                      
                                                                                      
                                                                                      
                                                                                      8,738Prime
      brokerage services
                                                                                      
                                                                                      
                                                                                      19,923
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,664
                                                                                      
                                                                                      
                                                                                      
                                                                                      34,363
                                                                                      
                                                                                      
                                                                                      
                                                                                      21,184Capital
      Markets Total
                                                                                      
                                                                                      
                                                                                      28,349
                                                                                      
                                                                                      
                                                                                      
                                                                                      20,387
                                                                                      
                                                                                      
                                                                                      
                                                                                      49,438
                                                                                      
                                                                                      
                                                                                      
                                                                                      35,320Corporate
      Support and Other
                                                                                      
                                                                                      
                                                                                      2,329
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,406
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,097
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,670Total
                                                                                      
                                                                                      $
                                                                                      55,075
                                                                                      
                                                                                      
                                                                                      $
                                                                                      52,147
                                                                                      
                                                                                      
                                                                                      $
                                                                                      96,274
                                                                                      
                                                                                      
                                                                                      $
                                                                                      92,799Income
      (loss) from continuing operations before equity in income (loss) of
      limited partnerships and income taxes:Asset/Wealth
      Management
                                                                                      
                                                                                      $
                                                                                      5,926
                                                                                      
                                                                                      
                                                                                      $
                                                                                      9,465
                                                                                      
                                                                                      
                                                                                      $
                                                                                      11,600
                                                                                      
                                                                                      
                                                                                      $
                                                                                      18,872Capital
      Markets:Investment
      banking
                                                                                      
                                                                                      
                                                                                      (964
                                                                                      )
                                                                                      
                                                                                      
                                                                                      542
                                                                                      
                                                                                      
                                                                                      
                                                                                      (2,541
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (2,630
                                                                                      )Institutional
      brokerage
                                                                                      
                                                                                      
                                                                                      852
                                                                                      
                                                                                      
                                                                                      
                                                                                      382
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,198
                                                                                      
                                                                                      
                                                                                      
                                                                                      373Prime
      brokerage services
                                                                                      
                                                                                      
                                                                                      450
                                                                                      
                                                                                      
                                                                                      
                                                                                      940
                                                                                      
                                                                                      
                                                                                      
                                                                                      777
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,447Capital
      Markets Total
                                                                                      
                                                                                      
                                                                                      338
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,864
                                                                                      
                                                                                      
                                                                                      
                                                                                      (566
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (810
                                                                                      )Corporate
      Support and Other
                                                                                      
                                                                                      
                                                                                      (3,383
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (285
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (24,692
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (5,306
                                                                                      )Total
                                                                                      
                                                                                      $
                                                                                      2,881
                                                                                      
                                                                                      
                                                                                      $
                                                                                      11,044
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (13,658
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      12,756Equity
      in income (loss) of limited partnerships:Asset/Wealth
      Management
                                                                                      
                                                                                      $
                                                                                      (407
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      4,725
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (1,155
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      5,377Capital
      Markets:Investment
      banking
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Institutional
      brokerage
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Prime
      brokerage services
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Capital
      Markets Total
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Corporate
      Support and Other
                                                                                      
                                                                                      
                                                                                      1,893
                                                                                      
                                                                                      
                                                                                      
                                                                                      106
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,143
                                                                                      
                                                                                      
                                                                                      
                                                                                      (2,106
                                                                                      )Total
                                                                                      
                                                                                      $
                                                                                      1,486
                                                                                      
                                                                                      
                                                                                      $
                                                                                      4,831
                                                                                      
                                                                                      
                                                                                      $
                                                                                      988
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,271Income
      (loss) from continuing operations before income taxes:Asset/Wealth
      Management
                                                                                      
                                                                                      $
                                                                                      5,519
                                                                                      
                                                                                      
                                                                                      $
                                                                                      14,190
                                                                                      
                                                                                      
                                                                                      $
                                                                                      10,445
                                                                                      
                                                                                      
                                                                                      $
                                                                                      24,249Capital
      Markets:Investment
      banking
                                                                                      
                                                                                      
                                                                                      (964
                                                                                      )
                                                                                      
                                                                                      
                                                                                      542
                                                                                      
                                                                                      
                                                                                      
                                                                                      (2,541
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (2,630
                                                                                      )Institutional
      brokerage
                                                                                      
                                                                                      
                                                                                      852
                                                                                      
                                                                                      
                                                                                      
                                                                                      382
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,198
                                                                                      
                                                                                      
                                                                                      
                                                                                      373Prime
      brokerage services
                                                                                      
                                                                                      
                                                                                      450
                                                                                      
                                                                                      
                                                                                      
                                                                                      940
                                                                                      
                                                                                      
                                                                                      
                                                                                      777
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,447Capital
      Markets Total
                                                                                      
                                                                                      
                                                                                      338
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,864
                                                                                      
                                                                                      
                                                                                      
                                                                                      (566
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (810
                                                                                      )Corporate
      Support and Other
                                                                                      
                                                                                      
                                                                                      (1,490
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (179
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (22,549
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (7,412
                                                                                      )Total
                                                                                      
                                                                                      $
                                                                                      4,367
                                                                                      
                                                                                      
                                                                                      $
                                                                                      15,875
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (12,670
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      16,027Net
      income attributable to the noncontrolling interest:Asset/Wealth
      Management
                                                                                      
                                                                                      $
                                                                                      (1,092
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (5,065
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (2,144
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (7,953
                                                                                      )Capital
      Markets:Investment
      banking
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Institutional
      brokerage
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Prime
      brokerage services
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Capital
      Markets Total
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Corporate
      Support and Other
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Total
                                                                                      
                                                                                      $
                                                                                      (1,092
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (5,065
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (2,144
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (7,953
                                                                                      )




19




12.
              SUPPLEMENTAL
      CASH FLOW INFORMATION





Six Months Ended June 30,2009
                  
                  
                  2008(in
      thousands)Cash
      payment (refund) for income taxes, net
                  
                  $
                  (623
                  )
                  
                  $
                  556Cash
      paid for interest
                  
                  
                  618
                  
                  
                  
                  9Noncash
      investing activities:Acquisitions:Receivables
                  
                  
                  -
                  
                  
                  
                  10Goodwill,
      net
                  
                  
                  10,000
                  
                  
                  
                  24,136Accounts
      payable and accrued liabilities
                  
                  
                  -
                  
                  
                  
                  (290
                  )Subordinated
      promissory note
                  
                  
                  (10,000
                  )
                  
                  
                  -Noncontrolling
      interest
                  
                  
                  -
                  
                  
                  
                  77Common
      stock
                  
                  
                  -
                  
                  
                  
                  (23,933
                  )Noncash
      financing activities:Dividends
      declared not yet paid
                  
                  
                  1,268
                  
                  
                  
                  1,259




13.
              RELATED
      PARTIES





The
Company had receivables from related parties totaling $10.4 million at June 30,
2009, primarily consisting of $4.7 million of advances to unconsolidated related
entities to fund operating expenses, $4.1 million of notes receivable from
employees and consultants representing loans made to induce the employees and
consultants to affiliate with the Company, and $1.2 million of management fees
receivable from the limited partnerships that the Company manages.





14.
              DISCONTINUED
      OPERATIONS





During
the first quarter of 2009, the Company closed three retail
offices.  This decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs.  A summary of
selected financial information of discontinued operations is as follows for the
three and six months ended June 30, 2009 and 2008.





Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      thousands)Operating
      activities:Revenue
                    
                    $
                    15
                    
                    
                    $
                    1,153
                    
                    
                    $
                    296
                    
                    
                    $
                    1,926Expenses
                    
                    
                    768
                    
                    
                    
                    1,663
                    
                    
                    
                    3,108
                    
                    
                    
                    3,061Loss
      from discontinued operations before income taxes
                    
                    
                    (753
                    )
                    
                    
                    (510
                    )
                    
                    
                    (2,812
                    )
                    
                    
                    (1,135
                    )Benefit
      for income taxes
                    
                    
                    293
                    
                    
                    
                    237
                    
                    
                    
                    1,124
                    
                    
                    
                    469Loss
      from discontinued operations
                    
                    $
                    (460
                    )
                    
                    $
                    (273
                    )
                    
                    $
                    (1,688
                    )
                    
                    $
                    (666
                    )




20




Major
classes of assets and liabilities of the offices accounted for as discontinued
operations in the accompanying condensed consolidated balance sheets at June 30,
2009 and December 31, 2008 were as follows:





June 30,
                
                
                December 31,2009
                
                
                2008(in
      thousands)Furniture,
      equipment, and leasehold improvements, net
                
                $
                207
                
                
                $
                420Total
      assets of discontinued operations
                
                $
                207
                
                
                $
                420Total
      liabilities of discontinued operations
                
                $
                -
                
                
                $
                -




15.
              SUBSEQUENT
      EVENTS





The
Company evaluated its June 30, 2009 condensed consolidated financial statements
for subsequent events through August 10, 2009, the date the financial statements
were issued.  The Company is not aware of any subsequent events which
would require recognition or disclosure in the condensed consolidated financial
statements.





21




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





Special
Cautionary Notice Regarding Forward-Looking Statements





This
quarterly report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements may relate to such matters as anticipated financial
performance, future revenue or earnings, business prospects, projected ventures,
new products, anticipated market performance, and similar matters. We caution
you that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to (1) trading volume in the
securities markets; (2) volatility of the securities markets and interest rates;
(3) changes in regulatory requirements that could affect the demand for our
services or the cost of doing business; (4) general economic conditions, both
domestic and foreign, especially in the regions where we do business; (5)
changes in the rate of inflation and related impact on securities markets; (6)
competition from existing financial institutions and other new participants in
the securities markets; (7) legal developments affecting the litigation
experience of the securities industry; (8) successful implementation of
technology solutions; (9) changes in valuations of our trading and warrant
portfolios resulting from mark-to-market adjustments; (10) dependence on key
personnel; (11) demand for our services; and (12) litigation and securities law
liabilities. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2008.  The Company does not
undertake to publicly update or revise any forward-looking
statements.





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





Overview





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





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





OurCapital Marketssegment
provides investment banking, institutional equity and fixed income brokerage,
and prime brokerage services to institutional clients.





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





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





Prime Brokerage Services provides trade
execution, clearing, bookkeeping, reporting,  securities borrowing,
financing, research, and fund raising to hedge fund clients.




22




We are
exposed to volatility and trends in the general securities market and the
economy and we are currently facing difficult market and economic
conditions.  Due to the downturn in the market and the economic
recession that began during the second half of 2008, client assets have
decreased resulting in, among other things, lower fee and commission
revenue.  Client assets under management or advisement were as
follows:




Client Assets(1)(in millions)December
      31, 2007
                      
                      $
                      11,344March
      31, 2008
                      
                      
                      11,342June
      30, 2008
                      
                      
                      10,979September
      30, 2008
                      
                      
                      10,290December
      31, 2008
                      
                      
                      8,627March
      31, 2009
                      
                      
                      8,501June
      30, 2009
                      
                      
                      9,534


(1)Client
assets include the gross value of assets under
management directly or via outside managers and
assets held in brokerage accounts for clients by outside
clearing firms.





Fiscal
year 2008 was a very challenging environment for the capital markets given the
unprecedented events on Wall Street that led to increased uncertainty and
turmoil in the United States economy and global financial markets.  We
are focused on making the necessary adjustments to our business and adapting to
the current environment.  We are planning for 2009 to be a
continuation of 2008 and are focused on the following items:





·
            preserving
      capital and retaining key people in order to emerge as a strong player
      once market stability returns;


·
            reducing
      compensation and non-compensation expenses in order to operate on a
      positive cash basis;


·
            closing
      offices that have been
unprofitable;


·
            exiting
      business units that are subject to revenue and profit volatility;
      and


·
            acquiring
      wealth management businesses that enhance or complement our existing
      franchise value.





Components
of Revenue and Expenses





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





Expenses.Our expenses consist of
(1) compensation and benefits, (2) floor brokerage, exchange, and clearance
fees, and (3) other expenses. Compensation and benefits have both a variable
component, based on revenue production, and a fixed component. The variable
component includes institutional and retail sales commissions, bonuses,
overrides, and other incentives. Wealth advisory and institutional commissions
are based on competitive commission schedules. Employees of the investment
banking group and the research group receive a salary and discretionary bonuses
as compensation. The fixed component includes administrative and executive
salaries, payroll taxes, employee benefits, and temporary employee costs.
Compensation and benefits is our largest expense item and includes wages,
salaries, and benefits. During the second quarter of 2009, compensation and
benefits represented 69.9% of total expenses and 66.3% of total revenue,
compared to 63.5% of total expenses and 50.0% of total revenue during the second
quarter of 2008.  During the first six months of 2009, compensation
and benefits represented 58.9% of total expenses and 67.3% of total revenue,
compared to 64.2% of total expenses and 55.4% of total revenue for the same
period in 2008.  For the three and six months ended June 30, 2009, the
increase in compensation and benefits as a percentage of total revenue is
principally due to an increase in revenue in our prime brokerage services
division which has a higher payout than our other business lines.  For
the six months ended June 30, 2009, the decrease in compensation and benefits as
a percentage of expenses is principally due to $14.9 million of goodwill and
other intangible assets impairment charges recognized in the first quarter of
2009.




23




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., First
Clearing Corporation, and J.P. Morgan Clearing Corp.





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





Results
of Operations





Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008





Total
revenue was $55.1 million for the second quarter of 2009 compared to $52.1
million for the same quarter in 2008, an increase of $3.0 million, or 5.8%,
reflecting increases of $7.8 million in principal transaction revenue and $1.8
million in interest revenue partially offset by declines of $3.0 million in
revenue from investment advisory and related services, $1.4 million in
commissions, and $1.3 million in investment banking revenue.  Total
expenses for the second quarter of 2009 increased $11.1 million, or 27.0%, to
$52.2 million from $41.1 million in the same quarter of the previous year
reflecting increased compensation and other costs associated with the higher
revenue and $1.3 million of costs associated with the acquisition of an
additional 66% membership interest in Edelman Financial Advisors, LLC
(“EFA”).  Equity in income of limited partnerships decreased to $1.5
million for the second quarter of 2009 compared to $4.8 million for the second
quarter of 2008, reflecting a decline in the value of one of the limited
partnerships that we manage.  Income from continuing operations, net
of tax, was $2.0 million, or $0.07 per diluted common share, for the second
quarter of 2009 compared to $6.5 million, or $0.24 per diluted common share, for
the second quarter of 2008.





Revenue
from investment advisory and related services decreased to $17.3 million in the
second quarter of 2009 from $20.3 million in the same quarter of 2008 as a
result of a decrease in client assets.  Commission revenue decreased
to $12.4 million in the second quarter of 2009 from $13.8 million for the same
period in 2008 as a result of a decrease in trading volume in the Asset/Wealth
Management segment.  Investment banking revenue decreased to $4.1
million during the second quarter of 2009 from $5.5 million in the same period
of 2008 due to a decrease of $2.6 million in advisory fees earned partially
offset by an increase in sales credits received in investment banking
transactions.  Principal transactions revenue increased from $8.2
million for the second quarter of 2008 to $16.0 million for the second quarter
of 2009 as the result of an increase of $9.7 million in the sale of fixed income
products partially offset by a decline in the value of securities in the
Company’s investment portfolio.  Interest and dividend income
increased to $2.8 million in the second quarter of 2009 from $1.0 million in the
same period last year as a result of interest earned on notes receivable
received in connection with the sale of our interests in Salient Partners, L.P.
and Endowment Advisers, L.P.  Other income decreased from $3.4 million
during the second quarter of 2008 to $2.5 million during the same period in 2009
reflecting a decrease of $820,000 in hedge fund servicing revenue and
third-party marketing fees.




24




During
the three months ended June 30, 2009, employee compensation and benefits
increased to $36.5 million from $26.1 million in the same period last year due
to the revenue growth in the prime brokerage services
division.  During the three months ended June 30, 2009, floor
brokerage, exchange, and clearance fees increased to $1.6 million from $1.3
million in the same period last year due to an increase in clearance fees in the
prime brokerage services division.  Occupancy costs increased to $3.4
million in the second quarter of 2009 compared to $3.0 million in the second
quarter of 2008 due to the acquisition of an additional 66% membership interest
in EFA on April 1, 2009.  Interest expense was $640,000 for the second
quarter of 2009 due to (i) the imputed interest associated with an incentive
compensation payable resulting from the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P., (ii) the funding of a credit
facility during the second quarter of 2009, and (iii) costs associated with the
acquisition of the additional 66% membership interest in EFA.  Other
general and administrative expenses decreased to $6.8 million during the second
quarter of 2009 from $7.4 million in the second quarter of last year due to a
decrease of $1.1 million in outside sales commissions.





Our
effective tax rate was 39.2% for the three months ended June 30, 2009 compared
to 40.0% for the three months ended June 30, 2008.  The effective tax
rate exceeds the federal statutory income tax rate primarily as a result of
state income taxes and certain nondeductible expenses.





During
the first quarter of 2009, the Company closed three retail
offices.  This decision was made due to the offices’ inability to
achieve sufficient revenues to offset their costs.  As a result, we
recorded a net loss from discontinued operations, which consists of operating
losses, of $460,000 and $273,000 for the three months ended June 30, 2009 and
2008, respectively.





Results
by Segment





Asset/Wealth
Management





Three Months Ended June 30,2009
                        
                        
                        2008(in
      thousands)Revenue
                        
                        $
                        24,397
                        
                        
                        $
                        27,354Income
      from continuing operations before income taxes
                        
                        $
                        5,519
                        
                        
                        $
                        14,190





The
turmoil in the global financial markets over the past year has caused equity
prices to decline to levels not seen in many years.  That
market-driven value decline has carried over to our client
portfolios.  As the fees and commissions that we charge for managing
client assets is based, to a large degree, on the size of our client portfolios,
we have seen a significant drop in revenue from the second quarter of 2008 to
the comparable 2009 period.  On April 1, 2009, the Company increased
its ownership of EFA from 10% to 76% which required a change in our method of
accounting for EFA’s results to consolidation from the equity
method.  Revenue from asset/wealth management decreased to $24.4
million from $27.4 million and income from continuing operations before income
taxes decreased to $5.5 million from $14.2 million.  Investment
advisory and related services revenue decreased to $17.2 million from $20.3
million as a result of a decrease in client assets.  Commission
revenue decreased to $2.7 million from $4.9 million reflecting a decline in
shares traded by the firm’s retail clients due to the uncertainty in the
financial markets.  Total expenses increased to $18.5 million from
$17.9 million due to higher employee compensation and occupancy costs associated
with the EFA acquisition.  Equity in income (loss) of limited
partnerships decreased to a loss of $408,000 from income of $4.7 million. The
2008 income is attributable to a higher portfolio valuation of one of the
limited partnerships that we manage.  The partnership’s investments
are energy-related and such investments had higher values during the first half
of 2008 due to the elevated price of oil. Net income attributable to the
noncontrolling interest in consolidated subsidiaries, which reduces the
Company’s pretax income, was $1.1 million for the second quarter of 2009
compared to $5.1 million for the same period last year due to the lower earnings
during the 2009 period.




25




Capital
Markets





InvestmentBanking





Three Months Ended June 30,2009
                            
                            
                            2008(in thousands)Revenue
                            
                            $
                            2,500
                            
                            
                            $
                            4,742Income
      (loss) from continuing operations before income taxes
                            
                            $
                            (964
                            )
                            
                            $
                            542





Revenue
from investment banking decreased to $2.5 million from $4.7 million and income
(loss) from continuing operations before income taxes decreased to a loss of
$964,000 from income of $542,000.  The revenue decline is due to a
decrease of $2.6 million in advisory fees.  Total expenses decreased
to $3.5 million from $4.2 million due to a decrease of $599,000 in employee
compensation.





Institutional
Brokerage





Three Months Ended June 30,2009
                          
                          
                          2008(in thousands)Revenue
                          
                          $
                          5,926
                          
                          
                          $
                          4,981Income
      from continuing operations before income taxes
                          
                          $
                          852
                          
                          
                          $
                          382





Revenue
from institutional brokerage increased to $5.9 million from $5.0 million and
income from continuing operations before income taxes increased to $852,000 from
$382,000.  Principal transaction revenue increased to $2.3 million
from $767,000 reflecting an increase of $1.3 million in revenue from the sale of
fixed income products.  Total expenses increased to $5.1 million from
$4.6 million due to increased employee compensation related to the higher
revenue.




Prime Brokerage
Services





Three Months Ended June 30,2009
                          
                          
                          2008(in thousands)Revenue
                          
                          $
                          19,923
                          
                          
                          $
                          10,664Income
      from continuing operations before income taxes
                          
                          $
                          450
                          
                          
                          $
                          940





Revenue
from prime brokerage services increased to $19.9 million from $10.7 million and
income from continuing operations before income taxes decreased to $450,000 from
$940,000.  Principal transactions revenue increased to $11.8 million
from $3.3 million reflecting an increase of $8.3 million in revenue earned from
the sale of fixed income products.  Total expenses increased to $19.5
million from $9.7 million due to a $9.6 million increase in compensation and a
$264,000 increase in clearing costs related to the increased
revenue.




26




Corporate
Support and Other





Three Months Ended June 30,2009
                        
                        
                        2008(in
      thousands)Revenue
                        
                        $
                        2,329
                        
                        
                        $
                        4,406Loss
      from continuing operations before income taxes
                        
                        $
                        (1,490
                        )
                        
                        $
                        (179
                        )





Revenue
from corporate support and other decreased to $2.3 million from $4.4 million and
the loss from continuing operations before income taxes increased to $1.5
million from $179,000.  Revenue from principal transactions, which
consists of changes in the values of our investment portfolios, decreased to
$1.5 million from $3.7 million.  Many of these investments are
energy-related and such investments had higher values during the first half of
2008 due to the elevated price of oil.  Total expenses increased to
$5.7 million from $4.7 million due to compensation and interest costs associated
with the acquisition of EFA and to interest costs associated with the Company’s
credit facility that was initially funded in the second quarter of
2009.





Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008





Total
revenue was $96.3 million for the six months ended June 30, 2009 compared to
$92.8 million for the same period in 2008, an increase of $3.5 million, or 3.8%,
primarily reflecting an increase in principal transactions and interest revenue
partially offset by a decrease in investment advisory and related services and
commission revenue.  Total expenses for the six months ended June 30,
2009 increased $29.9 million, or 37.4%, to $109.9 million from $80.0 million in
the same period of the previous year reflecting (i) compensation and other costs
associated with the higher revenue, (ii) $14.9 million in goodwill and other
intangible assets impairment charges recognized in the first quarter of 2009,
and (iii) $1.4 million of compensation and interest costs associated with the
acquisition of an additional 66% membership interest in EFA.  Equity
in income of limited partnerships decreased to $988,000 for the six months ended
June 30, 2009 compared to $3.3 million for the same period in 2008 reflecting a
decline in the value of one of the limited partnerships that we
manage.  Income (loss) from continuing operations, net of tax, was
$(9.6) million, or $(0.35) per diluted common share, for the six months ended
June 30, 2009 compared to $4.8 million, or $0.18 per diluted common share, for
the same period in 2008.





Revenue
from investment advisory and related services decreased to $31.5 million for the
six months ended June 30, 2009 from $39.0 million in the same period in 2008 as
a result of a decrease in client assets.  Commission revenue decreased
to $24.1 million for the six months ended June 30, 2009 from $27.3 million for
the same period in 2008 as a result of a decrease in trading volume in the
Asset/Wealth Management segment.  Investment banking revenue decreased
to $6.0 million for the six months ended June 30, 2009 from $6.6 million in the
same period in 2008 due to a decrease of $1.6 million in advisory fees earned
partially offset by an increase in sales credits received in investment banking
transactions.  Principal transactions revenue increased from $10.8
million for the six months ended June 30, 2008 to $24.7 million for the same
period in 2009 as the result of an increase in the sale of fixed income
products.  Interest and dividend income increased to $5.4 million for
the six months ended June 30, 2009 from $2.1 million in the same period last
year as a result of interest earned on notes receivable received in connection
with the sale of our interests in Salient Partners, L.P. and Endowment Advisers,
L.P.  Other income decreased from $7.0 million for the six months
ended June 30, 2008 to $4.6 million during the same period in 2009 reflecting a
decrease of $2.2 million in hedge fund servicing revenue and third-party
marketing fees.




27




During
the six months ended June 30, 2009, employee compensation and benefits increased
to $64.8 million from $51.4 million in the same period last year due to the
revenue growth in the prime brokerage services division.  During the
six months ended June 30, 2009, floor brokerage, exchange, and clearance fees
increased to $3.4 million from $2.7 million in the same period last year due to
an increase of $722,000 in clearance fees in the prime brokerage services
division.  Occupancy costs were $6.9 million for the six months ended
June 30, 2009 compared to $5.9 million in the same period of 2008 due to the
acquisition of an additional 66% membership interest in EFA on April 1, 2009 and
the acquisitions of Leonetti and Miller-Green during the first six months of
2008.  Interest expense was $820,000 for the six months ended June 30,
2009 due to (i) $179,000 of imputed interest associated with an incentive
compensation payable resulting from the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P., (ii) $194,000 of interest related
to the credit facility funded in 2009, and (iii) $447,000 of interest associated
with the acquisition of an additional 66% membership interest in EFA on April 1,
2009.  The Company recognized goodwill and other intangible assets
impairment charges of $14.9 million for the six months ended June 30,
2009.  No such charge was recognized in the same period in
2008.  Other general and administrative expenses decreased to $13.1
million for the six months ended June 30, 2009 from $13.9 million in the same
period last year due to a decrease of $1.3 million in outside sales
commissions.





Our
effective tax rate was 35.8% for the six months ended June 30, 2009 compared to
41.1% for the six months ended June 30, 2008 due to nondeductible goodwill and
other intangible assets impairment charges taken in 2009.  The
effective tax rate exceeds the federal statutory income tax rate primarily as a
result of state income taxes and certain nondeductible expenses.





During
the first quarter of 2009, the Company closed three retail
offices.  This decision was made due to the offices’ inability to
achieve sufficient revenues to offset their costs.  As a result, we
recorded a net loss from discontinued operations, which consists of operating
losses, of $1.7 million and $666,000 for the six months ended June 30, 2009 and
2008, respectively.





Results
by Segment





Asset/Wealth
Management





Six Months Ended June 30,2009
                        
                        
                        2008(in
      thousands)Revenue
                        
                        $
                        45,739
                        
                        
                        $
                        53,809Income
      from continuing operations before income taxes
                        
                        $
                        10,445
                        
                        
                        $
                        24,249





The
turmoil in the global financial markets over the past year has caused equity
prices to decline to levels not seen in many years.  That
market-driven value decline has carried over to our client
portfolios.  As the fees and commissions that we charge for managing
client assets is based, to a large degree, on the size of our client portfolios,
we have seen a significant drop in revenue from the six months ended June 30,
2008 to the comparable 2009 period.  On April 1, 2009, the Company
increased its ownership of EFA from 10% to 76% which required a change in our
method of accounting for EFA’s results to consolidation from the equity
method.  Revenue from asset/wealth management decreased to $45.7
million from $53.8 million and income from continuing operations before income
taxes decreased to $10.4 million from $24.2 million.  Investment
advisory and related services revenue decreased to $31.4 million from $39.0
million as a result of a decrease in assets under management or
advisement.  Commission revenue decreased to $5.6 million from $9.9
million reflecting a decline in shares traded by the firm’s retail clients due
to the uncertainty in the financial markets.  Total expenses decreased
to $34.1 million from $34.9 million due to a decrease of $1.2 million in
employee compensation and benefits.  Equity in income (loss) of
limited partnerships decreased to a loss of $1.2 million from income of $5.4
million. The 2008 income is attributable to a higher portfolio valuation of one
of the limited partnerships that we manage.  The partnership’s
investments are energy-related and such investments had higher values during the
first half of 2008 due to the elevated price of oil.  Net income
attributable to the noncontrolling interest in consolidated subsidiaries, which
reduces the Company’s pretax income, was $2.1 million for the six months ended
June 30, 2009 compared to $8.0 million for the same period last year due to the
lower earnings during the 2009 period.




28




Capital
Markets





InvestmentBanking





Six Months Ended June 30,2009
                                                  
                                                  
                                                  2008(in
      thousands)Revenue
                                                  
                                                  $
                                                  4,003
                                                  
                                                  
                                                  $
                                                  5,398Loss
      from continuing operations before income taxes
                                                  
                                                  $
                                                  (2,541
                                                  )
                                                  
                                                  $
                                                  (2,630
                                                  )





Revenue
from investment banking decreased to $4.0 million from $5.4 million and loss
from continuing operations before income taxes decreased to $2.5 million from
$2.6 million.  The revenue decrease is due to a decrease of $1.6
million in advisory fees.  Total expenses decreased to $6.5 million
from $8.0 million due to a decrease of $1.1 million in employee
compensation.





Institutional
Brokerage





Six Months Ended June 30,2009
                              
                              
                              2008(in
      thousands)Revenue
                              
                              $
                              11,072
                              
                              
                              $
                              8,738Income
      from continuing operations before income taxes
                              
                              $
                              1,198
                              
                              
                              $
                              373





Revenue
from institutional brokerage increased to $11.1 million from $8.7 million and
income from continuing operations before income taxes increased to $1.2 million
from $373,000.  Principal transaction revenue increased to $4.8
million from $1.6 million reflecting an increase of $2.8 million in revenue from
the sale of fixed income products.  Total expenses increased to $9.9
million from $8.4 million due to an increase of $2.5 million in employee
compensation related to the higher revenue.





Prime Brokerage
Services





Six Months Ended June 30,2009
                          
                          
                          2008(in
      thousands)Revenue
                          
                          $
                          34,363
                          
                          
                          $
                          21,184Income
      from continuing operations before income taxes
                          
                          $
                          777
                          
                          
                          $
                          1,447





Revenue
from prime brokerage services increased to $34.4 million from $21.2 million and
income from continuing operations before income taxes decreased to $777,000 from
$1.4 million.  Principal transactions revenue increased to $19.3
million from $6.0 million reflecting a $12.8 million increase in revenue earned
from the sale of fixed income products and from a $1.0 million increase in
proprietary trading revenue.  Total expenses increased to $33.6
million from $19.7 million reflecting a $13.0 million increase in compensation,
a $171,000 increase in outside sales commissions, and an increase of $722,000 in
clearing costs related to the increased revenue.





29


Corporate
Support and Other





Six Months Ended June 30,2009
                  
                  
                  2008(in
      thousands)Revenue
                  
                  $
                  1,097
                  
                  
                  $
                  3,670Loss
      from continuing operations before income taxes
                  
                  $
                  (22,549
                  )
                  
                  $
                  (7,412
                  )





Revenue
from corporate support and other decreased to $1.1 million from $3.7 million and
the loss from continuing operations before income taxes increased to $22.5
million from $7.4 million.  Revenue from principal transactions, which
consists principally of changes in the values of our investment portfolios,
decreased to a loss of $303,000 from a gain of $2.3 million.  Many of
these investments are energy-related and such investments had higher values
during the first half of 2008 due to the elevated price of oil.  Total
expenses increased to $25.8 million from $9.0 million due to $14.9 million of
goodwill and other intangible assets impairment charges recognized in
2009.  Also, compensation and interest costs of $1.4 million
associated with the acquisition of EFA and interest costs of $194,000 associated
with the Company’s credit facility were recorded in 2009.





Liquidity
and Capital Resources





The
Company’s funding needs consist of (1) funds necessary to maintain current
operations, (2) capital expenditure requirements, (3) debt repayment, and (4)
funds used for acquisitions.





We intend
to satisfy our funding needs with our own capital resources, consisting largely
of internally generated earnings and liquid assets, and with borrowings from
outside parties.  At June 30, 2009, we had $40.6 million in cash and
cash equivalents, which together with receivables from broker-dealers and
clearing organizations, deposits with clearing organizations, and marketable
securities owned represented 18.0% of our total assets at the end of the second
quarter.





Receivables
turnover, calculated as annualized revenue divided by average receivables, was
two for the six months ended June 30, 2009 compared to four for the same period
in the prior year.  The decrease in the receivables turnover was the
result of an increase in receivables from notes receivable issued in exchange
for the sale of our interests in Salient Partners, L.P. and Endowment Advisers,
L.P.  The allowance for doubtful accounts as a percentage of
receivables was 2.3% at June 30, 2009 compared to 1.3% at December 31,
2008.  The increase in the allowance for doubtful accounts as a
percentage of receivables was the result of an increase in the allowance for
employee notes receivables from the three offices closed in the first quarter of
2009.





For the
six months ended June 30, 2009, net cash provided by operations was $15.4
million versus $15.6 million during the same period in
2008.  Marketable securities owned decreased by $7.5 million during
the first six months of 2009, securities sold, not yet purchased increased by
$9.1 million, and payables to broker-dealers and clearing organizations
decreased by $2.0 million.  The change in marketable securities owned,
securities sold, not yet purchased, and payables to broker-dealers and clearing
organizations is primarily due to the Company’s securities managed by third
party asset managers.  The Company’s portfolio includes both long and
short equity positions.  Our asset managers generally seek to generate
profits based on trading spreads, rather than through speculation on the
direction of the market and employ hedging strategies designed to insulate the
net value of our portfolios from fluctuations in the general level of interest
rates and equity price variances.  We finance a portion of our
positions through our clearing broker-dealers.


30


Not
readily marketable securities owned, primarily investments in limited
partnerships, were $30.4 million at June 30, 2009 compared to $32.7 million at
December 31, 2008.  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 2009 were $768,000, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for our growth.





At June
30, 2009, SMH, our registered broker-dealer subsidiary, was in compliance with
the net capital requirements of the Securities and Exchange Commission's Uniform
Net Capital Rules and had capital in excess of the required
minimum.





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





Critical
Accounting Policies/Estimates





Goodwill.  Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a purchase business combination.  Goodwill is
reviewed for impairment at least annually in accordance with the provisions of
SFAS No. 142, Goodwill and
Other Intangible Assets.  SFAS No. 142 requires that goodwill
be tested for impairment between annual test dates if an event or changing
circumstances indicate that it is more likely than not that the fair value of
the reporting unit is below its carrying amount.   The Company
has reviewed goodwill for impairment on a quarterly basis as the Company’s stock price has
traded below its book value for an extended period of time.  The goodwill
impairment test is a two-step test.  Under the first step, the fair
value of the reporting unit is compared with its carrying value (including
goodwill and other intangible assets).  If the fair value of the
reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and the enterprise must perform step
two of the impairment test (measurement).  Under step two, an
impairment loss is recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of that
goodwill.  The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141R.  The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.





Factors
considered in determining fair value in accordance with SFAS No. 142 include,
among other things, the Company’s market capitalization as determined by quoted
market prices for its common stock and the value of the Company’s reporting
units.  The Company uses several methods to value its reporting units,
including discounted cash flows, comparisons with valuations of public companies
in the same industry, and multiples of assets under management.  If
the fair value of the reporting unit exceeds its carrying value, step two does
not need to be performed.





In
performing the first step of the goodwill impairment test, the estimated fair
values of the reporting units were developed using the methods listed
above.  When performing the discounted cash flow analysis, the Company
utilized observable market data to the extent available.  Future cash
flow projections are based primarily on actual results and, at April 30, 2009,
include negative future cash flows for one reporting unit.  This
reporting unit has no recorded goodwill.  Due to the downturn in the
market and the economic recession that began during the second half of 2008,
client assets have decreased resulting in, among other things, lower revenue at
our asset/wealth management businesses.  As a result, growth projections
used in the April 30, 2008 cash flow projections have not been realized. 
For the February 28, 2009 and April 30, 2009 goodwill analyses the cash flow
estimates reflect zero growth for all projected future periods.  The
discount rates utilized in these analyses ranged from 11% to 20%.  The
Company also calculates estimated fair values of the reporting units utilizing
multiples of earnings, book value, and, when applicable, assets under management
of the reporting unit.  The estimated fair value using these
techniques is compared with the carrying value of the reporting unit to
determine if there is an indication of impairment.


31


The
Company performed an update of its April 30, 2008 review for goodwill impairment
as of February 28, 2009 due to deterioration in overall macroeconomic conditions
and the extended decline in the Company’s stock price.  This review
was performed using the methodology described above.  Future cash flow
projections were based primarily on actual results with budgeted cash flow
projections used for one reporting unit.  When performing the February 28,
2009 discounted cash flow analysis no future negative cash flows were
projected.  This assessment resulted in the recognition of a goodwill
impairment charge of $13.8 million at two reporting units: Edelman - $13.0
million and Kissinger - $837,000.





The
Company performed its annual review for goodwill impairment as of April 30,
2009.  The first step of the April 30, 2009 goodwill impairment test
resulted in no indication of impairment.





Goodwill
is evaluated for impairment at the reporting unit level, which is defined as the
operating subsidiaries of the Company.  The Company has four reporting
units with recorded goodwill that were evaluated for impairment.  At
April 30, 2009, the estimated fair values of three of the four reporting units
were well in excess of the carrying values of these businesses resulting in no
impairment.  For one reporting unit, Leonetti, the excess was
significantly impacted due to a reduction in earnings at this reporting
unit.    Remaining amounts of goodwill at June 30, 2009 were
as follows:  Edelman - $79.1 million, Kissinger - $2.4 million,
Dickenson - $2.1 million, SMH Colorado - $1.5 million, and Leonetti -
$225,000.





With the
Company’s common stock price at extraordinary lows, management analyzed the
estimated fair values of the reporting units in relation to our market
capitalization.  The sum of the estimated fair values of the Company’s
reporting units is greater than the market value of the Company’s common
stock.  Based upon an analysis of historical acquisitions of financial
services companies similar to ours, we believe the excess of approximately 40%
represents a reasonable control premium in a hypothetical acquisition of the
Company.   In the event that the Company’s stock price continues
to trade below its book value, the Company would expect to update its review for
goodwill impairment quarterly.  The future goodwill impairment tests
may result in a future charge to earnings.


32


Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Market
Risk





During
the six months ended June 30, 2009, 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, 2008.





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, 2009, securities owned by the Company were $43.9 million, including $13.5
million in marketable securities, $27.5 million representing the Company’s
investments in limited partnerships, and $2.9 million representing other not
readily marketable securities.





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





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





Item 4.Controls and
Procedures





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


33


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 was
converted to a liquidation under Chapter 7.





In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH, US
Special Opportunities Trust PLC and Renaissance US Growth Investment Trust
PLC, 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. On
March 17, 2009, a third purchaser of Ronco convertible preferred stock filed a
complaint against SMH, Palisades Master Fund, L.P.
and PEF Advisors, LLC, in the 11th
Judicial District Court of Harris County, Texas.  The claims are
similar to the above referenced case.  Palisades Master Fund, L.P.
invested $1.9 million in Ronco convertible preferred stock. In addition, in July
2009, the Bankruptcy Trustee filed a derivative action on behalf of the
shareholders of Ronco against two former directors of Ronco (who were employees
of SMH) for negligently authorizing the closing of the purchase of the assets of
Ronco Marketing Corp. in breach of their fiduciary duties of care and loyalty
and against SMH for negligent misrepresentation, breach of fiduciary duties,
breach of contract, and violation of the Texas Fraudulent Transfer Act, Diane Weil, Solely in Her
Capacity as Trustee of Ronco Corporation and Ronco Marketing Corporation vs. A.
Emerson Martin II, Gregg Mockenhaupt, and Sanders Morris Harris, Inc., in
the 190th
Judicial District Court of Harris County, Texas. No amount of damages is
alleged. SMH has filed an answer and special exceptions in each of these cases
and believes it has valid defenses to all claims made by the
plaintiffs.  However, there is no assurance that the Company will
successfully defend such claims.





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.


34


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





On May
10, 2009, the Company issued 266,525 shares of common stock to certain employees
of Edelman as part of a retention bonus payable pursuant to the terms of their
employment agreements entered into in connection with the Company’s acquisition
of Edelman in 2005.  The shares were valued at $1.25 million, or $4.69
per share.  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.





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





On May
21, 2009, 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.





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





Number
      of
                    
                    
                    Number
      of
                    
                    
                    Number
      of
                    
                    
                    Number
      ofShares
                    
                    
                    Shares
                    
                    
                    Shares
                    
                    
                    BrokerVoted
      For
                    
                    
                    Voted
      Against
                    
                    
                    Withheld
                    
                    
                    Non-VotesGeorge
      L. Ball
                    
                    
                    25,331,457
                    
                    
                    
                    -
                    
                    
                    
                    684,316
                    
                    
                    
                    -Richard
      E. Bean
                    
                    
                    25,513,078
                    
                    
                    
                    -
                    
                    
                    
                    502,695
                    
                    
                    
                    -Charles
      W. Duncan III
                    
                    
                    25,746,493
                    
                    
                    
                    -
                    
                    
                    
                    269,280
                    
                    
                    
                    -Fredric
      M. Edelman
                    
                    
                    25,427,159
                    
                    
                    
                    -
                    
                    
                    
                    588,614
                    
                    
                    
                    -Scott
      B. McClelland
                    
                    
                    25,847,116
                    
                    
                    
                    -
                    
                    
                    
                    168,657
                    
                    
                    
                    -Ben
      T. Morris
                    
                    
                    25,617,365
                    
                    
                    
                    -
                    
                    
                    
                    398,408
                    
                    
                    
                    -Albert
      W. Niemi, Jr., PH.D.
                    
                    
                    25,510,240
                    
                    
                    
                    -
                    
                    
                    
                    505,533
                    
                    
                    
                    -Don
      A. Sanders
                    
                    
                    25,628,935
                    
                    
                    
                    -
                    
                    
                    
                    386,838
                    
                    
                    
                    -W.
      Blair Waltrip
                    
                    
                    25,727,060
                    
                    
                    
                    -
                    
                    
                    
                    288,713
                    
                    
                    
                    -





Item
5. Other
Information





None.


35


Item
6.  Exhibits





INDEX
TO EXHIBITS





ExhibitNumber
                
                Description2.1
                
                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).2.2
                
                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).2.3
                
                Agreement
      to Retire Partnership Interest and Second Amendment to the Limited
      Partnership Agreement of Endowment Advisers, L.P. dated as of August 29,
      2008, among Sanders Morris Harris Group Inc. and Endowment Advisers, L.P.,
      The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC, and
      their respective partners and members (Filed as Exhibit 99.2 to the
      Company’s Current Report on Form 8-K dated August 29, 2008 (File No.
      000-30066), and incorporated herein by reference).2.4
                
                Letter
      agreement dated as of January 1, 2009, among Sanders Morris Harris Group
      Inc., Fredric M. Edelman, and Edward Moore.  (Filed as Exhibit
      99.2 to the Company’s Current Report on Form 8-K dated January 29, 2009
      (File No. 000-30066), and incorporated herein by
    reference).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
                
                Employment
      Agreement dated as of May 10, 2005, between The Edelman Financial Center,
      LLC and Fredric M. Edelman.10.06
                
                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).10.07
                
                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).





36





*10.08
                      
                      Credit
      Agreement dated as of May 11, 2009, between Sanders Morris Harris Group
      Inc. and Prosperity Bank.*10.09
                      
                      First
      Amendment to Credit Agreement dated as of June 23, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.*10.10
                      
                      Second
      Amendment to Credit Agreement dated as of July 15, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.*31.1
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.*31.2
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.*32.1
                      
                      Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*32.2
                      
                      Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.________________________*          Filed
      herewith.†          Management
      contract or compensation plan or
arrangement.


37




SIGNATURES





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





SANDERS
      MORRIS HARRIS GROUP INC.By:
                  /s/ GEORGE L. BALLGeorge
      L. BallChief
      Executive OfficerBy:
                  /s/ RICK BERRYRick
      BerryChief
      Financial Officer





Date:           August
10, 2009


38