SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










FORM
10-Q/A


Amendment
No. 1


(Mark
one)




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




FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009




OR




o
            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
              incorporation
      or organization)
            (I.R.S.
      Employer
              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  o No




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




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




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




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




As of November 6, 2009, the registrant
had 28,492,846 outstanding shares of common stock, par value $0.01 per
share.












SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES





INDEX




PART
      I.FINANCIAL
      INFORMATION
            
            PageItem
      1.
            Financial
      Statements
            
            3Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008
            
            3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      September 30, 2009 and 2008 (unaudited)
            
            4Condensed
      Consolidated Statement of Changes in Equity for the Nine Months Ended
      September 30, 2009 (unaudited)
            
            5Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended September
      30, 2009 and 2008 (unaudited)
            
            6Notes
      to Condensed Consolidated Financial Statements (unaudited)
            
            7Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            24Item
      4.
            Controls
      and Procedures
            
            35Item
      6.
            Exhibits
            
            36




1




EXPLANATORY
NOTE





Sanders
Morris Harris Inc. (“SMHG” or the “Company”) is filing this Amendment No. 1 on
Form 10-Q/A to amend the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2009 filed with the Securities and
Exchange Commission (“SEC”) on November 9, 2009  (the “Original
Report”).  The Company has determined that its accounting for the
acquisition of Edelman Financial Advisors, LLC (“EFA”) reported in the Original
Report was incorrect as we did not recognize a gain on step acquisition related
to the Company’s previously-held noncontrolling interest in EFA.





This Form
10-Q/A revises Part I – Item 1. Financial Statements, Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and
Item 4. Controls and Procedures of the Original Report solely as a result of and
to reflect the recognition of the gain on step acquisition and related entries
and disclosures.





Except as
specifically noted above, this Form 10-Q/A does not modify or update disclosures
in the Original Report.  Accordingly, this Form 10-Q/A does not
reflect events occurring after the filing of the Original Report or modify or
update any related or other disclosures.




2




PART
I.   FINANCIAL INFORMATION





Item
1.  Financial
Statements




SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSAs
      of September 30, 2009 and December 31, 2008(in
      thousands, except share and per share amounts)September
      30,
              
              
              December
      31,2009
              
              
              2008(unaudited)RestatedASSETSCash
      and cash equivalents
              
              $
              24,851
              
              
              $
              30,224Receivables,
      net of allowance of $2,886 and $1,470, respectivelyBroker-dealers
      and clearing organizations
              
              
              1,506
              
              
              
              254Customers
              
              
              25,926
              
              
              
              16,344Related
      parties
              
              
              11,551
              
              
              
              8,417Other
              
              
              81,407
              
              
              
              89,847Deposits
      with clearing organizations
              
              
              1,563
              
              
              
              1,062Securities
      owned
              
              
              41,278
              
              
              
              54,559Furniture,
      equipment, and leasehold improvements, net
              
              
              17,577
              
              
              
              18,859Other
      assets and prepaid expenses
              
              
              2,994
              
              
              
              2,261Goodwill,
      net
              
              
              73,455
              
              
              
              63,078Other
      intangible assets, net
              
              
              32,799
              
              
              
              12,565Total
      assets
              
              $
              314,907
              
              
              $
              297,470LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued liabilities
              
              $
              37,238
              
              
              $
              36,644Borrowings
              
              
              22,024
              
              
              
              -Subordinated
      promissory note
              
              
              10,000
              
              
              
              -Deferred
      tax liability, net
              
              
              12,307
              
              
              
              14,532Securities
      sold, not yet purchased
              
              
              5,498
              
              
              
              12,884Payable
      to broker-dealers and clearing organizations
              
              
              22
              
              
              
              2,051Total
      liabilities
              
              
              87,089
              
              
              
              66,111Commitments
      and contingenciesEquity:Preferred
      stock, $0.10 par value; 10,000,000 sharesauthorized;
      no shares issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.01 par value; 100,000,000 sharesauthorized;
      29,545,380 and 29,207,962 shares issued,respectively
              
              
              295
              
              
              
              292Additional
      paid-in capital
              
              
              236,767
              
              
              
              234,578Accumulated
      deficit
              
              
              (18,334
              )
              
              
              (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
              
              
              212,279
              
              
              
              222,554Noncontrolling
      interest
              
              
              15,539
              
              
              
              8,805Total
      equity
              
              
              227,818
              
              
              
              231,359Total
      liabilities and equity
              
              $
              314,907
              
              
              $
              297,470The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 
 3




SANDERS MORRIS HARRIS GROUP INC. AND
      SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(in
      thousands, except per share amounts)(unaudited)Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Restated
              
              
              
              
              
              RestatedRevenue:Investment
      advisory and related services
              
              $
              19,428
              
              
              $
              19,649
              
              
              $
              50,909
              
              
              $
              58,689Commissions
              
              
              13,139
              
              
              
              13,247
              
              
              
              37,202
              
              
              
              40,537Investment
      banking
              
              
              3,358
              
              
              
              3,971
              
              
              
              9,385
              
              
              
              10,538Principal
      transactions
              
              
              6,849
              
              
              
              5,194
              
              
              
              31,592
              
              
              
              15,978Interest
      and dividends
              
              
              2,505
              
              
              
              1,591
              
              
              
              7,902
              
              
              
              3,725Other
      income
              
              
              2,581
              
              
              
              2,362
              
              
              
              7,144
              
              
              
              9,346Total
      revenue
              
              
              47,860
              
              
              
              46,014
              
              
              
              144,134
              
              
              
              138,813Expenses:Employee
      compensation and benefits
              
              
              29,010
              
              
              
              29,084
              
              
              
              93,792
              
              
              
              80,492Floor
      brokerage, exchange, and clearance fees
              
              
              1,458
              
              
              
              1,567
              
              
              
              4,896
              
              
              
              4,297Communications
      and data processing
              
              
              3,037
              
              
              
              2,477
              
              
              
              8,607
              
              
              
              8,241Occupancy
              
              
              3,830
              
              
              
              3,375
              
              
              
              10,745
              
              
              
              9,236Interest
              
              
              1,263
              
              
              
              400
              
              
              
              2,083
              
              
              
              400Goodwill
      and other intangible assets impairment charges
              
              
              -
              
              
              
              -
              
              
              
              14,928
              
              
              
              -Amortization
      of other intangible assets
              
              
              544
              
              
              
              165
              
              
              
              962
              
              
              
              568Other
      general and administrative
              
              
              7,107
              
              
              
              6,146
              
              
              
              20,168
              
              
              
              20,023Total
      expenses
              
              
              46,249
              
              
              
              43,214
              
              
              
              156,181
              
              
              
              123,257Income
      (loss) from continuing operations before equity in income
    oflimited
      partnerships and income taxes
              
              
              1,611
              
              
              
              2,800
              
              
              
              (12,047
              )
              
              
              15,556Equity
      in income of limited partnerships
              
              
              1,772
              
              
              
              43,285
              
              
              
              2,760
              
              
              
              46,556Gain
      on step acquisition
              
              
              3,000
              
              
              
              -
              
              
              
              3,000
              
              
              
              -Income
      (loss) from continuing operations before income taxes
              
              
              6,383
              
              
              
              46,085
              
              
              
              (6,287
              )
              
              
              62,112Provision
      (benefit) for income taxes
              
              
              1,995
              
              
              
              17,829
              
              
              
              (3,196
              )
              
              
              21,152Income
      (loss) from continuing operations, net of income taxes
              
              
              4,388
              
              
              
              28,256
              
              
              
              (3,091
              )
              
              
              40,960Loss
      from discontinued operations, net of income taxes
              
              
              (355
              )
              
              
              (238
              )
              
              
              (2,043
              )
              
              
              (904
              )Net
      income (loss)
              
              
              4,033
              
              
              
              28,018
              
              
              
              (5,134
              )
              
              
              40,056Less:  Net
      (income) loss attributable to the noncontrolling interest
              
              
              (1,329
              )
              
              
              942
              
              
              
              (3,473
              )
              
              
              (7,011
              )Net
      income (loss) attributable to Sanders Morris Harris Group
    Inc.
              
              $
              2,704
              
              
              $
              28,960
              
              
              $
              (8,607
              )
              
              $
              33,045Basic
      earnings (loss) per common share:Continuing
      operations
              
              $
              0.11
              
              
              $
              1.04
              
              
              $
              (0.24
              )
              
              $
              1.28Discontinued
      operations
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.07
              )
              
              
              (0.04
              )Net
      earnings (loss)
              
              $
              0.10
              
              
              $
              1.03
              
              
              $
              (0.31
              )
              
              $
              1.24Diluted
      earnings (loss) per common share:Continuing
      operations
              
              $
              0.11
              
              
              $
              1.04
              
              
              $
              (0.24
              )
              
              $
              1.27Discontinued
      operations
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.07
              )
              
              
              (0.04
              )Net
      earnings (loss)
              
              $
              0.10
              
              
              $
              1.03
              
              
              $
              (0.31
              )
              
              $
              1.23Weighted
      average common shares outstanding:Basic
              
              
              27,797
              
              
              
              28,033
              
              
              
              27,689
              
              
              
              26,583Diluted
              
              
              28,497
              
              
              
              28,192
              
              
              
              27,689
              
              
              
              26,764Amounts
      attributable to Sanders Morris Harris Group Inc. commonshareholders:Income
      (loss) from continuing operations, net of income taxes
              
              $
              3,059
              
              
              $
              29,198
              
              
              $
              (6,564
              )
              
              $
              33,949Discontinued
      operations, net of income taxes
              
              
              (355
              )
              
              
              (238
              )
              
              
              (2,043
              )
              
              
              (904
              )Net
      income (loss)
              
              $
              2,704
              
              
              $
              28,960
              
              
              $
              (8,607
              )
              
              $
              33,045The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 
 4




SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor
      the nine months ended September 30, 2009(in
      thousands, except share and per share amounts)(unaudited)Amounts
              
              
              SharesRestatedCommon
      stock:Balance,
      beginning of period
              
              $
              292
              
              
              
              29,207,962Stock
      issued pursuant to employee benefit plan
              
              
              3
              
              
              
              337,418Balance,
      end of period
              
              
              295
              
              
              
              29,545,380Additional
      paid-in capital:Balance,
      beginning of period
              
              
              234,578Stock
      issued pursuant to employee benefit plan; including tax
      benefit
              
              
              239Tax
      adjustment related to employee benefit plan
              
              
              (971
              )Stock-based
      compensation expense
              
              
              2,921Balance,
      end of period
              
              
              236,767Accumulated
      deficit:Balance,
      beginning of period
              
              
              (5,895
              )Cash
      dividends ($0.135 per share)
              
              
              (3,832
              )Net
      loss attributable to Sanders Morris Harris Group Inc.
              
              
              (8,607
              )Balance,
      end of period
              
              
              (18,334
              )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
              
              
              7,200Contributions
              
              
              20Distributions
              
              
              (3,959
              )Net
      income attributable to the noncontrolling interest
              
              
              3,473Balance,
      end of period
              
              
              15,539Total
      equity and common shares outstanding
              
              $
              227,818
              
              
              
              28,489,486The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 
 5




SANDERS
      MORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(in
      thousands)(unaudited)Nine
      Months EndedSeptember
      30,2009
                
                
                2008RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                
                $
                (5,134
                )
                
                $
                40,056Adjustments
      to reconcile net income (loss) to net cash provided byoperating
      activities:Realized
      gain on securities available for sale
                
                
                -
                
                
                
                (205
                )Loss
      on sales of assets
                
                
                12
                
                
                
                79Depreciation
                
                
                3,280
                
                
                
                2,866Provision
      for bad debts
                
                
                127
                
                
                
                978Stock-based
      compensation expense
                
                
                2,921
                
                
                
                2,179Goodwill
      and other intangible assets impairment charges
                
                
                14,928
                
                
                
                -Amortization
      of other intangible assets
                
                
                962
                
                
                
                568Deferred
      income taxes
                
                
                (2,225
                )
                
                
                19,443Equity
      in income of limited partnerships
                
                
                (2,760
                )
                
                
                (46,556
                )Gain
      on step acquisition
                
                
                (3,000
                )
                
                
                -Unrealized
      and realized loss on not readily marketablesecurities
      owned, net
                
                
                58
                
                
                
                4,836Not
      readily marketable securities owned received for paymentof
      investment banking fees
                
                
                (21
                )
                
                
                (581
                )Net
      change in:Receivables
                
                
                (4,238
                )
                
                
                820Deposits
      with clearing organizations
                
                
                (501
                )
                
                
                35Marketable
      securities owned
                
                
                9,156
                
                
                
                (1,404
                )Other
      assets and prepaid expenses
                
                
                (702
                )
                
                
                (393
                )Accounts
      payable and accrued liabilities
                
                
                (2,359
                )
                
                
                906Securities
      sold, not yet purchased
                
                
                (7,386
                )
                
                
                36Payable
      to broker-dealers and clearing organizations
                
                
                (2,029
                )
                
                
                (2,955
                )Net
      cash provided by operating activities
                
                
                1,089
                
                
                
                20,708CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                
                
                (1,607
                )
                
                
                (7,203
                )Acquisitions,
      net of cash acquired of $210 and $126, respectively
                
                
                (25,324
                )
                
                
                (29,070
                )Purchases
      of not readily marketable securities owned
                
                
                (493
                )
                
                
                (882
                )Proceeds
      from sales of not readily marketable securities owned
                
                
                7,341
                
                
                
                11,020Proceeds
      from sales and maturities of securities available for sale
                
                
                -
                
                
                
                697Proceeds
      from sales of assets
                
                
                110
                
                
                
                266Net
      cash used in investing activities
                
                
                (19,973
                )
                
                
                (25,172
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchases
      of treasury stock
                
                
                (28
                )
                
                
                (1,162
                )Proceeds
      from shares issued pursuant to employee benefit plan
                
                
                225
                
                
                
                1,164Tax
      benefit of stock options exercised
                
                
                17
                
                
                
                364Tax
      adjustment related to employee benefit plan
                
                
                (971
                )
                
                
                -Proceeds
      from borrowings
                
                
                25,000
                
                
                
                250Repayment
      of borrowings
                
                
                (2,976
                )
                
                
                (450
                )Contributions
      by noncontrolling interest
                
                
                20
                
                
                
                -Distributions
      to noncontrolling interest
                
                
                (3,959
                )
                
                
                (13,791
                )Payments
      of cash dividends
                
                
                (3,817
                )
                
                
                (2,389
                )Net
      cash provided by (used in) financing activities
                
                
                13,511
                
                
                
                (16,014
                )Net
      decrease in cash and cash equivalents
                
                
                (5,373
                )
                
                
                (20,478
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                30,224
                
                
                
                46,503CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                24,851
                
                
                $
                26,025The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 6


SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            BASIS
      OF PRESENTATION





Nature
of Operations




Sanders
Morris Harris Group Inc. (“SMHG” or “the Company”) provides a broad range of
financial and other professional services, including wealth management
(including investment advice and management, financial planning, sports
representation and management), investment and merchant banking, and
institutional services (including institutional sales and trading, prime
brokerage services, and research).  The Company’s operating
subsidiaries include 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, a
division of SMH, (“Kissinger”), and Select Sports Group, Ltd.
(“SSG”).  The Company serves a diverse group of institutional,
corporate, and individual clients.





Principles
of Consolidation




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





In
management's opinion, the unaudited condensed consolidated financial statements
include all adjustments necessary for a fair presentation of our consolidated
financial position at September 30, 2009 and December 31, 2008, our consolidated
results of operations for the three and nine months ended September 30, 2009 and
2008, our consolidated changes in equity for the nine months ended September 30,
2009, and our consolidated cash flows for the nine months ended September 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.





New
Authoritative Accounting Guidance





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




7





FASB ASC Topic 320, Investments –
Debt and Equity Securities.New authoritative accounting
guidance under ASC Topic 320, Investments – Debt and Equity
Securities,(i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis.  Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses.  The amount
of the impairment related to other factors is recognized in other comprehensive
income.  The Company adopted the provisions of the new authoritative
accounting guidance under ASC Topic 320 for the interim period ending June 30,
2009.  Adoption of the new guidance did not have a material impact on
the Company’s consolidated financial statements.





FASB ASC Topic 805, Business
Combinations.  On January 1, 2009, new authoritative guidance
under ASC Topic 805, Business
Combinations,became applicable to
the Company’s accounting for business combinations closing on or after January
1, 2009.  ASC Topic 805 applies to all transactions and other events
in which one entity obtains control over one or more other businesses. ASC Topic
805 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 previous accounting guidance whereby the
cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value. ASC Topic 805 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 prior accounting guidance. Assets acquired and
liabilities assumed in a business combination that arise from contingencies are
to be recognized at fair value if fair value can be reasonably
estimated.  If fair value of such an asset or liability cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with ASC Topic 450, Contingencies.Under
ASC Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, 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 ASC Topic 450, Contingencies.





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




8





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





FASB ASC Topic 820, Fair Value
Measurements and Disclosures.  New authoritative accounting
guidance under ASC Topic 820, Fair Value Measurements and
Disclosures, affirms that the objective of fair value when the market for
an asset is not active is the price that would be received to sell the asset in
an orderly transaction, and clarifies and includes additional factors for
determining whether there has been a significant decrease in market activity for
an asset when the market for that asset is not active.  ASC Topic 820
requires an entity to base its conclusions about whether a transaction was not
orderly on the weight of the evidence.  The new accounting guidance
amended prior guidance to expand certain disclosure requirements.  The
new authoritative accounting guidance under ASC Topic 820 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.





Further
new authoritative accounting guidance (Accounting Standards Update No. 2009-5)
under ASC Topic 820 provides guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available.  In such instances, a reporting
entity is required to measure fair value utilizing a valuation technique that
uses (i) the quoted price of the identical liability when traded as an asset,
(ii) quoted prices for similar liabilities or similar liabilities when traded as
assets, or (iii) another valuation technique that is consistent with the
existing principles of ASC Topic 820, such as an income approach or market
approach.  The new authoritative accounting guidance also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment or other inputs relating to
the existence of a restriction that prevents the transfer of the
liability.  This new authoritative accounting guidance under ASC Topic
820 will be effective for the Company on October 1, 2009 and is not expected to
have a material impact on the Company’s consolidated financial
statements.





FASB ASC Topic 825, Financial
Instruments.New authoritative accounting guidance under ASC
Topic 825, Financial
Instruments, requires an entity to provide disclosures about the fair
value of financial instruments in interim financial information and amends prior
guidance to require those disclosures in summarized financial information at
interim reporting periods.   The new authoritative accounting
guidance under ASC Topic 825 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.





FASB ASC Topic 855, Subsequent
Events.  New authoritative accounting guidance under ASC Topic
855, Subsequent Events,
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.  ASC Topic 855 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.  The new authoritative accounting guidance under ASC Topic 855
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.





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




9





2.
            RESTATEMENT





The
Company has determined that its previously reported accounting for the
acquisition of Edelman Financial Advisors, LLC (“EFA”) was incorrect as we did
not recognize a gain on step acquisition related to the Company’s
previously-held noncontrolling interest in EFA.  The result of the
correction on the September 30, 2009 condensed consolidated balance sheet is as
follows:




September 30,
      2009As Reported
              
              
              As Restated(in
    thousands)Goodwill,
    net
              
              $
              70,653
              
              
              $
              73,455Deferred tax liability,
      net
              
              
              11,168
              
              
              
              12,307Total Sanders Morris Harris Group
      Inc.'sshareholders’
      equity
              
              
              210,418
              
              
              
              212,279Noncontrolling
      interest
              
              
              15,737
              
              
              
              15,539




The
result of the correction on the September 30, 2009 condensed consolidated
statements of operations is as follows:




Three Months
      Ended
                  
                  
                  Nine Months
      EndedSeptember 30,
      2009
                  
                  
                  September 30,
      2009As Reported
                  
                  
                  As Restated
                  
                  
                  As Reported
                  
                  
                  As Restated(in thousands, except per share
      amounts)Gain on step
      acquisition
                  
                  $
                  -
                  
                  
                  $
                  3,000
                  
                  
                  $
                  -
                  
                  
                  $
                  3,000Provision (benefit) for income
      taxes
                  
                  
                  856
                  
                  
                  
                  1,995
                  
                  
                  
                  (4,335
                  )
                  
                  
                  (3,196
                  )Income (loss) from continuing
      operations,net of income
      taxes
                  
                  
                  2,527
                  
                  
                  
                  4,388
                  
                  
                  
                  (4,952
                  )
                  
                  
                  (3,091
                  )Net income attributable to
      SandersMorris Harris Group
      Inc.
                  
                  
                  843
                  
                  
                  
                  2,704
                  
                  
                  
                  (10,468
                  )
                  
                  
                  (8,607
                  )Basic earnings (loss) per common
      share:Continuing
      operations
                  
                  $
                  0.04
                  
                  
                  $
                  0.11
                  
                  
                  $
                  (0.31
                  )
                  
                  $
                  (0.24
                  )Discontinued
      operations
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )
                  
                  
                  (0.07
                  )
                  
                  
                  (0.07
                  )Net earnings
      (loss)
                  
                  $
                  0.03
                  
                  
                  $
                  0.10
                  
                  
                  $
                  (0.38
                  )
                  
                  $
                  (0.31
                  )Diluted earnings (loss) per common
      share:Continuing
      operations
                  
                  $
                  0.04
                  
                  
                  $
                  0.11
                  
                  
                  $
                  (0.31
                  )
                  
                  $
                  (0.24
                  )Discontinued
      operations
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )
                  
                  
                  (0.07
                  )
                  
                  
                  (0.07
                  )Net earnings
      (loss)
                  
                  $
                  0.03
                  
                  
                  $
                  0.10
                  
                  
                  $
                  (0.38
                  )
                  
                  $
                  (0.31
                  )




10




3.
            ACQUISITIONS
      (Restated)





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





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





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 $3.6 billion in assets.  On May 12,
2008, the Company purchased an additional 25% membership interest in
Edelman.  The Company paid an amount determined based upon Edelman’s
2007 pretax income (the “Second Tranche Consideration”).  The Second
Tranche Consideration of $44.4 million, which was paid in a combination of cash
and the Company’s common stock, has been recorded as goodwill.





In
December 2006, Ric Edelman organized a new entity, EFA to expand the Edelman
financial platform into additional markets outside the Washington, D.C.
metropolitan area.  In exchange for a 10% membership interest in EFA,
we initially committed to loan EFA up to $20.0 million to cover its start-up
expenses of which $10.0 million was advanced and subsequently
repaid.  On April 1, 2009, the Company acquired an additional 66%
membership interest in EFA for an aggregate consideration of $25.5 million in
cash and a subordinated promissory note in the principal amount of $10.0
million.  Under the terms of the EFA acquisition agreement, the
earlier loan agreement was terminated.  The fair value of the
Company’s previously-held noncontrolling interest in EFA on April 1, 2009 was
$3.0 million.  The consideration exceeded the fair market value of
identifiable net tangible assets by $36.3 million, $24.2 million of which has
been recorded as goodwill, $22.3 million of which has been recorded as other
intangible assets, $7.2 million of which has been recorded as noncontrolling
interest, and $3.0 million of which has been recorded as a gain on step
acquisition.  All of the goodwill associated with the EFA acquisition
is expected to be deductible for tax purposes.  On August 24, 2009,
EFA was merged with and into another Edelman subsidiary, Edelman Financial
Services, LLC (“EFS”). From the acquisition date to the date of the merger with
EFS, the Company recorded $3.4 million of revenue and a pretax loss of $841,000
associated with EFA which is included in the accompanying Condensed Consolidated
Statements of Operations.




11





The EFA
acquisition was accounted for as a purchase and, accordingly, the financial
information of EFA has been included in the Company’s Condensed Consolidated
Financial Statements from April 1, 2009.  The pro forma combined
historical results as if the EFA acquisition had been included in operations
commencing January 1, 2008 are as follows:




Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008(in
      thousands, except per share amounts)Total
      revenue
                
                $
                47,860
                
                
                $
                46,678
                
                
                $
                145,671
                
                
                $
                140,165Net
      income (loss) attributable toSanders
      Morris Harris Group Inc.
                
                
                2,704
                
                
                
                27,459
                
                
                
                (9,428
                )
                
                
                28,344Earnings
      (loss) per common share:Basic
                
                $
                0.10
                
                
                $
                0.98
                
                
                $
                (0.34
                )
                
                $
                1.07Diluted
                
                $
                0.10
                
                
                $
                0.97
                
                
                $
                (0.34
                )
                
                $
                1.06


4.
            SECURITIES
      OWNED AND SECURITIES SOLD, NOT YET
PURCHASED





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




September 30,
      2009
              
              
              December 31,
      2008Sold,
      Not Yet
              
              
              
              
              
              Sold, Not
    YetOwned
              
              
              Purchased
              
              
              Owned
              
              
              Purchased(in
    thousands)Marketable:Corporate stocks and
      options
              
              $
              11,818
              
              
              $
              5,498
              
              
              $
              21,877
              
              
              $
              12,803Corporate
    bond
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              81Total
      marketable
              
              
              11,818
              
              
              
              5,498
              
              
              
              21,877
              
              
              
              12,884Not readily
      marketable:Limited
      partnerships
              
              
              26,120
              
              
              
              -
              
              
              
              29,356
              
              
              
              -Warrants
              
              
              2,661
              
              
              
              -
              
              
              
              2,316
              
              
              
              -Equities and
      options
              
              
              679
              
              
              
              -
              
              
              
              1,010
              
              
              
              -Total not readily
      marketable
              
              
              29,460
              
              
              
              -
              
              
              
              32,682
              
              
              
              -Total
              
              $
              41,278
              
              
              $
              5,498
              
              
              $
              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 FASB ASC Topic 323, Investments – Equity Method and
Joint Ventures, direct investments in limited partnerships are accounted
for using the equity method which approximates fair
value.  Proprietary investments in limited partnerships held by the
Company’s broker-dealer subsidiary are accounted for at fair value.





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





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




12




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





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





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





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





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





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





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





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





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




Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Total(in
      thousands)Securities
      owned
              
              $
              11,158
              
              
              $
              3,308
              
              
              $
              12,059
              
              
              $
              26,525Securities
      sold, not yet purchased
              
              
              5,442
              
              
              
              56
              
              
              
              -
              
              
              
              5,498
  13


The
following table sets forth a summary of changes in the fair value of the
Company’s level 3 securities owned for the three and nine months ended September
30, 2009:




Level 3 Securities
      OwnedThree Months
      Ended
              
              
              Nine
      Months EndedSeptember 30,
      2009
              
              
              September
      30, 2009(in
      thousands)Balance, beginning of
      period
              
              $
              12,582
              
              
              $
              13,423Realized
    gains
              
              
              -
              
              
              
              19Unrealized gains
      relatingto securities still held
      atthe reporting
      date
              
              
              492
              
              
              
              359Purchases, issuances,
      andsettlements
              
              
              (1,015
              )
              
              
              (1,742
              )Balance, end of
      period
              
              $
              12,059
              
              
              $
              12,059


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
                
                
                
                Nine
      Months EndedSeptember 30,
      2009
                
                
                
                September
      30, 2009Principal
                  Transactions
                
                
                
                Equity in
      Income

                    of Limited

                      Partnerships
                
                
                
                Principal

                    Transactions
                
                
                
                Equity in
      Income

                    of Limited

                      Partnerships(in
      thousands)Unrealized
      gains (losses) relatingto
      securities still held at thereporting
      date
                
                $
                136
                
                
                $
                356
                
                
                $
                (20
                )
                
                $
                379


At
September 30, 2009, the Company had $13.0 million and $1.8 million in securities
owned that are valued using the equity method, which approximates fair value,
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.  The balance of this
receivable was $70.0 million at September 30, 2009.




14




5.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS, NET
(Restated)





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




Nine Months Ended September 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
              
              
              24,167
              
              
              
              15,000
              
              
              
              4,000
              
              
              
              3,300
              
              
              
              7,300
              
              
              
              22,300Leonetti purchase price
      adjustment
              
              
              34
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Impairment
      charges
              
              
              (13,824
              )
              
              
              (1,104
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,104
              )Amortization of other intangible
      assets
              
              
              -
              
              
              
              -
              
              
              
              (417
              )
              
              
              (545
              )
              
              
              (962
              )
              
              
              (962
              )Balance, end of
      period
              
              $
              73,455
              
              
              $
              18,422
              
              
              $
              4,033
              
              
              $
              10,344
              
              
              $
              14,377
              
              
              $
              32,799


All of
the Company’s goodwill and other intangible assets, net, are related to the
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 FASB ASC Topic 350, Intangibles – Goodwill and
Other, which compared carrying value to the estimated fair value of
assets and liabilities.  Factors considered in determining fair value
include, among other things, the Company’s market capitalization as determined
by quoted market prices for its common stock and the value of the Company’s
reporting units.  The Company uses several methods to value its
reporting units, including discounted cash flows, comparisons with valuations of
public companies in the same industry, and multiples of assets under
management.





Other
intangible assets consist primarily of customer relationships and trade names
acquired in 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 on a
straight line basis over their estimated useful lives and tested for impairment
if certain circumstances indicate an impairment may exist.  Other
intangible assets are tested for impairment by comparing expected future cash
flows to the carrying amount of the intangible assets.  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.





6.
            BORROWINGS





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




15




7.
            INCOME
      TAXES (Restated)





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
              
              
              Nine Months
      EndedSeptember
    30,
              
              
              September
    30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in
    thousands)Expected federal tax at statutory
      rate of 34%
              
              $
              1,719
              
              
              $
              15,989
              
              
              $
              (3,318
              )
              
              $
              18,734State and other income
      taxes
              
              
              276
              
              
              
              1,840
              
              
              
              122
              
              
              
              2,418Total
              
              $
              1,995
              
              
              $
              17,829
              
              
              $
              (3,196
              )
              
              $
              21,152




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.





8.
            ACCOUNTING
      FOR STOCK-BASED COMPENSATION PLANS





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





The
following table sets forth pertinent information regarding stock option
transactions for the nine months ended September 30, 2009:




WeightedNumber
              
              
              Averageof Shares
              
              
              Exercise
    PriceOutstanding at January 1,
      2009
              
              
              660,307
              
              
              $
              9.56Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (42,500
              )
              
              
              4.59Outstanding at September 30,
      2009
              
              
              617,807
              
              
              
              9.90Options exercisable at September
      30, 2009
              
              
              601,141
              
              
              
              9.95Incentive award shares available
      for grant at September 30, 2009
              
              
              2,438,628




During
the nine months ended September 30, 2009 and 2008, 42,500 and 214,706 options
were exercised for which the Company received proceeds of $195,000 and $1.1
million, respectively.  The Company recognized pretax compensation
expense of $27,000 and $131,000 during the nine months ended September 30, 2009
and 2008, respectively, related to stock options.  The portion of
stock-based compensation expense related to stock options that was unrecognized
at September 30, 2009 was $12,000 and is expected to be recognized over a
weighted average period of 0.25 years.




16





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




WeightedAverageNumber of
              
              
              Grant DateShares
              
              
              Fair ValueNonvested at January 1,
      2009
              
              
              683,116
              
              
              $
              11.06Nonvested at September 30,
      2009
              
              
              623,584
              
              
              
              7.76For the nine months ended
      September 30, 2009:Granted
              
              
              314,038
              
              
              
              4.72Vested
              
              
              354,450
              
              
              
              11.41Forfeited
              
              
              19,120
              
              
              
              8.09


Employees
deferred compensation of $30,000 and $114,000 during the nine months ended
September 30, 2009 and 2008, respectively, that was used to purchase restricted
common stock.  The Company recognized pretax compensation expense of
$2.9 million and $2.0 million during the nine months ended September 30, 2009
and 2008, respectively, related to its restricted common stock
plan.  At September 30, 2009, total unrecognized compensation cost,
net of estimated forfeitures, related to nonvested restricted stock was $3.3
million and is expected to be recognized over the next 3.25 years.





9.
            TREASURY
      STOCK





On
November 6, 2007, the Company’s board of directors approved a program to
repurchase up to 1,000,000 shares of the Company’s common
stock.  Under the program, shares are repurchased in the open market
or privately negotiated transactions from time to time at prevailing market
prices.  Such repurchases are accounted for using the cost
method.  The Company repurchased 6,809 shares of its common stock at
an average price of $4.16 per share during the nine months ended September 30,
2009 related to this program.




17





10.
            EARNINGS
      (LOSS) PER COMMON SHARE (Restated)





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




Three Months Ended September
      30,
              
              
              Nine Months Ended September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in thousands, except per share
      amounts)Income (loss) from continuing
      operations, net of income taxes
              
              $
              3,059
              
              
              $
              29,198
              
              
              $
              (6,564
              )
              
              $
              33,949Loss from discontinued operations,
      net of income taxes
              
              
              (355
              )
              
              
              (238
              )
              
              
              (2,043
              )
              
              
              (904
              )Net earnings (loss) attributable
      to the Company
              
              $
              2,704
              
              
              $
              28,960
              
              
              $
              (8,607
              )
              
              $
              33,045Basic earnings (loss) per common
      share:Continuing
      operations
              
              $
              0.11
              
              
              $
              1.04
              
              
              $
              (0.24
              )
              
              $
              1.28Discontinued
      operations
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.07
              )
              
              
              (0.04
              )Net earnings
      (loss)
              
              $
              0.10
              
              
              $
              1.03
              
              
              $
              (0.31
              )
              
              $
              1.24Diluted earnings (loss) per common
      share:Continuing
      operations
              
              $
              0.11
              
              
              $
              1.04
              
              
              $
              (0.24
              )
              
              $
              1.27Discontinued
      operations
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.07
              )
              
              
              (0.04
              )Net earnings
      (loss)
              
              $
              0.10
              
              
              $
              1.03
              
              
              $
              (0.31
              )
              
              $
              1.23Weighted average number of
      commonshares
      outstanding:Basic
              
              
              27,797
              
              
              
              28,033
              
              
              
              27,689
              
              
              
              26,583Potential dilutive effect of
      stock-based awards
              
              
              700
              
              
              
              159
              
              
              
              -
              
              
              
              181Diluted
              
              
              28,497
              
              
              
              28,192
              
              
              
              27,689
              
              
              
              26,764


Outstanding
stock options of 440,000 and 310,000 for the three months ended September 30,
2009 and 2008, respectively, and 448,807 and 310,000 for the nine months ended
September 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.




11.
            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.





In
January 2009, the Company and SMH entered into a Contribution Agreement with Pan
Asia China Commerce Corp. (“PAC3”), Madison Williams Capital, LLC (formerly
Siwanoy Capital, LLC) (“Madison Williams”) and Madison Williams and Company, LLC
(“New BD”), pursuant to which (a) PAC3 agreed to subscribe for and purchase
a 40% Class A membership interest in Madison Williams 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 Madison Williams, (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 Madison Williams, cash, and a note issued by
Madison Williams to the Company. Current members of management of the Capital
Markets Business will retain the remaining 40% membership interest in Madison
Williams. The transaction is expected to close following approval by the
Financial Industry Regulatory Authority (“FINRA”) of a new member application by
the New BD, which is anticipated to be in the fourth quarter of
2009.   For the nine months ended September 30, 2009, the Capital
Markets Business revenue was $18.8 million and expenses were $21.7
million.





On
November 9, 2009, the Company, SMH, PAC3, and Madison Williams entered into an
Amended and Restated Contribution Agreement with Fletcher Asset Management, Inc.
(“Fletcher”), with respect to the formation of the New BD. Pursuant to the
Amended and Restated Contribution Agreement, (a) PAC3’s interest in Madison
Williams was reduced to a 3.1% Class A membership interest and 28.0% Class B
membership interest, (b) SMH’s interest in Madison Williams was reduced to a
17.5% Class A Membership Interest, (c) Fletcher agreed to subscribe for and
purchase a 40.5% Class A membership interest in Madison Williams in exchange for
a cash contribution, and (d) the interest of management of Madison Williams was
reduced to a 6.5% Class B membership interest.  The Class A membership
interests have a distribution preference over the Class B membership interests
until a total of $8.5 of distributions to the Class A membership interest have
been made, and no distributions may be made to any class of Class B membership
interests until the SMH note for $8 million has been repaid.




18





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
September 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.




19





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





12.
            BUSINESS
      SEGMENT INFORMATION (Restated)





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





The
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 division or the 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.




20





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




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in
      thousands)Revenue:Wealth
      Management
              
              $
              26,359
              
              
              $
              26,328
              
              
              $
              72,098
              
              
              $
              80,137Capital
      Markets:Investment
      banking
              
              
              2,087
              
              
              
              3,373
              
              
              
              6,090
              
              
              
              8,771Institutional
      brokerage
              
              
              5,602
              
              
              
              5,039
              
              
              
              16,674
              
              
              
              13,777Prime
      brokerage services
              
              
              12,566
              
              
              
              14,116
              
              
              
              46,929
              
              
              
              35,300Capital
      Markets Total
              
              
              20,255
              
              
              
              22,528
              
              
              
              69,693
              
              
              
              57,848Corporate
      Support and Other
              
              
              1,246
              
              
              
              (2,842
              )
              
              
              2,343
              
              
              
              828Total
              
              $
              47,860
              
              
              $
              46,014
              
              
              $
              144,134
              
              
              $
              138,813Income
      (loss) from continuing operations before equity in income
      (loss)of
      limited partnerships and income taxes:Wealth
      Management
              
              $
              7,069
              
              
              $
              9,872
              
              
              $
              18,669
              
              
              $
              28,744Capital
      Markets:Investment
      banking
              
              
              (1,165
              )
              
              
              (1,033
              )
              
              
              (3,706
              )
              
              
              (3,663
              )Institutional
      brokerage
              
              
              1,002
              
              
              
              828
              
              
              
              2,200
              
              
              
              1,201Prime
      brokerage services
              
              
              (416
              )
              
              
              1,303
              
              
              
              361
              
              
              
              2,750Capital
      Markets Total
              
              
              (579
              )
              
              
              1,098
              
              
              
              (1,145
              )
              
              
              288Corporate
      Support and Other
              
              
              (4,879
              )
              
              
              (8,170
              )
              
              
              (29,571
              )
              
              
              (13,476
              )Total
              
              $
              1,611
              
              
              $
              2,800
              
              
              $
              (12,047
              )
              
              $
              15,556Equity
      in income (loss) of limited partnerships:Wealth
      Management
              
              $
              356
              
              
              $
              46,820
              
              
              $
              (799
              )
              
              $
              52,197Capital
      Markets:Investment
      banking
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Institutional
      brokerage
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Prime
      brokerage services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Capital
      Markets Total
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Corporate
      Support and Other
              
              
              1,416
              
              
              
              (3,535
              )
              
              
              3,559
              
              
              
              (5,641
              )Total
              
              $
              1,772
              
              
              $
              43,285
              
              
              $
              2,760
              
              
              $
              46,556Gain
      on step acquisition:Wealth
      Management
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Capital
      Markets:Investment
      banking
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Institutional
      brokerage
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Prime
      brokerage services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Capital
      Markets Total
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Corporate
      Support and Other
              
              
              3,000
              
              
              
              -
              
              
              
              3,000
              
              
              
              -Total
              
              $
              3,000
              
              
              $
              -
              
              
              $
              3,000
              
              
              $
              -Income
      (loss) from continuing operations before income taxes:Wealth
      Management
              
              $
              7,425
              
              
              $
              56,692
              
              
              $
              17,870
              
              
              $
              80,941Capital
      Markets:Investment
      banking
              
              
              (1,165
              )
              
              
              (1,033
              )
              
              
              (3,706
              )
              
              
              (3,663
              )Institutional
      brokerage
              
              
              1,002
              
              
              
              828
              
              
              
              2,200
              
              
              
              1,201Prime
      brokerage services
              
              
              (416
              )
              
              
              1,303
              
              
              
              361
              
              
              
              2,750Capital
      Markets Total
              
              
              (579
              )
              
              
              1,098
              
              
              
              (1,145
              )
              
              
              288Corporate
      Support and Other
              
              
              (463
              )
              
              
              (11,705
              )
              
              
              (23,012
              )
              
              
              (19,117
              )Total
              
              $
              6,383
              
              
              $
              46,085
              
              
              $
              (6,287
              )
              
              $
              62,112Net
      (income) loss attributable to the noncontrolling interest:Wealth
      Management
              
              $
              (1,329
              )
              
              $
              942
              
              
              $
              (3,473
              )
              
              $
              (7,011
              )Capital
      Markets:Investment
      banking
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Institutional
      brokerage
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Prime
      brokerage services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Capital
      Markets Total
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Corporate
      Support and Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              (1,329
              )
              
              $
              942
              
              
              $
              (3,473
              )
              
              $
              (7,011
              )
 
 21


13.
            SUPPLEMENTAL
      CASH FLOW INFORMATION




Nine Months Ended September
    30,2009
              
              
              2008(in
    thousands)Cash payment (refund) for income
      taxes, net
              
              $
              (2,407
              )
              
              $
              2,056Cash paid for
      interest
              
              
              903
              
              
              
              9Noncash investing
      activities:Acquisitions:Receivables
              
              
              -
              
              
              
              10Goodwill and
      other intangible assets, net
              
              
              10,000
              
              
              
              24,136Accounts payable
      and accrued liabilities
              
              
              -
              
              
              
              (290
              )Subordinated
      promissory note
              
              
              (10,000
              )
              
              
              -Noncontrolling
      interest
              
              
              -
              
              
              
              77Common
      stock
              
              
              -
              
              
              
              (23,933
              )Sale of not readily marketable
      securities:Receivables
              
              
              -
              
              
              
              74,732Sale of limited
      partnerships
              
              
              -
              
              
              
              (70,666
              )Accounts payable
      and accrued liabilities
              
              
              -
              
              
              
              (4,066
              )Noncash financing
      activities:Dividends
      declared not yet paid
              
              
              1,281
              
              
              
              1,265


14.
            RELATED
      PARTIES





The
Company had receivables from related parties totaling $11.6 million at September
30, 2009, primarily consisting of $4.8 million of advances to unconsolidated
related entities to fund operating expenses, $4.2 million of notes receivable
from employees and consultants representing loans made to induce the employees
and consultants to affiliate with the Company, and $1.8 million of management
fees receivable from the limited partnerships that the Company
manages.




15.
            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 nine months ended September 30, 2009 and 2008.




Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in
      thousands)Operating
      activities:Revenue
              
              $
              7
              
              
              $
              947
              
              
              $
              303
              
              
              $
              2,873Expenses
              
              
              600
              
              
              
              1,279
              
              
              
              3,708
              
              
              
              4,340Loss from discontinued
      operationsbefore income
      taxes
              
              
              (593
              )
              
              
              (332
              )
              
              
              (3,405
              )
              
              
              (1,467
              )Benefit for income
      taxes
              
              
              238
              
              
              
              94
              
              
              
              1,362
              
              
              
              563Loss from discontinued
      operations
              
              $
              (355
              )
              
              $
              (238
              )
              
              $
              (2,043
              )
              
              $
              (904
              )
  22


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




September
    30,
              
              December
31,2009
              
              2008(in
    thousands)Furniture, equipment, and
      leasehold improvements, net
              
              $
              193
              
              
              $
              420Total assets of discontinued
      operations
              
              $
              193
              
              
              $
              420Total liabilities of discontinued
      operations
              
              $
              -
              
              
              $
              -




16.
            SUBSEQUENT
      EVENTS





The
Company evaluated its September 30, 2009 condensed consolidated financial
statements for subsequent events through November 9, 2009, the date the
financial statements were issued.  As described in Note 2 – Restatement, the Company
amended its condensed consolidated financial statements as of and for the three
and nine months ended September 30, 2009 in order to correct an error discovered
subsequent to their original issuance.  In connection with the
reissuance of these financial statements, the Company has considered whether
there are other subsequent events that have occurred since November 9, 2009 and
through February 18, 2010 (the date of reissuance) that require recognition or
disclosure in the condensed consolidated financial statements and believes that
there are no such events.




23




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/A 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 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 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
Bankingincludes 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.




24




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 declined during the last half of 2008 and into the first quarter
of 2009.  However, during the second quarter of 2009, the market began
to improve and client assets have recovered resulting in, among other things,
higher fee and commission revenue.  Client assets 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
              
              
              9,534September 30,
      2009
              
              
              10,595(1)Client
      assets include the gross value of assetsunder
      management directly or via outside managersand
      assets held in brokerage accounts for clients byoutside
      clearing firms.


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





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





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





§
            closing offices that have been
      unprofitable;





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





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





Components of Revenue and
Expenses





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





Expenses.Our expenses consist of (1)
compensation and benefits, (2) floor brokerage, exchange, and clearance fees,
and (3) other expenses. Compensation and benefits have both a variable
component, based on revenue production, and a fixed component. The variable
component includes institutional and retail sales commissions, bonuses,
overrides, and other incentives. Wealth advisory and institutional commissions
are based on competitive commission schedules. Employees of the investment
banking group and the research group receive a salary and discretionary bonuses
as compensation. The fixed component includes administrative and executive
salaries, payroll taxes, employee benefits, and temporary employee costs.
Compensation and benefits is our largest expense item and includes wages,
salaries, and benefits. During the third quarter of 2009, compensation and
benefits represented 62.7% of total expenses and 60.6% of total revenue,
compared to 67.3% of total expenses and 63.2% of total revenue during the third
quarter of 2008.  During the first nine months of 2009, compensation
and benefits represented 60.1% of total expenses and 65.1% of total revenue,
compared to 65.3% of total expenses and 58.0% of total revenue for the same
period in 2008.  For the three months ended September 30, 2009, the
decrease in compensation and benefits as a percentage of total revenue is
principally due to a decrease in revenue in our prime brokerage services
division which has a higher payout than our other business lines.  For
the nine months ended September 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. For the nine months ended
September 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.




25





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 September30, 2009 Compared to Three Months Ended September 30,
2008





Total
revenue was $47.9 million for the third quarter of 2009 compared to $46.0
million for the same quarter in 2008, an increase of $1.9 million, or 4.0%,
reflecting increases of $1.7 million in principal transactions revenue and
$914,000 in interest revenue partially offset by declines of $221,000 in revenue
from investment advisory and related services and $613,000 in investment banking
revenue.  Total expenses for the third quarter of 2009 increased $3.0
million, or 7.0%, to $46.2 million from $43.2 million in the same quarter of the
previous year reflecting increased communications and data processing costs,
interest expense, and other general and administrative
expenses.  Equity in income of limited partnerships decreased to $1.8
million for the third quarter of 2009 compared to $43.3 million for the third
quarter of 2008, reflecting the sale of our interests in Salient Partners, L.P.
and Endowment Advisers, L.P. in the third quarter of 2008.  The
Company recognized a $3.0 million gain on step acquisition during the quarter
ended September 30, 2009 related to the Company’s previously-held noncontrolling
interest in Edelman Financial Advisors, LLC (“EFA”).  Income from
continuing operations, net of income taxes, was $3.1 million, or $0.11 per
diluted common share, for the third quarter of 2009 compared to $29.2 million,
or $1.04 per diluted common share, for the third quarter of 2008.





Revenue
from investment advisory and related services decreased to $19.4 million in the
third quarter of 2009 from $19.6 million in the same quarter of 2008 as a result
of a decrease in client assets.  Commission revenue decreased to $13.1
million in the third quarter of 2009 from $13.2 million for the same period in
2008 as a result of a decrease in trading volume in the Wealth Management
segment.  Investment banking revenue decreased to $3.4 million during
the third quarter of 2009 from $4.0 million in the same period of 2008 due to a
decrease of $1.6 million in advisory fees earned partially offset by an increase
in management income.  Principal transactions revenue increased from
$5.2 million for the third quarter of 2008 to $6.8 million for the third quarter
of 2009 as the result of an increase of $1.7 million in the sale of fixed income
products.  Interest and dividend income increased to $2.5 million in
the third quarter of 2009 from $1.6 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 increased from $2.4 million during the third
quarter of 2008 to $2.6 million during the same period in 2009 reflecting an
increase of $476,000 in hedge fund servicing revenue and third-party marketing
fees partially offset by a decrease of $170,000 in insurance
commissions.




26





During
the three months ended September 30, 2009, employee compensation and benefits
decreased to $29.0 million from $29.1 million in the same period last
year.  During the three months ended September 30, 2009, floor
brokerage, exchange, and clearance fees decreased to $1.5 million from $1.6
million in the same period last year due to a decrease in clearance fees in the
institutional brokerage division.  Communications and data processing
costs increased to $3.0 million in the third quarter of 2009 compared to $2.5
million in the same period last year due to higher clearing firm service fees
resulting from the increase in trading volume.  Occupancy costs
increased to $3.8 million in the third quarter of 2009 compared to $3.4 million
in the third quarter of 2008 due to the acquisition of an additional 66%
membership interest in EFA on April 1, 2009 and the expansion of the prime
brokerage division with the hiring of the principals of The Washington Research
Group in the first quarter of 2009.  Interest expense increased to
$1.3 million for the third quarter of 2009 compared to $400,000 in the third
quarter of 2008 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 increased to $7.1 million during the third
quarter of 2009 from $6.1 million in the third quarter of last year due to an
increase of $1.1 million in advertising expense at Edelman.





Our
effective tax rate was 39.4% for the three months ended September 30, 2009
compared to 38.0% for the three months ended September 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 $355,000 and $238,000 for the three months ended September 30, 2009
and 2008, respectively.





Results
by Segment





Wealth
Management




Three
      Months Ended September 30,2009
              
              
              2008(in
      thousands)Revenue
              
              $
              26,359
              
              
              $
              26,328Income from continuing operations
      before income taxes
              
              $
              7,425
              
              
              $
              56,692


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 commissions revenue from the third 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 wealth management increased to $26.4 million
from $26.3 million and income from continuing operations before income taxes
decreased to $7.4 million from $56.7 million.  Commission revenue
decreased to $2.9 million from $3.8 million reflecting a decline in shares
traded by the firm’s retail clients due to the uncertainty in the financial
markets.  Interest income increased to $2.0 million from $712,000 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. on
August 29, 2008.  Total expenses increased to $19.3 million from $16.5
million due to higher employee compensation and occupancy costs associated with
the EFA acquisition.  Equity in income of limited partnerships
decreased to $356,000 from $46.8 million. The decrease in equity in income of
limited partnerships is attributable to the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P. in 2008.




27





Capital
Markets





InvestmentBanking




Three Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              2,087
              
              
              $
              3,373Loss from continuing operations
      before income taxes
              
              $
              (1,165
              )
              
              $
              (1,033
              )


Revenue
from investment banking decreased to $2.1 million from $3.4 million and loss
from continuing operations before income taxes increased to a loss of $1.2
million from a loss of $1.0 million.  The revenue decline is due to a
decrease of $1.6 million in advisory fees.  Total expenses decreased
to $3.3 million from $4.4 million due to a decrease of $812,000 in employee
compensation.





Institutional
Brokerage




Three Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              5,602
              
              
              $
              5,039Income from continuing operations
      before income taxes
              
              $
              1,002
              
              
              $
              828


Revenue
from institutional brokerage increased to $5.6 million from $5.0 million and
income from continuing operations before income taxes increased to $1.0 million
from $828,000.  Principal transaction revenue increased to $1.9
million from $1.3 million reflecting an increase of $1.1 million in revenue from
the sale of fixed income products.  Total expenses increased to $4.6
million from $4.2 million due to increased employee compensation related to the
higher revenue.





Prime Brokerage
Services




Three Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              12,566
              
              
              $
              14,116Income
      (loss) from continuing operationsbefore income
      taxes
              
              $
              (416
              )
              
              $
              1,303
  28


Revenue
from prime brokerage services decreased to $12.6 million from $14.1 million and
income (loss) from continuing operations before income taxes decreased to a loss
of $416,000 from income of $1.3 million.  Principal transactions
revenue decreased to $3.9 million from $7.0 million reflecting a decrease of
$2.9 million in proprietary trading revenue offset by an increase in revenue
earned from the sale of fixed income products.  Total expenses
increased to $13.0 million from $12.8 million due to a $237,000 increase in
occupancy costs.





Corporate
Support and Other




Three Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              1,246
              
              
              $
              (2,842
              )Loss from continuing operations
      before income taxes
              
              $
              (463
              )
              
              $
              (11,705
              )


Revenue
from corporate support and other increased to $1.2 million from $(2.8) million
and the loss from continuing operations before income taxes decreased to
$463,000 from $11.7 million.  Revenue from principal transactions,
which consists of changes in the values of our investment portfolios, increased
to $696,000 from a loss of $3.5 million.  Total expenses increased to
$6.1 million from $5.3 million due to interest costs associated with the
Company’s credit facility that was initially funded in the second quarter of
2009.  The Company recognized a $3.0 million gain on step acquisition
during the quarter ended September 30, 2009 related to the Company’s
previously-held noncontrolling interest in EFA.





Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008





Total
revenue was $144.1 million for the nine months ended September 30, 2009 compared
to $138.8 million for the same period in 2008, an increase of $5.3 million, or
3.8%, 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 nine months ended
September 30, 2009 increased $32.9 million, or 26.7%, to $156.2 million from
$123.3 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 $2.8
million for the nine months ended September 30, 2009 compared to $46.6 million
for the same period in 2008, reflecting the sale of our interests in Salient
Partners, L.P. and Endowment Advisers, L.P. in the third quarter of
2008.  The Company recognized a $3.0 million gain on step acquisition
during the quarter ended September 30, 2009 related to the Company’s
previously-held noncontrolling interest in EFA. Income (loss) from continuing
operations, net of income taxes, was $(6.6) million, or $(0.24) per diluted
common share, for the nine months ended September 30, 2009 compared to $33.9
million, or $1.27 per diluted common share, for the same period in
2008.





Revenue
from investment advisory and related services decreased to $50.9 million for the
nine months ended September 30, 2009 from $58.7 million in the same period in
2008 as a result of a decrease in client assets.  Commission revenue
decreased to $37.2 million for the nine months ended September 30, 2009 from
$40.5 million for the same period in 2008 as a result of a decrease in trading
volume in the Wealth Management segment.  Investment banking revenue
decreased to $9.4 million for the nine months ended September 30, 2009 from
$10.5 million in the same period in 2008 due to a decrease of $3.1 million in
advisory fees earned partially offset by an increase in sales credits received
in investment banking transactions.  Principal transactions revenue
increased from $16.0 million for the nine months ended September 30, 2008 to
$31.6 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 $7.9 million for the nine months ended September 30, 2009 from $3.7 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 $9.3 million
for the nine months ended September 30, 2008 to $7.1 million during the same
period in 2009 reflecting a decrease of $1.7 million in hedge fund servicing
revenue and third-party marketing fees.




29





During
the nine months ended September 30, 2009, employee compensation and benefits
increased to $93.8 million from $80.5 million in the same period last year due
to the revenue growth in the prime brokerage services
division.  During the nine months ended September 30, 2009, floor
brokerage, exchange, and clearance fees increased to $4.9 million from $4.3
million in the same period last year due to an increase of $677,000 in clearance
fees in the prime brokerage services division.  Communications and
data processing costs increased to $8.6 million for the nine months ended
September 30, 2009 from $8.2 million in the same period last year, primarily due
to higher trading system fees.  Occupancy costs were $10.7 million for
the nine months ended September 30, 2009 compared to $9.2 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 nine months of 2008.  Interest expense was $2.1 million for
the nine months ended September 30, 2009 due to (i) $888,000 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) $457,000
of interest related to the credit facility funded in 2009, and (iii) $666,000 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 nine months
ended September 30, 2009.  No such charge was recognized in the same
period in 2008.  Other general and administrative expenses increased
to $20.2 million for the nine months ended September 30, 2009 from $20.0 million
in the same period last year due to an increase of $1.6 million in advertising
expense at Edelman partially offset by decreases in outside sales commissions
and the provision for uncollectible accounts.





Our
effective tax rate was 34.6% for the nine months ended September 30, 2009
compared to 38.4% for the nine months ended September 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 $2.0 million and $904,000 for the nine months ended September 30,
2009 and 2008, respectively.





Results
by Segment





Wealth
Management




Nine Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              72,098
              
              
              $
              80,137Income from continuing operations
      before income taxes
              
              $
              17,870
              
              
              $
              80,941


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 nine months ended September
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 wealth management decreased to $72.1 million
from $80.1 million and income from continuing operations before income taxes
decreased to $17.9 million from $80.9 million.  Investment advisory
and related services revenue decreased to $50.8 million from $58.6 million as a
result of a decrease in assets under management or
advisement.  Commission revenue decreased to $8.5 million from $13.7
million reflecting a decline in shares traded by the firm’s retail clients due
to the uncertainty in the financial markets.  Interest income
increased to $6.2 million from $945,000 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. on August 29, 2008.  Total
expenses increased to $53.4 million from $51.4 million due to increases of $1.2
million in occupancy expense and $1.5 million in advertising expense offset by a
decrease of $633,000 in outside sales commissions.  Equity in income
(loss) of limited partnerships decreased to a loss of $799,000 from income of
$52.2 million. The decrease in equity in income (loss) of limited partnerships
is attributable to the sale of our interests in Salient Partners, L.P. and
Endowment Advisers, L.P. in 2008.




30





Capital
Markets





InvestmentBanking





Nine Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              6,090
              
              
              $
              8,771Loss from continuing operations
      before income taxes
              
              $
              (3,706
              )
              
              $
              (3,663
              )




Revenue
from investment banking decreased to $6.1 million from $8.8 million and loss
from continuing operations before income taxes remained constant at $3.7
million.  The revenue decrease is due to a decrease of $3.2 million in
advisory fees.  Total expenses decreased to $9.8 million from $12.4
million due to decreases of $1.9 million in employee compensation and $551,000
in the provision for uncollectible accounts.





Institutional
Brokerage





Nine Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              16,674
              
              
              $
              13,777Income from continuing operations
      before income taxes
              
              $
              2,200
              
              
              $
              1,201




Revenue
from institutional brokerage increased to $16.7 million from $13.8 million and
income from continuing operations before income taxes increased to $2.2 million
from $1.2 million.  Principal transaction revenue increased to $6.7
million from $2.8 million reflecting an increase of $4.0 million in revenue from
the sale of fixed income products.  Total expenses increased to $14.5
million from $12.6 million due to an increase of $3.3 million in employee
compensation related to the higher revenue offset by a decrease of $1.6 million
in corporate overhead allocation.




31




Prime Brokerage
Services





Nine Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              46,929
              
              
              $
              35,300Income from continuing operations
      before income taxes
              
              $
              361
              
              
              $
              2,750




Revenue
from prime brokerage services increased to $46.9 million from $35.3 million and
income from continuing operations before income taxes decreased to $361,000 from
$2.8 million.  Principal transactions revenue increased to $23.2
million from $13.0 million reflecting a $13.4 million increase in revenue earned
from the sale of fixed income products offset by a $1.9 million decrease in
proprietary trading revenue.  Total expenses increased to $46.6
million from $32.5 million reflecting a $12.7 million increase in compensation
and an increase of $677,000 in clearing costs related to the increased
revenue.





Corporate
Support and Other





Nine Months Ended September
      30,2009
              
              
              2008(in
    thousands)Revenue
              
              $
              2,343
              
              
              $
              828Loss from continuing operations
      before income taxes
              
              $
              (23,012
              )
              
              $
              (19,117
              )




Revenue
from corporate support and other increased to $2.3 million from $828,000 and the
loss from continuing operations before income taxes increased to $23.0 million
from $19.1 million.  Revenue from principal transactions, which
consists principally of changes in the values of our investment portfolios,
increased to a gain of $393,000 from a loss of $1.2 million.  Total
expenses increased to $31.9 million from $14.3 million due to $14.9 million of
goodwill and other intangible assets impairment charges recognized in
2009.  Also, compensation and interest costs of $1.6 million
associated with the acquisition of EFA and interest costs of $457,000 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 September 30, 2009, we had $24.9 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 12.6% of our total assets at the end of the third
quarter.





Receivables
turnover, calculated as annualized revenue divided by average receivables, was
two for the nine months ended September 30, 2009 compared to three 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 September 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.




32





For the
nine months ended September 30, 2009, net cash provided by operations was $1.1
million versus $20.7 million during the same period in
2008.  Marketable securities owned decreased by $9.2 million during
the first nine months of 2009, securities sold, not yet purchased decreased by
$7.4 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.





Not
readily marketable securities owned, primarily investments in limited
partnerships, were $29.5 million at September 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 nine months of 2009 were $1.6 million, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for our growth.





SMH is
subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC
rule 15c3-1), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1 (and the rule of the “applicable” exchange also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed 10 to 1).  At September 30, 2009, SMH had
net capital, as defined, of $4.2 million, which was $3.3 million in excess of
its required net capital of $917,000.





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





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
FASB ASC Topic 350, Intangibles – Goodwill and
Other.  ASC Topic 350 requires that goodwill be tested for
impairment between annual test dates if an event or changing circumstances
indicate that it is more likely than not that the fair value of the reporting
unit is below its carrying amount.  The goodwill impairment test is a
two-step test.  Under the first step, the fair value of the reporting
unit is compared with its carrying value (including goodwill and other
intangible assets).  If the fair value of the reporting unit is less
than its carrying value, an indication of goodwill impairment exists for the
reporting unit and the enterprise must perform step two of the impairment test
(measurement).  Under step two, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill.  The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB ASC Topic
805, Business
Combinations.  The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill.




33





Factors
considered in determining fair 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 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 this analysis ranged from 11%
to 20%.  The Company also calculates estimated fair values of the
reporting units utilizing multiples of earnings, book value, and, when
applicable, assets under management of the reporting unit.  The
estimated fair value using these techniques is compared with the carrying value
of the reporting unit to determine if there is an indication of
impairment.





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





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.





With the
Company’s common stock price at extraordinary lows, management analyzed the
estimated fair values of the reporting units in relation to our market
capitalization.  The sum of the estimated fair values of the Company’s
reporting units was greater than the market value of the Company’s common
stock.  Based upon an analysis of historical acquisitions of financial
services companies similar to ours, we believe the excess of approximately 40%
represents a reasonable control premium in a hypothetical acquisition of the
Company.





Remaining
amounts of goodwill at September 30, 2009 were as follows:  Edelman -
$67.2 million, Kissinger - $2.4 million, Dickenson - $2.1 million, SMH Colorado
- $1.5 million, and Leonetti - $225,000.  Future goodwill impairment
tests may result in a future charge to earnings.




34





Item 4.Controls and
Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the SEC under the Exchange Act, as amended, is recorded, processed,
summarized, and reported within the time periods specified by the Commission’s
rules and forms, and that information is accumulated and communicated to our
management, including the Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial and accounting officer) as
appropriate to allow timely decisions regarding required
disclosure.  As of September 30, 2009, our management evaluated, with
the participation of the Chief Executive Officer and Chief Financial Officer,
the effectiveness of the Company’s disclosure controls and procedures pursuant
to Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  In the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2009, as filed on November 9, 2009, the Company’s management concluded, based on
that evaluation, that the Company’s disclosure controls and procedures as of
September 30, 2009 were effective and management reported that there was no
change in the Company’s internal controls over financial reporting that occurred
during the quarter ended September 30, 2009 that materially affected, or were
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.





In
conjunction with the restatement described in Note 2 to our condensed
consolidated financial statements contained elsewhere in this document, a
re-evaluation was performed of the effectiveness of the Company’s disclosure
controls and procedures as of September 30, 2009.  Based upon this
re-evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were not
effective as of September 30, 2009, due to a material weakness in our internal
control over financial reporting.  Specifically, the Company’s
technical review of nonrecurring transactions did not occur on a timely
basis.  This matter was addressed by management in the fourth quarter
of 2009 and the relevant controls redesigned to address the weakness noted by
strengthening the review and interpretive capabilities of the Company’s
financial reporting process by engaging a technical consultant to perform
specific review and advisory procedures as needed.




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 Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2001 (File No. 000-30066), and incorporated herein by
      reference).†10.03
            
            Form
      of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
      10.03 to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.04
            
            Form
      of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed as
      Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.05
            
            Employment
      Agreement dated as of May 10, 2005, between The Edelman Financial Center,
      LLC and Fredric M. Edelman.  (Filed as Exhibit 10.05 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).10.06
            
            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 10.06 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007 (File No. 000-30066), and incorporated herein by
      reference).




36




ExhibitNumber
            Description10.08
            
            Credit
      Agreement dated as of May 11, 2009, between Sanders Morris Harris Group
      Inc. and Prosperity Bank.  (Filed as Exhibit 10.08 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).10.09
            
            First
      Amendment to Credit Agreement dated as of June 23, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.09 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.10
            
            Second
      Amendment to Credit Agreement dated as of July 15, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.11
            
            Third
      Amendment to Credit Agreement dated as of September 15, 2009, between
      Sanders Morris Harris Group Inc. and Prosperity Bank.10.12
            
            Fourth
      Amendment to Credit Agreement dated as of September 30, 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:   
February 18, 2010




38