SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**




**(mark
      one)**




x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **FOR THE QUARTERLY PERIOD
                ENDED JUNE
                30, 2005, OR**




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




Commission
      file No. **** 0-30066







**SANDERS
      MORRIS HARRIS GROUP INC.**


(Exact
      name of registrant as specified in its charter)





**Texas**
            **76-0583569**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





**600
      Travis, Suite 3100**


**Houston,
      Texas 77002**


(Address
      of principal executive office)





**(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.  YES  x NO
o





Indicate
      by check mark whether registrant is an accelerated filer (as defined in Rule
      12b-2 of the Exchange Act). YES x NO
o




The
      number of shares of the registrant’s Common Stock, par value $0.01 per share,
      outstanding as of August 1, 2005, was 18,845,852.








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





**INDEX**





**PART
      I.**  **FINANCIAL
      INFORMATION**





PageItem 1.
            Financial
                Statements
            2Condensed
                Consolidated Balance Sheet as of June 30, 2005 (unaudited) and December
                31, 2004
            2Condensed
                Consolidated Statement of Income for the Three and Six Months Ended
                June
                30, 2005 and 2004 (unaudited)
            3Condensed
                Consolidated Statement of Shareholders' Equity for the Six Months
                Ended
                June 30, 2005 (unaudited)
            4Condensed
                Consolidated Statement of Cash Flows for the Six Months Ended June
                30,
                2005 and 2004 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6Item 2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item 3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            25Item 4.
            Controls
                and Procedures
            27**PART
              II. OTHER INFORMATION**Item 1.
            Legal
                Proceedings
            28Item 2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            28Item 4.
            Submission
                of Matters to a Vote of Security Holders
            28Item 6.
            Exhibits
            29














**PART
                    I. FINANCIAL INFORMATION****Item
                    1.*****Financial
                    Statements*****SANDERS
                    MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                    CONSOLIDATED BALANCE SHEET**(in
                    thousands, except shares)
  **June
                      30,**
                  
                  **December
                      31,****2005**
                  
                  **2004**(unaudited)**ASSETS**Cash
                      and cash equivalents
                  
                  $
                  14,284
                  
                  $
                  21,678Receivables,
                      net of allowance of $476Broker-dealers
                  
                  
                  508
                  
                  
                  412Customers
                  
                  
                  7,757
                  
                  
                  6,662Related
                      parties
                  
                  
                  3,956
                  
                  
                  5,986Other
                  
                  
                  6,647
                  
                  
                  4,834Deposits
                      with clearing brokers
                  
                  
                  2,291
                  
                  
                  1,068Securities
                      owned
                  
                  
                  52,672
                  
                  
                  56,851Securities
                      available for sale
                  
                  
                  3,896
                  
                  
                  3,078Furniture
                      and equipment, net
                  
                  
                  8,428
                  
                  
                  7,643Other
                      assets
                  
                  
                  2,082
                  
                  
                  1,915Goodwill,
                      net
                  
                  
                  84,407
                  
                  
                  61,722Total
                      assets
                  
                  $
                  186,928
                  
                  $
                  171,849**LIABILITIES
                      AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                      payable and accrued liabilities
                  
                  $
                  14,626
                  
                  $
                  19,882Short
                      term borrowings
                  
                  
                  10,500
                  
                  
                  --Deferred
                      tax liability, net
                  
                  
                  447
                  
                  
                  1,526Securities
                      sold, not yet purchased
                  
                  
                  2,967
                  
                  
                  6,349Payable
                      to clearing brokers
                  
                  
                  1,356
                  
                  
                  10Other
                      liabilities
                  
                  
                  34
                  
                  
                  68Total
                      liabilities
                  
                  
                  29,930
                  
                  
                  27,835Commitments
                      and contingenciesMinority
                      interests
                  
                  
                  6,114
                  
                  
                  5,230Shareholders'
                      equity:Preferred
                      stock, $0.10 par value; 10,000,000 shares authorized;no
                      shares issued and outstanding
                  
                  
                  --
                  
                  
                  --Common
                      stock, $0.01 par value; 100,000,000 shares authorized;19,572,629
                      and 18,547,978 shares issued, respectively
                  
                  
                  196
                  
                  
                  185Common
                      stock committed, 440,000 shares
                  
                  
                  --
                  
                  
                  7,819Additional
                      paid-in capital
                  
                  
                  138,786
                  
                  
                  120,988Receivables
                      for shares issued
                  
                  
                  (1,132
                  )
                  
                  (1,494
                  )Retained
                      earnings
                  
                  
                  19,015
                  
                  
                  16,452Accumulated
                      other comprehensive loss
                  
                  
                  (24
                  )
                  
                  (50
                  )Unearned
                      compensation
                  
                  
                  (2,476
                  )
                  
                  (1,635
                  )Treasury
                      stock at cost, 739,402 shares
                  
                  
                  (3,481
                  )
                  
                  (3,481
                  )Total
                      shareholders' equity
                  
                  
                  150,884
                  
                  
                  138,784Total
                      liabilities and shareholders' equity
                  
                  $
                  186,928
                  
                  $
                  171,849
  The
                      accompanying notes are an integral part of these condensed
                      consolidated
                      financial
                      statements.


-2-


**SANDERS
                    MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                    CONSOLIDATED STATEMENT OF INCOME**(in
                    thousands, except share and per share amounts)(unaudited)
  **Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004**Revenues:Commissions
                
                $
                10,085
                
                $
                12,135
                
                $
                21,436
                
                $
                26,045Principal
                    transactions
                
                
                2,221
                
                
                1,989
                
                
                4,071
                
                
                3,442Investment
                    banking
                
                
                8,088
                
                
                7,825
                
                
                14,181
                
                
                17,361Fiduciary,
                    custodial and advisory fees
                
                
                8,094
                
                
                5,210
                
                
                13,107
                
                
                8,730Interest
                    and dividends
                
                
                1,138
                
                
                979
                
                
                2,320
                
                
                1,845Other
                    income
                
                
                873
                
                
                517
                
                
                1,724
                
                
                1,039Total
                    revenues
                
                
                30,499
                
                
                28,655
                
                
                56,839
                
                
                58,462Expenses:Employee
                    compensation and benefits
                
                
                17,719
                
                
                17,118
                
                
                34,210
                
                
                34,975Floor
                    brokerage, exchange and clearance fees
                
                
                1,124
                
                
                1,310
                
                
                2,192
                
                
                2,526Communications
                    and data processing
                
                
                2,230
                
                
                1,926
                
                
                3,996
                
                
                3,462Occupancy
                
                
                1,939
                
                
                1,695
                
                
                4,011
                
                
                3,403Other
                    general and administrative
                
                
                3,593
                
                
                2,809
                
                
                6,347
                
                
                5,254Total
                    expenses
                
                
                26,605
                
                
                24,858
                
                
                50,756
                
                
                49,620Income
                    before equity in income oflimited
                    partnerships, minority interests,and
                    income taxes
                
                
                3,894
                
                
                3,797
                
                
                6,083
                
                
                8,842Equity
                    in income of limited partnerships
                
                
                706
                
                
                2,025
                
                
                2,402
                
                
                2,830Income
                    before minority interests and income taxes
                
                
                4,600
                
                
                5,822
                
                
                8,485
                
                
                11,672Minority
                    interests in net income of consolidatedcompanies
                
                
                (828
                )
                
                (933
                )
                
                (1,625
                )
                
                (1,385
                )Income
                    before income taxes
                
                
                3,772
                
                
                4,889
                
                
                6,860
                
                
                10,287Provision
                    for income taxes
                
                
                1,546
                
                
                1,942
                
                
                2,802
                
                
                4,070Net
                    income
                
                $
                2,226
                
                $
                2,947
                
                $
                4,058
                
                $
                6,217Earnings
                    per share:Basic
                
                $
                0.12
                
                $
                0.17
                
                $
                0.22
                
                $
                0.36Diluted
                
                $
                0.12
                
                $
                0.16
                
                $
                0.21
                
                $
                0.34Weighted
                    average common shares outstanding:Basic
                
                
                18,605,636
                
                
                17,592,623
                
                
                18,455,976
                
                
                17,493,334Diluted
                
                
                19,209,037
                
                
                18,186,799
                
                
                19,086,352
                
                
                18,088,780The
                    accompanying notes are an integral part of these condensed consolidated
                    financial
                    statements.




-3-


**SANDERS
                    MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                    CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY****For
                    the six months ended June 30, 2005**(in
                    thousands, except share and per share amounts)(unaudited)
  Amounts
                  
                  
                  
                  Shares**Common
                      stock**Balance,
                      beginning of period
                  
                  $
                  185
                  
                  
                  
                  
                  
                  18,547,978Stock
                      issued pursuant to commitment
                  
                  
                  5
                  
                  
                  
                  
                  
                  440,000Stock
                      issued pursuant to employee benefit plan
                  
                  
                  2
                  
                  
                  
                  
                  
                  222,546Stock
                      issued for acquisitions
                  
                  
                  4
                  
                  
                  
                  
                  
                  362,105Balance,
                      end of period
                  
                  
                  196
                  
                  
                  
                  
                  
                  19,572,629**Common
                      stock committed**Balance,
                      beginning of period
                  
                  
                  7,819
                  
                  
                  
                  
                  
                  440,000Stock
                      issued
                  
                  
                  (7,819
                  )
                  
                  
                  
                  
                  (440,000
                  )Balance,
                      end of period
                  
                  
                  --
                  
                  
                  
                  
                  
                  --**Additional
                      paid-in capital**Balance,
                      beginning of period
                  
                  
                  120,988Stock
                      issued pursuant to commitment
                  
                  
                  7,814Stock
                      issued pursuant to employee benefit plan
                  
                  
                  3,738Stock
                      issued for acquisitions
                  
                  
                  6,246Balance,
                      end of period
                  
                  
                  138,786**Receivables
                      for shares issued**Balance,
                      beginning of period
                  
                  
                  (1,494
                  )Issuance
                      of restricted stock
                  
                  
                  (6
                  )Amortization
                      of notes receivable
                  
                  
                  368Balance,
                      end of period
                  
                  
                  (1,132
                  )**Retained
                      earnings**Balance,
                      beginning of period
                  
                  
                  16,452Dividends
                      ($0.0825 per share)
                  
                  
                  (1,495
                  )Net
                      income
                  
                  
                  4,058
                  
                  
                  4,058Balance,
                      end of period
                  
                  
                  19,015
                  
                  
                  4,058**Accumulated
                      other comprehensive loss**Balance,
                      beginning of period
                  
                  
                  (50
                  )Net
                      change in unrealized depreciationon
                      securities available for sale
                  
                  
                  43
                  
                  
                  43Income
                      tax benefit on change
                  
                  
                  (17
                  )
                  
                  (17
                  )Balance,
                      end of period
                  
                  
                  (24
                  )
                  
                  26**Comprehensive
                      income**
                  
                  
                  
                  
                  
                  4,084**Unearned
                      compensation**Balance,
                      beginning of period
                  
                  
                  (1,635
                  )Net
                      issuance of restricted stock
                  
                  
                  (1,396
                  )Amortization
                      of unearned compensation
                  
                  
                  555Balance,
                      end of period
                  
                  
                  (2,476
                  )**Treasury
                      stock**Balance,
                      beginning of period
                  
                  
                  (3,481
                  )
                  
                  
                  
                  
                  (739,402
                  )Balance,
                      end of period
                  
                  
                  (3,481
                  )
                  
                  
                  
                  
                  (739,402
                  )**Total
                      shareholders' equity and common shares
                      outstanding**
                  
                  **$**
                  **150,884**
                  
                  
                  
                  
                  
                  **18,833,227**
  The
                      accompanying notes are an integral part of these condensed
                      consolidated
                      financial
                      statements.


-4-


**SANDERS
                      MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                      CONSOLIDATED STATEMENT OF CASH FLOWS****For
                      the six months ended June 30, 2005 and 2004**(in
                      thousands)(unaudited)
  **2005**
                    
                    **2004**CASH
                        FLOWS FROM OPERATING ACTIVITIES:Net
                        income
                    
                    $
                    4,058
                    
                    $
                    6,217Adjustments
                        to reconcile net income to net cash provided by (used in)operating
                        activities:Realized
                        loss (gain) on securities available for sale
                    
                    
                    5
                    
                    
                    (12
                    )Depreciation
                    
                    
                    954
                    
                    
                    974Provision
                        for bad debts
                    
                    
                    54
                    
                    
                    45Compensation
                        expense related to amortization ofnotes
                        receivable and unearned compensation
                    
                    
                    923
                    
                    
                    1,086Deferred
                        income taxes
                    
                    
                    (1,096
                    )
                    
                    (561
                    )Equity
                        in income of limited partnerships
                    
                    
                    (2,402
                    )
                    
                    (2,830
                    )Minority
                        interests in income of consolidated companies
                    
                    
                    1,624
                    
                    
                    1,385Changes
                        in assets and liabilities:Increase
                        in receivables
                    
                    
                    (1,028
                    )
                    
                    (5,986
                    )Increase
                        in deposits with clearing brokers
                    
                    
                    (1,223
                    )
                    
                    --Decrease
                        in securities owned
                    
                    
                    6,581
                    
                    
                    387Decrease
                        in other assets
                    
                    
                    106
                    
                    
                    50Decrease
                        in securities sold, not yet purchased
                    
                    
                    (3,382
                    )
                    
                    (9
                    )Increase
                        (decrease) in payable to clearing brokers
                    
                    
                    1,346
                    
                    
                    (6
                    )Decrease
                        in other liabilities
                    
                    
                    (34
                    )
                    
                    (31
                    )Decrease
                        in accounts payable and accrued liabilities
                    
                    
                    (6,064
                    )
                    
                    (4,140
                    )Net
                        cash provided by (used in) operating activities
                    
                    
                    422
                    
                    
                    (3,431
                    )CASH
                        FLOWS FROM INVESTING ACTIVITIES:Capital
                        expenditures
                    
                    
                    (1,401
                    )
                    
                    (4,234
                    )Acquisitions,
                        net of cash acquired of $421 and $478, respectively
                    
                    
                    (16,129
                    )
                    
                    (2,938
                    )Cash
                        of business consolidated
                    
                    
                    -
                    
                    
                    49Purchase
                        of securities available for sale
                    
                    
                    (851
                    )
                    
                    (1,163
                    )Proceeds
                        from sales and maturities of securities available for sale
                    
                    
                    71
                    
                    
                    343Net
                        cash used in investing activities
                    
                    
                    (18,310
                    )
                    
                    (7,943
                    )CASH
                        FLOWS FROM FINANCING ACTIVITIES:Purchase
                        of treasury stock
                    
                    
                    --
                    
                    
                    (183
                    )Proceeds
                        from short term borrowings
                    
                    
                    10,500
                    
                    
                    --Proceeds
                        from shares issued
                    
                    
                    2,338
                    
                    
                    1,478Investments
                        by minority interests
                    
                    
                    41
                    
                    
                    27Distributions
                        to minority interests
                    
                    
                    (890
                    )
                    
                    (1,202
                    )Payments
                        of cash dividends
                    
                    
                    (1,495
                    )
                    
                    (653
                    )Net
                        cash provided by (used in) financing activities
                    
                    
                    10,494
                    
                    
                    (533
                    )Net
                        decrease in cash and cash equivalents
                    
                    
                    (7,394
                    )
                    
                    (11,907
                    )CASH
                        AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                    
                    
                    21,678
                    
                    
                    32,590CASH
                        AND CASH EQUIVALENTS AT END OF PERIOD
                    
                    $
                    14,284
                    
                    $
                    20,683Cash
                        paid for income taxes, net
                    
                    $
                    4,576
                    
                    $
                    2,085Noncash
                        activities:Acquisitions
                        and consolidation:Fixed
                        assets
                    
                    
                    338
                    
                    
                    6Other
                        assets
                    
                    
                    273
                    
                    
                    (5
                    )Securities
                        owned
                    
                    
                    --
                    
                    
                    (800
                    )Goodwill
                    
                    
                    22,685
                    
                    
                    800Accounts
                        payable and accrued liabilities
                    
                    
                    (808
                    )
                    
                    (18
                    )Minority
                        interests
                    
                    
                    (109
                    )
                    
                    (32
                    )
 The
                accompanying notes are an integral part of the condensed consolidated
                financial
                statements.
 -5-
 **SANDERS
                    MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**
 NOTES
                    TO CONDENSED CONSOLIDATED FINANCIAL
                    STATEMENTS


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





*Nature
      of Operations*




Through
      its operating subsidiaries Sanders Morris Harris Inc. (“Sanders Morris Harris”
      or “SMH”), Salient Capital Management (“Salient/PMT”), SMH Capital Advisors
      (“SMCA”), Charlotte Capital, Select Sports Group (“SSG”), and Edelman Financial
      Center (“Edelman”), Sanders Morris Harris Group Inc. (“SMHG” or “the Company”)
      provides a broad range of financial and other professional services, including
      institutional, retail and prime brokerage, principal trading, investment
      banking, merchant banking, financial advisory, trust related services,
      investment management, financial planning, and sports representation and
      management. The Company serves a diverse group of institutional, corporate,
      and
      individual clients.





The
      Company merged with and acquired its operating subsidiaries in 1999 through
      2005. The acquisitions were accounted for using the purchase method and, as
      a
      result, current period results are not comparable to the prior periods.





*Consolidation*




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





In
      management's opinion, the unaudited condensed consolidated financial statements
      include all adjustments necessary for a fair presentation of our consolidated
      financial position at June 30, 2005, our results of operations for the three
      and
      six months ended June 30, 2005 and 2004, and our cash flows for the six months
      ended June 30, 2005 and 2004. All adjustments are of a normal recurring nature.
      Interim results are not necessarily indicative of results for a full
      year.





These
      financial statements and notes should be read in conjunction with the Company’s
      annual report on Form 10-K for the year ended December 31, 2004.





*Effects
      of Recently Issued Accounting Standards*




In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based
      Payment (Revised 2004).* SFAS
      123R
      establishes standards for the accounting for transactions in which an entity
      (i)
      exchanges its equity instruments for goods or services, or (ii) incurs
      liabilities in exchange for goods or services that are based on the fair value
      of the entity’s equity instruments or that may be settled by the issuance of the
      equity instruments. SFAS 123R eliminates the ability to account for stock-based
      compensation using APB 25 and requires that such transactions be recognized
      as
      compensation cost in the income statement based on their fair values on the
      date
      of the grant. SFAS 123R is effective for the Company on January 1, 2006. The
      Company will transition to fair value based accounting for stock-based
      compensation using a modified version of prospective application (“modified
      prospective application”). Under modified prospective application, as it is
      applicable to the Company, SFAS 123R applies to new awards and to awards
      modified, repurchased, or cancelled after January 1, 2006. Additionally,
      compensation cost for the portion of awards for which the requisite service
      has
      not been rendered (generally referring to non-vested awards) that are
      outstanding as of January 1, 2006, must be recognized as the remaining requisite
      service is rendered during the period of and/or the periods after the adoption
      of SFAS 123R. The attribution of compensation cost for those earlier awards
      will
      be based on the same method and on the same grant-date fair values previously
      determined for the pro forma disclosures required for companies that did not
      adopt the fair value accounting method for stock-based employee compensation.
      Based on the stock-based compensation awards outstanding as of June 30, 2005,
      for which the requisite service is not expected to be fully rendered prior
      to
      January 1, 2006, the Company expects to recognize additional pre-tax, quarterly
      compensation cost of approximately $41,000 beginning in the first quarter of
      2006 as a result of the adoption of SFAS 123R. Future levels of compensation
      cost recognized related to stock-based compensation awards (including the
      aforementioned expected costs during the period of adoption) may be impacted
      by
      new awards and/or modifications, repurchase, and cancellations of existing
      awards before and after the adoption of this standard.




-6-




In
      June
      2005 the Emerging Issues Task Force (EITF) issued EITF No. 04-5, *Investor’s
      Accounting for an Investment in a Limited Partnership When the Investor Is
      the
      Sole General Partner and the Limited Partners Have Certain
      Rights* .
      EITF
      No. 04-5 changes the accounting for general partners that are in certain
      industries. In conjunction with EITF No. 04-5, the FASB staff is planning to
      amend SOP 78-9, *Accounting
      for Investments in Real Estate Ventures* to be
      consistent with EITF No. 04-5. SOP 78-9-a, *Interaction
      of AICPA Statement of Position 78-9, Accounting for Investments in Real Estate
      Ventures,* and
      EITF
      No. 04-5, *Investor’s Accounting for an Investment in a Limited Partnership When the
      Investor is the Sole General Partner and the Limited Partners Have Certain
      Rights* (SOP
      78-9-a) will have the presumption that a general partner controls a limited
      partnership and therefore should consolidate the partnership. This presumption
      can be overcome if the limited partners have kick-out or substantive
      participating rights. As a result of this new guidance, we will be required
      to
      consolidate for financial reporting purposes many of the limited partnerships
      for which we act as general partner. We are evaluating the impact that these
      new
      accounting standards will have on our consolidated financial statements. The
      effective date of SOP 78-9-a and EITF No. 04-5 is January 1, 2006.




*Stock-Based
      Compensation*





SFAS
      No.
      148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure,* was
      issued in December 2002. SFAS No. 148 amends SFAS No. 123, *Accounting
      for Stock-Based Compensation,* to
      provide alternative methods for transition for a voluntary change to the fair
      value based method of accounting for stock-based employee compensation. In
      addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
      require prominent disclosures in both annual and interim financial statements
      about the method of accounting for stock-based employee compensation and the
      effect of the method used on reported results. The Company has adopted the
      disclosure provisions included in SFAS No. 148 in the notes to the condensed
      consolidated financial statements contained herein.





The
      following table illustrates the effect on net income as if the Company had
      applied the fair value recognition provisions of SFAS No. 123 as amended by
      SFAS
      No. 148:


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(in
                  thousands, except per share amounts)Net
                  income as reported
              
              $
              2,226
              
              $
              2,947
              
              $
              4,058
              
              $
              6,217Deduct:
                  Total stock based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of related tax effects
              
              
              (58
              )
              
              (194
              )
              
              (117
              )
              
              (254
              )Proforma
                  income
              
              $
              2,168
              
              $
              2,753
              
              $
              3,941
              
              $
              5,963Earnings
                  per shareBasic-as
                  reported
              
              $
              0.12
              
              $
              0.17
              
              $
              0.22
              
              $
              0.36Basic-pro
                  forma
              
              $
              0.12
              
              $
              0.16
              
              $
              0.21
              
              $
              0.34Diluted-as
                  reported
              
              $
              0.12
              
              $
              0.16
              
              $
              0.21
              
              $
              0.34Diluted-pro
                  forma
              
              $
              0.11
              
              $
              0.15
              
              $
              0.21
              
              $
              0.33


*Reclassifications*





Certain
      reclassifications have been made to the 2004 condensed consolidated financial
      statements to conform them with the 2005 presentation. The reclassifications
      had
      no effect on retained earnings, results of operations or cash flows as
      previously reported.




-7-




**2.**
            **ACQUISITIONS
                AND DISPOSITION**





On
      May
      10, 2005, the Company acquired a 51% interest in The Edelman Financial Center
      LLC, one of the leading financial planning firms in the country. The Company
      will acquire the remaining 49% of Edelman over four years. Edelman, based in
      Fairfax, Virginia, manages over $2.6 billion in assets. At the initial closing,
      SMHG bought 51% of the outstanding membership units of Edelman (“the First
      Tranche Units”). The Company paid $12.5 million, in a combination of cash and
      shares of the Company’s common stock for the First Tranche Units. The
      consideration for the First Tranche Units is subject to later adjustment (the
      “Earn-Out Consideration”) based on a multiple of the net income of Edelman for
      the period of October 1, 2005 through September 30, 2006. The multiple used
      to
      calculate the Earn-Out Consideration will also be based upon the level of net
      income for the period. The Earn-Out Consideration will be paid 50% in cash
      and
      50% in the Company’s common stock.





In
      May
      2008, the Company will purchase an additional 25% membership interest in
      Edelman. The Company will pay an amount equal to 25% of a multiple of between
      8
      and 11 times Edelman’s net income for the fiscal year ending December 31, 2007
      (the “Second Tranche Consideration”). The multiple will be determined based upon
      the compound annual growth rate of Edelman’s net income over a specified period.
      The Second Tranche Consideration will be paid in a combination of cash and
      the
      Company’s common stock.





In
      May
      2009, the Company will purchase all of the remaining issued and outstanding
      membership interests of Edelman. The Company will pay an amount equal to 24%
      of
      a multiple of between 8 and 11 times Edelman’s net income for the fiscal year
      ending December 31, 2008 (the “Third Tranche Consideration”). The multiple will
      be determined based upon the compound annual growth rate of Edelman’s net income
      over a specified period. The Third Tranche Consideration will also be paid
      in a
      combination of cash and the Company’s common stock.





At
      the
      initial closing, the Company advanced an additional $7.5 million, in a
      combination of cash and the Company’s common stock, as a nonrefundable credit
      against future payments for the Earn-Out Consideration, the Second Tranche
      Consideration and the Third Tranche Consideration. Also, the aggregate issuances
      of common stock may never exceed 20% of the total number of shares of the
      Company’s common stock issued and outstanding on the initial closing date. The
      shares of common stock issued were not registered in reliance upon the exemption
      provided in Section 4(2) of the Securities Act of 1933, as amended.





The
      acquisition was accounted for as a purchase, and accordingly, the financial
      information of Edelman has been included in the Company’s consolidated financial
      statements from May 10, 2005. Consideration of $20.0 million, consisting of
      the
      initial consideration of $12.5 million and the $7.5 million nonrefundable credit
      against future payments, exceeded the fair market value of identifiable net
      tangible assets by approximately $20.2 million, which has been recorded as
      goodwill.





On
      April
      15, 2005, the Company acquired a 50% interest in the investment advisory
      business of two financial advisors who are based in Colorado Springs, Colorado.
      The customer accounts were added to those of Sanders Morris Harris and the
      business will operate as SMH Colorado. The acquisition was accounted for as
      a
      purchase, and accordingly, the financial information of SMH Colorado has been
      included in the Company’s consolidated financial statements from April 15, 2005.
      The consideration of $2.5 million, consisting of a combination of cash and
      shares of the Company’s common stock, exceeded the fair market value of
      identifiable net tangible assets by $2.5 million, which has been recorded as
      goodwill.





On
      April
      1, 2005, the Company sold its Douglas, Noyes division to a third party. The
      Company retained cash, receivables, and other fixed assets, as well as all
      accounts payable and accrued liabilities associated with Douglas, Noyes.
      Beginning in April 2006 and continuing thereafter, the Company will receive
      a
      portion of the investment advisory fees earned by Douglas, Noyes. SMHG recorded
      no gain or loss on the sale of Douglas, Noyes. Douglas, Noyes, based in New
      York
      City provides investment management services.





On
      November 23, 2004, the Company acquired a 50% interest in Select Sports Group,
      Ltd., a sports representation and management services firm based in Houston,
      Texas. The former owners of SSG received cash of approximately $2.8 million
      and
      66,538 common shares of the Company with a market value of $965,000.
      Additionally, the Company paid SSG debt totaling approximately $596,000. The
      Company’s investment in SSG is accounted for using the equity
      method.





-8-


On
      April
      1, 2004, the Company acquired a 69% member interest in Charlotte Capital, LLC
      from a previous investor. Employees of Charlotte Capital retained a 31%
      ownership interest in the firm. Charlotte Capital, based in Charlotte, North
      Carolina, manages approximately $400 million in assets for institutional
      investors in small cap value and small/mid cap value styles. SMHG paid $3.4
      million in cash at closing, and is obligated to pay an additional amount in
      18
      months. The base amount of the additional payment is $2.3 million; however,
      it
      may be adjusted up or down based on changes in the firm’s revenues and assets
      under management for the 18 month period beginning April 1, 2004 and ending
      September 30, 2005. No additional consideration has been earned through June
      30,
      2005 as the calculation is based on the 18-month period ending September 30,
      2005. Employees of Charlotte Capital can earn up to an additional 9% ownership
      interest by achieving specified revenue run rates during the 18-month period
      following closing. The acquisition was accounted for as a purchase, and
      accordingly, the financial information of Charlotte Capital has been included
      in
      the Company’s consolidated financial statements from April 1, 2004. The initial
      consideration of $3.4 million exceeded the fair market value of identifiable
      net
      tangible assets by approximately $4.5 million, which has been recorded as
      goodwill.




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





Securities
      owned and securities sold, not yet purchased as of June 30, 2005 were as
      follows:


**Sold,
                  Not Yet****Owned**
              
              **Purchased**(in
                  thousands)Marketable:U.S.
                  Government and agency
              
              $
              3,536
              
              $
              1,774Corporate
                  stocks
              
              
              6,450
              
              
              1,193Corporate
                  bonds
              
              
              7,286
              
              
              --17,272
              
              
              2,967Not
                  readily marketable:Partnerships
              
              
              29,087
              
              
              --Corporate
                  stocks and warrants
              
              
              6,313
              
              
              --$
              52,672
              
              $
              2,967


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





-9-




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




Securities
                    available for sale at June 30, 2005 were as
                    follows:
  **Amortized**
                
                **Gross
                    Unrealized**
                
                **Estimated****Cost**
                
                **Gains**
                
                **Losses**
                
                **Fair
                    Value**(in
                    thousands)U.S.
                    Government and agency obligations
                
                $
                1,035
                
                $
                8
                
                $
                (8
                )
                $
                1,035Corporate
                    bonds
                
                
                251
                
                
                --
                
                
                (2
                )
                
                249Equity
                    securities
                
                
                1,638
                
                
                65
                
                
                (158
                )
                
                1,545Partnerships
                
                
                1,013
                
                
                55
                
                
                (1
                )
                
                1,067Total
                
                $
                3,937
                
                $
                128
                
                $
                (169
                )
                $
                3,896
  The
                    contractual maturities of debt securities available for sale
                    at June 30,
                    2005, were as follows (in
                    thousands):
  Due
                    before 5 years
                
                $
                990Due
                    after 25 years through 30 years
                
                $
                294


Gross
      realized gains on sales of securities available for sale were $6,000 for the
      six
      months ended June 30, 2005, and $13,000 for the six months ended June 30, 2004.
      Gross realized losses on securities available for sale were $11,000 for the
      three and six months ended June 30, 2005 and $1,000 for the three and six months
      ended June 30, 2004. Gross realized gains on sales of securities available
      for
      sale were $6,000 for the three months ended June 30, 2005, and $2,000 for the
      three months ended June 30, 2004.





The
      Company has pledged securities valued at $250,000 to the bank commissioner
      of
      the state of Oklahoma to secure its performance of fiduciary duties for trust
      activities in that state.





**5.**
            **INCOME
                TAXES**





The
      differences between the effective tax rate reflected in the income tax provision
      from operations and the statutory federal rate were as follows:


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(in
                  thousands)Tax
                  computed using the statutory rate
              
              $
              1,320
              
              $
              1,662
              
              $
              2,401
              
              $
              3,498State
                  income taxes and other
              
              
              226
              
              
              280
              
              
              401
              
              
              572Total
              
              $
              1,546
              
              $
              1,942
              
              $
              2,802
              
              $
              4,070




-10-




**6.**
            **SHORT
                TERM BORROWINGS**





During
      May 2005, the Company entered into a $15.0 million revolving credit facility
      with a bank. The line of credit expires in May 2006, unless extended. Borrowings
      under the line of credit bear interest based on LIBOR. The interest rate on
      the
      Company’s borrowings ranged from 4.81% to 5.0% during the three months ended
      June 30, 2005. The credit facility is secured by a pledge of ownership interests
      in two of the Company’s subsidiaries. Debt covenants require the Company to
      maintain certain debt-to-EBITDA and liquidity to funded debt ratios, as well
      as
      minimum assets under management. At June 30, 2005, the Company was in compliance
      with all covenants. The outstanding balance on the line of credit was $10.5
      million at June 30, 2005.





**7.**
            **COMMITMENTS
                AND CONTINGENCIES**





In
      the
      normal course of business, the Company enters into underwriting commitments.
      There were no firm underwriting commitments open at June 30, 2005.





The
      Company and its subsidiaries have obligations under operating leases that expire
      by 2014 with initial noncancelable terms in excess of one year.





The
      Company has pledged a certificate of deposit in the amount of $50,000 to secure
      a loan made by a bank to a relative of one of the Company’s customers (the
“Debtor”). The pledge expires in April 2006. Proceeds from the bank loan were
      used to finance a business venture of the Debtor. Should the Debtor fail to
      repay the loan, the Company’s certificate of deposit will be used to satisfy any
      unpaid portion of the debt up to the face amount of the certificate of deposit.
      The Company expects the Debtor to be able to pay the debt upon maturity.
      Therefore, the Company has recorded no reserve against this guarantee as of
      June
      30, 2005.





The
      Company is a party to various legal proceedings that are of an ordinary or
      routine nature incidental to its operations. The Company believes it has
      adequately reserved for such litigation matters and that they will not have
      a
      material adverse effect on the Company’s consolidated financial position,
      results of operations, or cash flows.





The
      Company has uncommitted financing arrangements with clearing brokers who finance
      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 accounting and 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 its clearing brokers.





The
      Company has issued a letter of credit in the amount of $1.2 million to the
      owner
      of one of the offices that we lease to secure payment of our lease obligation
      for that facility. The Company has issued a letter of credit in the amount
      of
      $100,000 to secure the payment of the deductible portion of the Company’s
      workers compensation insurance policy.





-11-




**8.**
            **EARNINGS
                PER COMMON SHARE**





Basic
      and
      diluted earnings per share computations for the periods indicated were as
      follows:


**Three
                    Months Ended June 30,****2005**
                
                **2004**(in
                    thousands, except per share amounts)Computation
                    of basic and diluted earnings per common share:Net
                    income
                
                $
                2,226
                
                $
                2,947Weighted
                    average common shares outstanding
                
                
                18,605,636
                
                
                17,592,623Common
                    shares issuable under stock option plan
                
                
                899,396
                
                
                984,026Less
                    shares assumed repurchased with proceeds
                
                
                (295,995
                )
                
                (389,850
                )Weighted
                    average common shares outstanding
                
                
                19,209,037
                
                
                18,186,799Basic
                    income per common share
                
                $
                0.12
                
                $
                0.17Diluted
                    income per common share
                
                $
                0.12
                
                $
                0.16
  **Six
                    Months Ended June 30,****2005**
                
                **2004**(in
                    thousands, except per share amounts)Computation
                    of basic and diluted earnings per common share:Net
                    income
                
                $
                4,058
                
                $
                6,217Weighted
                    average common shares outstanding
                
                
                18,455,976
                
                
                17,493,334Common
                    shares issuable under stock option plan
                
                
                911,896
                
                
                984,026Less
                    shares assumed repurchased with proceeds
                
                
                (281,520
                )
                
                (388,580
                )Weighted
                    average common shares outstanding
                
                
                19,086,352
                
                
                18,088,780Basic
                    income per common share
                
                $
                0.22
                
                $
                0.36Diluted
                    income per common share
                
                $
                0.21
                
                $
                0.34


Outstanding
      stock options (12,500 and zero for the three and six months ended June 30,
      2005
      and 45,000 for the three and six months ended June 30, 2004) have not been
      included in diluted earnings per common share because to do so would have been
      antidilutive for the periods presented.





**9.**
            **BUSINESS
                SEGMENT INFORMATION**





SMHG
      operates through six business segments: Retail Brokerage, Institutional
      Brokerage, Asset Management, Prime Brokerage, Investment Banking, and Corporate
      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
      Retail Brokerage segment distributes a range of financial products through
      its
      branch distribution network, including equity and fixed income securities,
      mutual funds and annuities. Retail revenues consist of commissions and principal
      credits earned on equity and fixed income transactions in customer brokerage
      accounts, distribution fees earned from mutual funds, fees earned from managed
      accounts, and net interest on customers’ margin loan and credit account
      balances. Additionally, retail revenues include sales credits from investment
      banking transactions such as the distribution of underwritings that we co-manage
      or in which we participate and private placements of securities in which we
      serve as placement agent. The firm employs registered representatives and also
      licenses independent financial advisors.





The
      Institutional Brokerage segment distributes equity and fixed income products
      through its distribution network to its institutional clients. Institutional
      revenues consist 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.





-12-


The
      Asset
      Management segment provides investment advisory, wealth and investment
      management, financial planning, and trust services to institutional and
      individual clients. It earns an advisory fee based on such factors as the amount
      of assets under management and the type of services provided. The asset
      management segment may also earn commission revenues 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
      Prime
      Brokerage segment provides trade execution, clearing, custody, and other
      back-office services to hedge funds and other professional traders. Prime broker
      revenues consist 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
      Investment Banking segment 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 segment. Sales credits
      associated with the distribution of investment banking products are reported
      in
      Retail Brokerage, Institutional Brokerage, or Asset Management depending on
      the
      relevant distribution channel.





The
      Corporate 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 revenues and expenses
      are
      included in Corporate and Other. Gains and losses from sports representation
      and
      management services performed by SSG are included in Corporate and Other.




The
      following summarizes certain financial information of each reportable business
      segment for the three and six months ended June 30, 2005 and 2004, respectively.
      SMHG does not analyze asset information for its business segments.




-13-


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(in
                  thousands)Revenues:Retail
                  brokerage
              
              $
              3,378
              
              $
              4,360
              
              $
              8,029
              
              $
              8,466Institutional
                  brokerage
              
              
              7,025
              
              
              8,085
              
              
              12,857
              
              
              16,306Asset
                  management
              
              
              10,152
              
              
              7,400
              
              
              17,194
              
              
              13,632Prime
                  brokerage
              
              
              4,766
              
              
              4,828
              
              
              8,877
              
              
              9,831Investment
                  banking
              
              
              4,276
              
              
              3,122
              
              
              7,949
              
              
              8,972Corporate
                  and other
              
              
              902
              
              
              860
              
              
              1,933
              
              
              1,255Total
              
              $
              30,499
              
              $
              28,655
              
              $
              56,839
              
              $
              58,462Income
                  (loss) before equity in income (loss) of limitedpartnerships,
                  minority interest and income taxes:Retail
                  brokerage
              
              $
              174
              
              $
              421
              
              $
              791
              
              $
              619Institutional
                  brokerage
              
              
              1,214
              
              
              1,350
              
              
              1,639
              
              
              2,786Asset
                  management
              
              
              2,937
              
              
              2,562
              
              
              4,351
              
              
              4,348Prime
                  brokerage
              
              
              609
              
              
              723
              
              
              998
              
              
              1,629Investment
                  banking
              
              
              1,583
              
              
              1,154
              
              
              2,616
              
              
              4,592Corporate
                  and other
              
              
              (2,623
              )
              
              (2,413
              )
              
              (4,312
              )
              
              (5,132
              )Total
              
              $
              3,894
              
              $
              3,797
              
              $
              6,083
              
              $
              8,842Equity
                  in income (loss) of limited partnerships:Retail
                  brokerage
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --Institutional
                  brokerage
              
              
              --
              
              
              --
              
              
              --
              
              
              --Asset
                  management
              
              
              513
              
              
              2,031
              
              
              2,179
              
              
              2,763Prime
                  brokerage
              
              
              --
              
              
              --
              
              
              --
              
              
              --Investment
                  banking
              
              
              --
              
              
              --
              
              
              --
              
              
              --Corporate
                  and other
              
              
              193
              
              
              (6
              )
              
              223
              
              
              67Total
              
              $
              706
              
              $
              2,025
              
              $
              2,402
              
              $
              2,830Minority
                  interests in net (income) loss ofconsolidated
                  companies:Retail
                  brokerage
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --Institutional
                  brokerage
              
              
              --
              
              
              --
              
              
              --
              
              
              --Asset
                  management
              
              
              (754
              )
              
              (934
              )
              
              (1,553
              )
              
              (1,399
              )Prime
                  brokerage
              
              
              --
              
              
              --
              
              
              --
              
              
              --Investment
                  banking
              
              
              --
              
              
              --
              
              
              --
              
              
              --Corporate
                  and other
              
              
              (74
              )
              
              1
              
              
              (72
              )
              
              14Total
              
              $
              (828
              )
              $
              (933
              )
              $
              (1,625
              )
              $
              (1,385
              )Income
                  (loss) before income taxes:Retail
                  brokerage
              
              $
              174
              
              $
              421
              
              $
              791
              
              $
              619Institutional
                  brokerage
              
              
              1,214
              
              
              1,350
              
              
              1,639
              
              
              2,786Asset
                  management
              
              
              2,696
              
              
              3,659
              
              
              4,977
              
              
              5,712Prime
                  brokerage
              
              
              609
              
              
              723
              
              
              998
              
              
              1,629Investment
                  banking
              
              
              1,583
              
              
              1,154
              
              
              2,616
              
              
              4,592Corporate
                  and other
              
              
              (2,504
              )
              
              (2,418
              )
              
              (4,161
              )
              
              (5,051
              )Total
              
              $
              3,772
              
              $
              4,889
              
              $
              6,860
              
              $
              10,287




-14-




**10.**
            **EMPLOYEE
                BENEFIT PLANS**





Under
      its
      1998 Incentive Plan, as amended, the Company has reserved 25% of the outstanding
      common stock of the Company, or 4,000,000 shares of common stock, whichever
      is
      greater, for the purpose of issuing incentive awards under the Incentive Plan.
      The Company had 1,410,487 shares of common stock available for grant under
      the
      Incentive Plan at June 30, 2005.





**Stock
      Options**





The
      Incentive Plan provides for the issuance to eligible employees of, among other
      things, incentive and non-qualified stock options, that may expire up to 10
      years from the date of grant. The outstanding options vest over varying periods
      and have an exercise price equal to the closing price of the Company’s stock on
      the date of the grant.





**Restricted
      and Capital Incentive Plan (“CIP”)**





Effective
      January 2, 2001, the Company adopted the CIP under its Incentive Plan in which
      eligible employees and consultants may purchase in lieu of salary, commission
      or
      bonus, shares of the Company’s restricted common stock at a price equal to 66.6%
      of the 20-day average of the closing sales prices for a share of the Company’s
      common stock, ending on the day prior to the date the shares are issued.





All
      shares issued are valued at the closing price on the date the shares are issued.
      Consideration paid through the deferral of salaries, commissions, or
      discretionary bonuses is recorded as compensation expense on the date the shares
      are issued. The difference between the value of the shares issued and the
      consideration paid is recorded as unearned compensation and is shown as a
      separate component of shareholders’ equity. Additionally, shares are issued
      under the CIP in conjunction with notes receivable. Restricted shares and shares
      issued under the CIP are amortized to compensation expense over the one to
      five
      year vesting periods.





The
      following summarizes certain information related to the CIP for the three and
      six months ended June 30, 2005 and 2004.


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(in
                  thousands, except shares)Number
                  of shares issued
              
              
              26,988
              
              
              147,314
              
              
              85,414
              
              
              265,451Value
                  of shares issued
              
              $
              457
              
              $
              1,816
              
              $
              1,451
              
              $
              3,252Additions
                  to unearned compensation
              
              
              488
              
              
              1,159
              
              
              1,396
              
              
              1,685(Forfeitures)
                  additions to notes receivable
              
              
              (36
              )
              
              658
              
              
              6
              
              
              1,566Amortization
                  of unearned compensation
              
              
              275
              
              
              274
              
              
              555
              
              
              460Amortization
                  of notes receivable
              
              
              167
              
              
              326
              
              
              368
              
              
              626
  -15-


**11.**
            **RELATED
                PARTIES**





The
      Company had receivables from related parties totaling $4.0 million at June
      30,
      2005, primarily consisting of $3.1 million of notes receivable from employees
      and consultants.





The
      Company has recorded a payable in the amount of $870,000 to the minority
      shareholder of an acquired subsidiary representing the post closing collection
      of receivables, net of related expenses that existed on the date on which the
      subsidiary was acquired.





-16-





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





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





**General**





We
      provide a broad range of financial and other professional services, including
      institutional, retail and prime brokerage, principal trading, investment
      banking, merchant banking, financial advisory, trust related services,
      investment management, financial planning and sports representation and
      management. All of these activities are highly competitive and are sensitive
      to
      many factors outside our control, including those factors listed under "Factors
      Affecting Forward-Looking Statements."





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





**Components
      of Revenues and Expenses**





*Revenues* .  Our
      revenues are comprised primarily of (1) commission revenue from retail, prime,
      and institutional brokerage transactions, (2) fees from asset-based advisory
      services, (3) principal and agent transactions, (4) investment banking revenue
      from corporate finance fees, public and private offerings, mergers and
      acquisitions, and merchant banking and (5) fees from asset management, financial
      planning, and fiduciary services. We also earn interest on the cash held and
      dividends received from the equity and debt securities held by us for our
      corporate capital accounts and have realized and unrealized gains (or losses)
      on
      securities in our inventory account.





*Expenses.*  Our
      expenses consist of (1) employee compensation and benefits, (2) brokerage and
      clearing costs, 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. Retail and institutional commissions are based
      on competitive commission schedules. The investment banking group and the
      research group receive salaries and discretionary bonuses as compensation.
      The
      fixed component includes administrative and executive salaries, payroll taxes,
      employee benefits, and temporary employee costs. Compensation and benefits
      is
      our largest expense item and includes wages, salaries, and benefits. During
      the
      second quarter of 2005, compensation and benefits represented 67% of total
      expenses and 58% of total revenues compared to 69% of total expenses, and 60%
      of
      total revenues during the same period in 2004. During the first six months
      of
      2005, compensation and benefits represented 67% of total expenses and 60% of
      total revenues compared to 70% of total expenses and 60% of total revenues
      during the same period in 2004.





Brokerage
      and clearance expenses include clearing and trade execution costs associated
      with the retail, prime, and institutional brokerage business at SMH. SMH clears
      its transactions primarily through Pershing LLC, a member of BNY Securities
      Group and a subsidiary of The Bank of New York and other clearing
      brokers.





Other
      expenses include (1) occupancy and equipment expenses, such as rent and utility
      charges for facilities and (2) communications and data processing expenses,
      such
      as third-party systems, market data and software program providers.





-17-




**Overview**





Our
      financial services business is affected by general economic conditions. The
      instability in the overall stock market has had a negative impact on our
      commission revenues, underwriting fees derived from public offerings, and
      advisory fees from private placements.





Our
      revenues relating to asset-based advisory services and managed accounts are
      typically from fees based on the market value of assets under management. The
      growth in assets under management resulted in higher management fees for the
      Company.





We
      have
      organized a number of private equity funds for the purpose of investing in
      public and private companies that we believe are either significantly
      undervalued relative to their growth potential or have substantial prospects
      for
      capital growth. We invest in these funds along with our clients and earn
      management fees based on capital commitments, net assets or capital
      contributions. We also receive incentive compensation of a portion of the profit
      if the profit exceeds specified hurdle rates.





We
      invest
      a portion of our excess cash in public equity and debt securities that we feel
      are undervalued. Additionally, we may receive warrants as a part of our
      compensation for investment banking services.





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





**Results
      of Operations**





*Three
      Months Ended June 30, 2005 Compared to Three Months Ended June 30,
      2004*





Total
      revenues were $30.5 million in the second quarter of 2005 compared to $28.7
      million for the same quarter in 2004. An increase in revenues from fiduciary,
      custodial, and advisory fees was partially offset by a decline in revenues
      from
      commissions. Total expenses for the second quarter of 2005 increased to $26.6
      million from $24.9 million in the same quarter of the previous year. We
      experienced increases in employee compensation and benefits, communications
      and
      data processing costs, occupancy costs, and other general and administrative
      expenses mainly due to our growth. Equity in income of limited partnerships
      declined to $706,000 during the second quarter of 2005 from $2.0 million during
      the prior year period, reflecting reduced gains on the investment portfolios
      in
      the limited partnerships. Net income for the three month period ended June
      30,
      2005 declined to $2.2 million from $2.9 million in the same period in 2004.
      Basic income per share was $0.12 for the three months ended June 30, 2005
      compared to $0.17 for the same period in 2004. Diluted income per share was
      $0.12 for the three months ended June 30, 2005 compared to $0.16 for the same
      period in 2004.





Commissions
      revenue declined to $10.1 million in the second quarter of 2005 from $12.1
      million for the same period in 2004, primarily as a result of reduced trading
      volume in our retail and institutional divisions. Principal transactions revenue
      totaled $2.2 million during the second quarter of 2005, compared to $2.0 million
      for the second quarter of 2004. Investment banking revenue increased to $8.1
      million during the second quarter of 2005 from $7.8 million in the same period
      of 2004, principally due to an increase in private placement fees. Revenues
      from
      fiduciary, custodial, and advisory fees increased to $8.1 million in the second
      quarter of 2005 from $5.2 million in the same quarter of 2004 primarily due
      to
      the acquisition of Edelman during the second quarter of 2005 and growth in
      assets under management at Salient/PMT and SMCA. Interest and dividend income
      increased to $1.1 million in the second quarter of 2005 from $979,000 in the
      same period last year, due to higher margin interest reflecting an increase
      in
      margin balances. Other income increased from $517,000 during the second quarter
      of 2004 to $873,000 during the same period in 2005, due to an increase in fees
      earned on the Company’s cash balances and customer credit balances at its
      clearing banks resulting from higher deposit balances.





-18-


During
      the three months ended June 30, 2005, employee compensation and benefits
      increased to $17.7 million from $17.1 million in the same period last year
      due
      to our growth during 2005. Floor brokerage, exchange and clearance fees declined
      to $1.1 million in the second quarter of 2005 from $1.3 million in the same
      quarter of 2004 reflecting lower clearing and execution costs resulting from
      the
      reduced trading volume. Communication and data processing costs increased to
      $2.2 million in 2005 from $1.9 million in the same period last year resulting
      primarily from increased personnel and additional offices. Occupancy costs
      totaled $1.9 million during the second quarter of 2005, compared to $1.7 million
      in the prior year quarter due to expansion of our New York City offices, and
      the
      addition of Edelman. Other general and administrative expenses increased to
      $3.6
      million during the second quarter of 2005 from $2.8 million in the second
      quarter of last year mainly due to our growth.





Our
      effective tax rate was 41% for the three months ended June 30, 2005 compared
      to
      40% for the three months ended June 30, 2004.





Results
      by Segment





*Retail
      Brokerage*




**Three
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              3,378
              
              $
              4,360Income
                  before income taxes
              
              $
              174
              
              $
              421


Revenues
      from retail brokerage decreased to $3.4 million from $4.4 million, and income
      before income taxes decreased to $174,000 from $421,000. Commission revenue
      declined to $1.9 million from $2.3 million due to lower trading volume during
      2005. Sales credits from investment banking transactions declined to $639,000
      from $1.0 million due to a decrease in sales credits from investment banking
      transactions. Compensation expenses declined to $2.3 million from $3.1 million
      in 2004, primarily due to the revenue decline.





*Institutional
      Brokerage*


**Three
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              7,025
              
              $
              8,085Income
                  before income taxes
              
              $
              1,214
              
              $
              1,350


Revenues
      from institutional brokerage declined to $7.0 million from $8.1 million, and
      income before taxes declined to $1.2 million from $1.4 million. Commission
      revenue declined to $3.7 million from $4.6 million due to a slowdown in
      institutional commission transactions and a decline in commission rates. Sales
      credits from investment banking transactions declined to $2.1 million from
      $2.5
      million, due to a decrease in fees earned from the Company’s participation in
      underwriting syndicates. Compensation expense declined from $5.2 million during
      2004 to $4.5 million during 2005 primarily due to the revenue decline.





-19-


*Asset
      Management*


**Three
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              10,152
              
              $
              7,400Income
                  before income taxes
              
              $
              2,696
              
              $
              3,659


Revenues
      from asset management increased to $10.2 million from $7.4 million, and income
      before taxes declined to $2.7 from $3.7 million. Fiduciary, custodial and
      advisory fees increased to $7.8 million from $4.9 million. The acquisition
      of
      Edelman in May 2005, and growth in assets under management at Salient/PMT and
      SMCA have contributed to the increase in revenues from advisory fees. Total
      expenses rose to $7.2 million from $4.8 million due to the higher revenues
      and
      the acquisition of Edelman. The change in value of our investments in limited
      partnerships resulted in a gain of $513,000 in 2005, compared to $2.0 million
      in
      2004. Minority interests in net income of consolidated companies reflect the
      portion of net income attributable to minority interest ownership of entities
      included in the Company’s consolidated financial statements. Income attributable
      to minority interests, which reduces SMHG’s pretax income, decreased to $754,000
      in 2005 from $934,000 in 2004, principally due to lower income from one of
      the
      Company’s limited partnerships.




*Prime
      Brokerage*


**Three
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              4,766
              
              $
              4,828Income
                  before income taxes
              
              $
              609
              
              $
              723


Revenues
      from prime brokerage remained at $4.8 million, and income before taxes decreased
      to $609,000 from $723,000. Commission revenue decreased to $3.5 million from
      $3.9 million reflecting an overall reduction in commission rates. Revenues
      from
      principal transactions, principally fixed income products, increased to $975,000
      from $596,000 reflecting higher trading volume during 2005. Compensation expense
      decreased to $2.1 million from $2.3 million due to reduced personnel. The
      percentage decline in income before taxes was greater than the percentage
      decline in revenues principally due to increases in those costs of the business
      that are not directly related to revenue variances.






-20-


*Investment
      Banking*


**Three
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              4,276
              
              $
              3,122Income
                  before income taxes
              
              $
              1,583
              
              $
              1,154


Revenues
      from investment banking increased to $4.3 million from $3.1 million, and income
      before taxes increased to $1.6 million from $1.2 million. The revenue increase
      is primarily due to greater revenues from private placement commissions during
      2005. Compensation expense increased to $2.1 million from $1.5 million in 2005
      due to the addition of personnel in the investment banking department.





*Corporate
      and Other*


**Three
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              902
              
              $
              860Loss
                  before income taxes
              
              $
              (2,504
              )
              $
              (2,418
              )


Revenues
      from corporate and other increased to $902,000 from $860,000. The loss before
      taxes increased to $2.5 million from $2.4 million in 2004.





*Six
      Months Ended June 30, 2005 Compared to Six Months Ended June 30,
      2004*





Total
      revenues were $56.8 million in the first six months of 2005 compared to $58.5
      million for the same period in 2004. A decline in revenues from commissions
      and
      investment banking was partially offset by an increase in fiduciary, custodial,
      and advisory fees. Total expenses for the first half of 2005 increased to $50.8
      million from $49.6 million in the same period of the previous year. Net income
      for the six month period ended June 30, 2005 declined to $4.1 million from
      $6.2
      million in the same period in 2004 as a result of the decline in revenues and
      increase in expenses. Basic income per share was $0.22 for the six months ended
      June 30, 2005, compared to $0.36 for the same period in 2004. Diluted income
      per
      share was $0.21 for the six months ended June 30, 2005, compared to $0.34 for
      the same period in 2004.





Commissions
      revenue declined to $21.4 million in the first six months of 2005 from $26.0
      million for the same period in 2004, primarily due to reduced trading volume
      in
      our retail and institutional divisions as well as an overall reduction in
      commission rates in our prime brokerage division. Principal transactions revenue
      totaled $4.1 million for the first six months of 2005 versus $3.4 million in
      the
      comparable 2004 period, principally due to an increase in net realized and
      unrealized gains on the Company’s investment portfolios. Investment banking
      revenue declined to $14.2 million during the first half of 2005 from $17.4
      million in the same period of 2004, principally due to a reduction in advisory
      fees and fees earned from the Company’s participation in underwriting
      syndicates. Revenues from fiduciary, custodial, and advisory fees increased
      to
      $13.1 million in the first half of 2005 from $8.7 million in the same period
      of
      2004 primarily due to the acquisitions of Charlotte Capital and Edelman and
      growth in assets under management at Salient/PMT and SMCA. Interest and dividend
      income increased to $2.3 million in the first half of 2005 from $1.8 million
      in
      the same period last year, due to higher margin interest reflecting an increase
      in margin balances. Other income increased from $1.0 million during the first
      half of 2004 to $1.7 million during the same period in 2005, due to an increase
      in fees earned on the Company’s cash balances and customer credit balances at
      its clearing banks resulting from higher deposit balances.





-21-


During
      the six months ended June 30, 2005, employee compensation and benefits declined
      to $34.2 million from $35.0 million in the same period last year due to lower
      revenues during 2005, and reflecting the direct relationship between certain
      compensation costs and revenues. Floor brokerage, exchange, and clearance fees
      declined to $2.2 million in the first six months of 2005 from $2.5 million
      in
      the same quarter of 2004 reflecting lower clearing and execution costs resulting
      from the reduced trading volume. Communication and data processing costs
      increased to $4.0 million in 2005 from $3.5 million in the same period last
      year
      resulting primarily from increased personnel and additional offices. Occupancy
      costs totaled $4.0 million during the first six months of 2005, compared to
      $3.4
      million in the prior year quarter due to expansion of our New York City offices,
      and the additions of Charlotte Capital and Edelman. Other general and
      administrative expenses increased to $6.3 million during the first six months
      of
      2005 from $5.3 million in the same period of last year mainly due to our growth.





Our
      effective tax rate was 41% for the six months ended June 30, 2005 compared
      to
      40% for the six months ended June 30, 2004.





Results
      by Segment





*Retail
      Brokerage*


**Six
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              8,029
              
              $
              8,466Income
                  before income taxes
              
              $
              791
              
              $
              619


Revenues
      from retail brokerage declined to $8.0 million from $8.5 million, and income
      before income taxes increased to $791,000 from $619,000. Commission revenue
      declined to $4.4 million from $4.8 million due to lower trading volume during
      2005. Compensation expense declined to $5.5 million from $6.1 million,
      principally due to lower revenues as well as reduced amortization of employee
      loans, which are paid to brokers upon their hire and then amortized to
      compensation expense over a specified employment term.





*Institutional
      Brokerage*


**Six
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              12,857
              
              $
              16,306Income
                  before income taxes
              
              $
              1,639
              
              $
              2,786


Revenues
      from institutional brokerage declined to $12.9 million from $16.3 million,
      and
      income before taxes declined to $1.6 million from $2.8 million. Commission
      revenue declined to $8.0 million from $10.1 million due to a slowdown in
      institutional commission transactions and a decline in commission rates. Sales
      credits from investment banking transactions declined to $3.2 million from
      $4.6
      million, due to a decrease in fees earned from the Company’s participation in
      underwriting syndicates. Compensation expense declined from $10.6 million during
      2004 to $8.5 million during 2005 primarily due to the revenue decline.





-22-


*Asset
      Management*


**Six
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              17,194
              
              $
              13,632Income
                  before income taxes
              
              $
              4,977
              
              $
              5,712


Revenues
      from asset management increased to $17.2 million from $13.6 million, and income
      before taxes declined to $5.0 million from $5.7 million. Fiduciary, custodial
      and advisory fees increased to $12.5 million from $8.1 million. The acquisitions
      of Charlotte Capital in April 2004 and Edelman in May 2005, and growth in assets
      under management at Salient/PMT and SMCA have contributed to the increase in
      revenues from advisory fees. Total expenses rose to $12.8 million from $9.3
      million due to the higher revenues and the acquisitions of Charlotte Capital
      and
      Edelman. The change in value of our investments in limited partnerships resulted
      in a gain of $2.2 million in 2005, compared to $2.8 million in 2004. Minority
      interests in net income of consolidated companies reflect the portion of net
      income attributable to minority interest ownership of entities included in
      the
      Company’s consolidated financial statements. Income attributable to minority
      interests, which reduces SMHG’s pretax income, increased to $1.6 million in 2005
      from $1.4 million in 2004, principally due to increased income from the
      Company’s ownership of 69% of Charlotte Capital and 51% of Edelman.




*Prime
      Brokerage*


**Six
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              8,877
              
              $
              9,831Income
                  before income taxes
              
              $
              998
              
              $
              1,629


Revenues
      from prime brokerage declined to $8.9 million from $9.8 million, and income
      before taxes decreased to $998,000 from $1.6 million. Commission revenue
      decreased to $6.7 million from $8.1 million reflecting an overall reduction
      in
      commission rates. Compensation expense decreased to $4.0 million from $4.9
      million due to lower revenues and reduced personnel. The percentage decline
      in
      income before taxes was greater than the percentage decline in revenues
      principally due to increases in those costs of the business that are not
      directly related to revenue variances.





-23-


*Investment
      Banking*


**Six
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              7,949
              
              $
              8,972Income
                  before income taxes
              
              $
              2,616
              
              $
              4,592


Revenues
      from investment banking declined to $7.9 million from $9.0 million, and income
      before taxes decreased to $2.6 million from $4.6 million. The revenue decline
      is
      primarily due to decreased revenues from advisory fees during 2005.





*Corporate
      and Other*


**Six
                  Months Ended June 30,****2005**
              
              **2004**(in
                  thousands)Revenues
              
              $
              1,933
              
              $
              1,255Loss
                  before income taxes
              
              $
              (4,161
              )
              $
              (5,051
              )


Revenues
      from corporate and other increased to $1.9 million from $1.3 million due to
      an
      increase in interest income reflecting higher margin interest caused by an
      increase in margin balances. The loss before taxes declined to $4.2 million
      from
      $5.1 million, primarily due to the revenue increase.





**Liquidity
      and Capital Resources**





We
      intend
      to satisfy a large portion of our funding needs with our own capital resources,
      consisting largely of internally generated earnings and liquid assets we
      currently hold. We will use borrowed funds as necessary to supplement our own
      capital resources.





At
      June
      30, 2005, we had approximately $14.3 million in cash and cash equivalents,
      which
      together with receivables from broker-dealers, deposits with clearing brokers,
      marketable securities owned, and securities available for sale represented
      about
      20% of our total assets at the end of the second quarter.





For
      the
      six months ended June 30, 2005, net cash provided by operations totaled $422,000
      versus net cash used in operations of $3.4 million during the first six months
      of 2004. Accounts payable and accrued liabilities decreased by $6.1 million
      during the six months ended June 30, 2005, principally due to the payment of
      accrued compensation during the first quarter of 2005. Securities owned declined
      by $6.6 million during the first six months of 2005, primarily due to the
      disposition of a portion of the securities that comprise the investment
      portfolio. The net dispositions were partially offset by realized and unrealized
      gains on the investments which are generally reinvested in the portfolio. The
      decrease of $3.4 million in securities sold, not yet purchased in 2005 consist
      primarily of securities sold short to hedge against similar positions recorded
      as securities owned.





Capital
      expenditures for the first half of 2005 were $1.4 million, mainly for the
      purchase of furniture, computer equipment, and software, as well as for
      leasehold improvements, necessary for our growth.





-24-


Short
      term borrowings increased by $10.5 million during 2005 reflecting the Company’s
      entry into a revolving credit arrangement with a bank.





At
      June
      30, 2005, SMH, our registered broker-dealer subsidiary, was in compliance with
      the net capital requirements of the Securities and Exchange Commission's Uniform
      Net Capital Rules and had capital in excess of the required minimum. Pinnacle
      Trust Co., LTA was in compliance with the Texas Department of Banking net
      capital requirement and had capital in excess of the required minimum.





We
      are a
      party to various legal proceedings that are of an ordinary or routine nature
      incidental to our operations. We believe we have adequately reserved for such
      litigation matters and that they will not have a material adverse effect on
      our
      consolidated financial position, results of operations, or cash
      flows.





**Factors
      Affecting Forward-Looking Statements**





This
      quarterly report on Form 10-Q includes "forward-looking statements" within
      the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities and Exchange Act of 1934, as amended (the "Acts"). These
      forward-looking statements may relate to such matters as anticipated financial
      performance, future revenues or earnings, business prospects, projected
      ventures, new products, anticipated market performance and similar matters.
      The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. To comply with the safe harbor, the Company cautions
      readers that a variety of factors could cause the Company's actual results
      to
      differ materially from the anticipated results or other expectations expressed
      in the Company's forward-looking statements. These risks and uncertainties,
      many
      of which are beyond the Company's control, include, but are not limited to
      (1)
      trading volume in the securities markets; (2) volatility of the securities
      markets and interest rates; (3) changes in regulatory requirements, which could
      affect the demand for the Company's services or the cost of doing business;
      (4)
      general economic conditions, both domestic and foreign, especially in the
      regions where the Company does business; (5) changes in the rate of inflation
      and related impact on securities markets; (6) competition from existing
      financial institutions and other new participants in the securities markets;
      (7)
      legal developments affecting the litigation experience of the securities
      industry; (8) successful implementation of technology solutions; (9) changes
      in
      valuations of the Company’s trading and warrant portfolios resulting from
      mark-to-market adjustments; (10) dependence on key personnel; (11) demand for
      the Company's services; and (12) litigation and securities law liabilities.
      The
      Company does not undertake to publicly update or revise any forward-looking
      statements.





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




Risk
        is
        an inherent part of our business. The extent to which we properly and
        effectively identify, assess, monitor, and manage each of the various types
        of
        risk involved in our activities is critical to our soundness and profitability.
        The primary risks that we seek to manage are market, credit, operational,
        and
        legal.
 
 We
        manage
        risk exposure through the involvement of various levels of management. Position
        limits in trading and inventory accounts are established and monitored on
        an
        ongoing basis. Current and proposed underwriting and other commitments are
        subject to due diligence reviews by senior management, as well as professionals
        in the appropriate business and support units involved. We monitor our exposure
        to counter-party risk through the use of credit exposure information, the
        monitoring of collateral values, and the establishment of credit limits.
  **Credit
        Risk**
 
 Credit
        risk arises from the potential nonperformance by counter-parties, customers,
        or
        issuers of debt securities or other instrument that we hold. We are exposed
        to
        credit risk as a trading counter-party to dealers and customers and as a
        holder
        of securities. Since we clear all securities transactions through Pershing
        LLC
        and other clearing brokers on a fully disclosed basis we are not subject
        to the
        credit exposure associated with customer margin accounts.
  -25-
 **Operational
        Risk**
 
 Operational
        risk refers generally to risk of loss resulting from our operations, including
        but not limited to, improper or unauthorized execution and processing of
        transactions, deficiencies in our operating systems, business disruptions,
        and
        inadequacies or breaches in our control processes. We operate different
        businesses in diverse markets and rely on the ability of our employees and
        systems to process large numbers of transactions in limited time frames.
        In
        order to mitigate and control operational risk, we have developed and continue
        to enhance specific policies and procedures that are designed to identify
        and
        manage operational risk at appropriate levels.
 
 Disaster
        recovery plans exist for our critical systems. We believe that our disaster
        recovery program, including off-site back-up technology and operational
        facilities, is adequate to handle a reasonable business disruption. However,
        there is no assurance that a disaster affecting our headquarters, our operations
        centers, or the operations of our clearing brokers would not have a material
        adverse impact.
  **Legal
        Risk**
 
 Legal
        risk includes the risk of non-compliance with applicable legal and regulatory
        requirements. We are subject to extensive regulation in the different
        jurisdictions in which we conduct business. We have established procedures
        based
        on legal and regulatory requirements that are designed to ensure compliance
        with
        all applicable statutory and regulatory requirements. We also have established
        procedures that are designed to ensure that executive management’s policies
        relating to conduct, ethics and business practices are followed. In connection
        with our business, we have various procedures addressing significant issues
        such
        as regulatory capital requirements, sales and trading practices, new products,
        use and safekeeping of customer funds and securities, money-laundering,
        protection of client information, and record keeping.
  **Market
        Risk**
 
 Market
        risk generally represents the risk of loss that may result from the potential
        change in value of a financial instrument as a result of fluctuations in
        interest rates, equity prices, indices, and liquidity, and changes in credit
        ratings of issuers. Our exposure to market risk is directly related to our
        role
        as a financial intermediary in customer-related transactions and as a market
        maker for certain securities traded on the Nasdaq Stock Market, and to our
        proprietary trading activities.
  Interest
        rate risk is a consequence of maintaining inventory positions and trading
        in
        interest-rate-sensitive financial instruments. Our fixed income activities
        also
        expose us to the risk of loss related to changes in credit spreads. Credit
        spread risk arises from the potential that changes in an issuer’s credit rating
        or credit perception could affect the value of financial instruments.
 
 We
        are
        exposed to equity price risk as a result of making markets and taking
        proprietary positions in equity securities. Equity price risk results from
        changes in the level or volatility of equity prices, which affect the value
        of
        equity securities or instruments that derive their value from a particular
        stock, a basket of stocks, or a stock index.
 
 Virtually
        all of our trading inventory is denominated in U.S. dollars, therefore
        minimizing foreign exchange risk. We do not deal in, or hold, interest rate
        or
        currency swaps or other similar off-balance sheet instruments. We generally
        do
        not deal in, or hold, commodity futures.


At
      June
      30, 2005, securities owned by the Company were recorded at a fair value of
      $52.7
      million, including $17.3 million in marketable securities, $29.1 million
      representing the Company’s investments in limited partnerships, and $6.3 million
      representing other not readily marketable securities.





At
      June
      30, 2005, Salient/PMT had securities available for sale with a fair value of
      $3.9 million. These securities have an original cost of $3.9 million, and are
      subject to price risk. At June 30, 2005, the unrealized decline in market value
      totaling $41,000 less tax of $17,000 has been included as a separate component
      of shareholders’ equity.




Management
      evaluates the realizability of securities available for sale to determine if
      a
      decline in value is other than temporary. Such evaluation considers the length
      of time and the extent to which market value has been less than cost, the
      financial condition and near-term prospects of the issuer, and the intent and
      ability of the Company to retain its investment in the issuer for a period
      of
      time sufficient to allow for any anticipated recovery in market value.
      Management believes the unrealized losses are temporary at June 30, 2005.
      However, a write-down accounted for as a realized loss may be necessary in
      the
      future.





-26-


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




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





-27-


**PART
      II. OTHER INFORMATION**





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





We
      are a
      party to various legal proceedings that are of an ordinary or routine nature
      incidental to our operations. Certain of our litigation and claims are covered
      by insurance with a maximum deductible per occurrence of $100,000. We believe
      we
      have adequately reserved for such litigation matters and that they will not
      have
      a material adverse effect on our consolidated financial position, results of
      operations, or cash flows.





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





On
      April
      15, 2005, the Company contributed 69,950 shares of common stock to SMH Colorado
      LLC in connection with the acquisition of 50% of the investment advisory
      business of two financial advisers based in Colorado Springs, Colorado. SMH
      Colorado LLC distributed such shares to Steven D. Rodemer and Richard A. Walsh.
      Both Mr. Rodemer and Mr. Walsh are “accredited investors” as defined by
      Regulation D. The issuance of such shares was exempt from registration under
      Section 4(2) of the Securities Act of 1933 as a transaction not involving a
      public offering.





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





On
      June
      16, 2005, the Company held its annual meeting of shareholders to vote for
      election of directors to the Company’s Board of Directors. Each nominee was
      elected and the results of the votes were as follows:




**Number
                  of**
              
              **Number
                  of**
              
              **Number
                  of****Shares**
              
              **Shares**
              
              **Broker****Voted
                  For**
              
              **Withheld**
              
              **Non-Votes**George
                  L. Ball
              
              
              17,175,095
              
              
              155,616
              
              
              --Richard
                  E. Bean
              
              
              17,042,372
              
              
              288,339
              
              
              --Robert
                  M. Collie
              
              
              17,144,649
              
              
              186,062
              
              
              --Charles
                  W. Duncan III
              
              
              17,145,149
              
              
              185,562
              
              
              --Robert
                  E. Garrison II
              
              
              17,174,195
              
              
              156,516
              
              
              --Titus
                  H. Harris, Jr.
              
              
              17,071,418
              
              
              259,293
              
              
              --Gerald
                  H. Hunsicker
              
              
              17,178,070
              
              
              152,641
              
              
              --Scott
                  McClelland
              
              
              17,178,895
              
              
              151,816
              
              
              --Ben
                  T. Morris
              
              
              17,175,095
              
              
              155,616
              
              
              --Dr.
                  Albert W. Niemi, Jr.
              
              
              17,076,118
              
              
              254,593
              
              
              --Nolan
                  Ryan
              
              
              16,569,509
              
              
              761,202
              
              
              --Don
                  A. Sanders
              
              
              17,142,749
              
              
              187,962
              
              
              --W.
                  Blair Waltrip
              
              
              17,107,004
              
              
              223,707
              
              
              --Dan
                  S. Wilford
              
              
              17,178,895
              
              
              151,816
              
              
              --


-28-


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




**Exhibit**
 **Number**
              **Description**
 
 2.1
              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, and incorporated
                  herein by reference).




3.1
            Articles
                of Incorporation of the Company, as amended (Filed as Exhibit 3.2
                to the
                Company’s Quarterly report on Form 10Q for the quarter ended June 30,
                2004, filed on August 9, 2004 (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
                  Annual Report on Form 10-K for the year ended December 31, 1998
                  (File No.
                  333-65417), and incorporated herein by reference).
 
 †10.01
              1998
                  Incentive Plan of the Company, as amended (Filed as Appendix A
                  to the
                  Definitive Proxy Statement on Schedule 14A of the Company dated
                  May 3,
                  2002 and incorporated herein by
                  reference).
 
 †10.02
              Sanders Morris Harris Group
                  Inc. Capital
                  Incentive Program (Filed as Exhibit 10.1 to the Company’s Form 10-Q for
                  the quarter ended September 30, 2001 (File No. 000-30066) and incorporated
                  herein by reference.




10.03
            Sublease
                Agreement dated January 19, 1994 between Texas Commerce Bank National
                Association and Harris Webb & Garrison, Inc., as amended by that
                certain First Amendment to Sublease Agreement dated February 23,
                1994, the
                Second Amendment to Sublease Agreement dated April 26, 1994, and
                the Third
                Amendment to Sublease Agreement dated January 19, 1995 (Filed
                as Exhibit 10.16 to the Proxy Statement/Prospectus
                of the
                Company dated December 31, 1998 (File No. 333-65417) and incorporated
                herein by reference).




10.04
            Letter
                Agreement dated April 7, 1999 between the Pershing Division of Donaldson,
                Lufkin Jenrette Securities Corporation and Harris Webb & Garrison,
                Inc. (Filed as Exhibit 10.20 to the Company's Annual Report on Form
                10-K
                for the year ended December 31, 1999 (File No. 000-30066), and
                incorporated herein by
                reference).




10.05
            Autotrust
                Agreement dated January 9, 1998 between SunGard Trust Systems Inc.
                and
                Pinnacle Management & Trust Company (Filed as Exhibit 10.19 to
                the Proxy Statement/Prospectus of the Company dated December 31,
                1998
                (File No. 333-65417) and incorporated herein by
                reference).




10.06
              Office
                  Lease Agreement and related amendments dated September 25, 1996
                  between
                  Texas TowerLimited
                  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
              Credit
                  Agreement dated as of May 9, 2005, between Sanders Morris Harris
                  Group
                  Inc. and JPMorgan Chase Bank, National
                  Association.




*31.1
              Rule
                  13a-14(a)/15d - 14(a) Certification of Chief Executive Officer.
 
 *31.2
              Rule 13a-14(a)/15d - 14(a) Certification
                of
                Chief Financial Officer.
 
 *32.1
              Certification Pursuant to 18 U.S.C.
                1350, as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.
 
 *32.2
              Certification Pursuant to 18 U.S.C.
                1350, as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.








*
            Filed
                herewith.


†
            Management
                contract on compensation plan or arrangement.






-29-
 **SIGNATURES**





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




**SANDERS
                  MORRIS HARRIS GROUP, INC.**By:
              /s/ Ben
                T. MorrisBen
                  T. Morris
                Chief Executive
                  Officer
 By:
                /s/ Rick
                  BerryRick
                    Berry
                  Chief Financial Officer
 Date:  August
        8,
        2005








-30-