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 SEPTEMBER 30, 2010




OR




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




Commission
File No. 000-30066




SANDERS
MORRIS HARRIS GROUP INC.




(Exact
name of registrant as specified in its charter)




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




(713)
224-3100




(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


x
Yes   ̈
No




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).


 ̈
Yes   ̈
No




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




Large
      accelerated filer   ̈
              Accelerated
      filerxNon-accelerated
      filer   ̈
              Smaller
      reporting company  ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


 ̈
Yes  x
No




As of November 5, 2010, the registrant
had 28,878,141 outstanding shares of common stock, par value $0.01 per
share.










SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES





INDEX





PagePART
      I.
                                                  FINANCIAL
      INFORMATIONItem
      1.
                                                  
                                                  Financial
      Statements
                                                  
                                                  2Condensed
      Consolidated Balance Sheets as of September 30, 2010 (unaudited)
      andDecember
      31, 2009
                                                  
                                                  2Condensed
      Consolidated Statements of Operations for the Three and Nine
      MonthsEnded
      September 30, 2010 and 2009 (unaudited)
                                                  
                                                  3Condensed
      Consolidated Statement of Changes in Equity for the Nine
      MonthsEnded
      September 30, 2010 (unaudited)
                                                  
                                                  4Condensed
      Consolidated Statements of Cash Flows for the Nine MonthsEnded
      September 30, 2010 and 2009 (unaudited)
                                                  
                                                  5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                                  
                                                  6Item
      2.
                                                  
                                                  Management's
      Discussion and Analysis of Financial Condition and Results
    ofOperations
                                                  
                                                  24Item
      3.
                                                  
                                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                                  
                                                  37Item
      4.
                                                  
                                                  Controls
      and Procedures
                                                  
                                                  37PART
      II.
                                                  OTHER
      INFORMATIONItem
      1.
                                                  
                                                  Legal
      Proceedings
                                                  
                                                  38Item
      1A.
                                                  
                                                  Risk
      Factors
                                                  
                                                  39Item
      2.
                                                  
                                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                  
                                                  39Item
      5.
                                                  
                                                  Other
      Information
                                                  
                                                  39Item
      6.
                                                  
                                                  Exhibits
                                                  
                                                  40




1


PART
I.   FINANCIAL INFORMATION





Item
1.  Financial
Statements




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 As
of September 30, 2010 and December 31, 2009
 (in
thousands, except share and per share amounts)
 
 September 30,
                                          
                                          
                                          December 31,2010
                                          
                                          
                                          2009(unaudited)ASSETSCash
      and cash equivalents
                                          
                                          $
                                          33,168
                                          
                                          
                                          $
                                          41,926Receivables,
      net
                                          
                                          
                                          120,822
                                          
                                          
                                          
                                          113,072Deposits
      with clearing organizations
                                          
                                          
                                          1,973
                                          
                                          
                                          
                                          2,527Securities
      owned
                                          
                                          
                                          34,588
                                          
                                          
                                          
                                          39,380Furniture,
      equipment, and leasehold improvements, net
                                          
                                          
                                          13,790
                                          
                                          
                                          
                                          14,617Other
      assets and prepaid expenses
                                          
                                          
                                          3,689
                                          
                                          
                                          
                                          2,863Goodwill,
      net
                                          
                                          
                                          73,864
                                          
                                          
                                          
                                          73,455Other
      intangible assets, net
                                          
                                          
                                          31,818
                                          
                                          
                                          
                                          32,198Total
      assets
                                          
                                          $
                                          313,712
                                          
                                          
                                          $
                                          320,038LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued liabilities
                                          
                                          $
                                          32,683
                                          
                                          
                                          $
                                          35,357Borrowings
                                          
                                          
                                          14,881
                                          
                                          
                                          
                                          20,238Deferred
      tax liability, net
                                          
                                          
                                          19,798
                                          
                                          
                                          
                                          15,455Securities
      sold, not yet purchased
                                          
                                          
                                          6,951
                                          
                                          
                                          
                                          8,339Payable
      to broker-dealers and clearing organizations
                                          
                                          
                                          -
                                          
                                          
                                          
                                          22Total
      liabilities
                                          
                                          
                                          74,313
                                          
                                          
                                          
                                          79,411Commitments
      and contingenciesEquity:Preferred
      stock, $0.10 par value; 10,000,000 shares authorized; no shares issued and
      outstanding
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Common
      stock, $0.01 par value; 100,000,000 shares authorized; 30,043,171 and
      29,882,238 shares issued, respectively
                                          
                                          
                                          300
                                          
                                          
                                          
                                          299Additional
      paid-in capital
                                          
                                          
                                          242,552
                                          
                                          
                                          
                                          240,450Accumulated
      deficit
                                          
                                          
                                          (15,511
                                          )
                                          
                                          
                                          (16,555
                                          )Treasury
      stock, at cost, 1,066,512 and 0 shares, respectively
                                          
                                          
                                          (5,695
                                          )
                                          
                                          
                                          -Total
      Sanders Morris Harris Group Inc. shareholders' equity
                                          
                                          
                                          221,646
                                          
                                          
                                          
                                          224,194Noncontrolling
      interest
                                          
                                          
                                          17,753
                                          
                                          
                                          
                                          16,433Total
      equity
                                          
                                          
                                          239,399
                                          
                                          
                                          
                                          240,627Total
      liabilities and equity
                                          
                                          $
                                          313,712
                                          
                                          
                                          $
                                          320,038
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.




2




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except per share amounts)
 (unaudited)
 
 Three Months Ended
                                                              
                                                              
                                                              Nine Months EndedSeptember 30,
                                                              
                                                              
                                                              September 30,2010
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2010
                                                              
                                                              
                                                              2009Revenue:Investment
      advisory and related services
                                                              
                                                              $
                                                              23,875
                                                              
                                                              
                                                              $
                                                              19,426
                                                              
                                                              
                                                              $
                                                              68,894
                                                              
                                                              
                                                              $
                                                              50,891Commissions
                                                              
                                                              
                                                              9,178
                                                              
                                                              
                                                              
                                                              11,462
                                                              
                                                              
                                                              
                                                              32,833
                                                              
                                                              
                                                              
                                                              33,034Principal
      transactions
                                                              
                                                              
                                                              2,920
                                                              
                                                              
                                                              
                                                              4,935
                                                              
                                                              
                                                              
                                                              13,895
                                                              
                                                              
                                                              
                                                              24,960Investment
      banking
                                                              
                                                              
                                                              502
                                                              
                                                              
                                                              
                                                              508
                                                              
                                                              
                                                              
                                                              2,913
                                                              
                                                              
                                                              
                                                              1,423Interest
      and dividends
                                                              
                                                              
                                                              2,444
                                                              
                                                              
                                                              
                                                              2,504
                                                              
                                                              
                                                              
                                                              7,840
                                                              
                                                              
                                                              
                                                              7,899Other
      income
                                                              
                                                              
                                                              2,173
                                                              
                                                              
                                                              
                                                              2,578
                                                              
                                                              
                                                              
                                                              7,526
                                                              
                                                              
                                                              
                                                              7,134Total
      revenue
                                                              
                                                              
                                                              41,092
                                                              
                                                              
                                                              
                                                              41,413
                                                              
                                                              
                                                              
                                                              133,901
                                                              
                                                              
                                                              
                                                              125,341Expenses:Employee
      compensation and benefits
                                                              
                                                              
                                                              24,526
                                                              
                                                              
                                                              
                                                              23,788
                                                              
                                                              
                                                              
                                                              80,878
                                                              
                                                              
                                                              
                                                              77,955Floor
      brokerage, exchange, and clearance fees
                                                              
                                                              
                                                              1,050
                                                              
                                                              
                                                              
                                                              1,373
                                                              
                                                              
                                                              
                                                              3,967
                                                              
                                                              
                                                              
                                                              4,627Communications
      and data processing
                                                              
                                                              
                                                              3,199
                                                              
                                                              
                                                              
                                                              2,600
                                                              
                                                              
                                                              
                                                              9,251
                                                              
                                                              
                                                              
                                                              7,361Occupancy
                                                              
                                                              
                                                              3,476
                                                              
                                                              
                                                              
                                                              3,150
                                                              
                                                              
                                                              
                                                              10,004
                                                              
                                                              
                                                              
                                                              8,718Interest
                                                              
                                                              
                                                              479
                                                              
                                                              
                                                              
                                                              1,263
                                                              
                                                              
                                                              
                                                              1,402
                                                              
                                                              
                                                              
                                                              2,083Goodwill
      and other intangible assets impairment charges
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              14,928Amortization
      of other intangible assets
                                                              
                                                              
                                                              445
                                                              
                                                              
                                                              
                                                              289
                                                              
                                                              
                                                              
                                                              1,335
                                                              
                                                              
                                                              
                                                              962Other
      general and administrative
                                                              
                                                              
                                                              6,263
                                                              
                                                              
                                                              
                                                              6,208
                                                              
                                                              
                                                              
                                                              20,654
                                                              
                                                              
                                                              
                                                              17,462Total
      expenses
                                                              
                                                              
                                                              39,438
                                                              
                                                              
                                                              
                                                              38,671
                                                              
                                                              
                                                              
                                                              127,491
                                                              
                                                              
                                                              
                                                              134,096Income
      (loss) from continuing operations before equity in income of limited
      partnerships and income taxes
                                                              
                                                              
                                                              1,654
                                                              
                                                              
                                                              
                                                              2,742
                                                              
                                                              
                                                              
                                                              6,410
                                                              
                                                              
                                                              
                                                              (8,755
                                                              )Equity
      in income of limited partnerships
                                                              
                                                              
                                                              1,741
                                                              
                                                              
                                                              
                                                              1,772
                                                              
                                                              
                                                              
                                                              5,331
                                                              
                                                              
                                                              
                                                              2,760Gain
      on step acquisition
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              3,000Income
      (loss) from continuing operations before income taxes
                                                              
                                                              
                                                              3,395
                                                              
                                                              
                                                              
                                                              4,514
                                                              
                                                              
                                                              
                                                              11,741
                                                              
                                                              
                                                              
                                                              (2,995
                                                              )Provision
      (benefit) for income taxes
                                                              
                                                              
                                                              815
                                                              
                                                              
                                                              
                                                              1,166
                                                              
                                                              
                                                              
                                                              3,151
                                                              
                                                              
                                                              
                                                              (1,987
                                                              )Income
      (loss) from continuing operations, net of income taxes
                                                              
                                                              
                                                              2,580
                                                              
                                                              
                                                              
                                                              3,348
                                                              
                                                              
                                                              
                                                              8,590
                                                              
                                                              
                                                              
                                                              (1,008
                                                              )Loss
      from discontinued operations, net of income taxes
                                                              
                                                              
                                                              (172
                                                              )
                                                              
                                                              
                                                              (840
                                                              )
                                                              
                                                              
                                                              (430
                                                              )
                                                              
                                                              
                                                              (3,934
                                                              )Net
      income (loss)
                                                              
                                                              
                                                              2,408
                                                              
                                                              
                                                              
                                                              2,508
                                                              
                                                              
                                                              
                                                              8,160
                                                              
                                                              
                                                              
                                                              (4,942
                                                              )Less:
      Net income attributable to the noncontrolling interest
                                                              
                                                              
                                                              (1,262
                                                              )
                                                              
                                                              
                                                              (1,409
                                                              )
                                                              
                                                              
                                                              (3,631
                                                              )
                                                              
                                                              
                                                              (3,665
                                                              )Net
      income (loss) attributable to Sanders Morris Harris Group
    Inc.
                                                              
                                                              $
                                                              1,146
                                                              
                                                              
                                                              $
                                                              1,099
                                                              
                                                              
                                                              $
                                                              4,529
                                                              
                                                              
                                                              $
                                                              (8,607
                                                              )Basic
      earnings (loss) per common share:Continuing
      operations
                                                              
                                                              $
                                                              0.05
                                                              
                                                              
                                                              $
                                                              0.07
                                                              
                                                              
                                                              $
                                                              0.17
                                                              
                                                              
                                                              $
                                                              (0.17
                                                              )Discontinued
      operations
                                                              
                                                              
                                                              (0.01
                                                              )
                                                              
                                                              
                                                              (0.03
                                                              )
                                                              
                                                              
                                                              (0.02
                                                              )
                                                              
                                                              
                                                              (0.14
                                                              )Net
      earnings (loss)
                                                              
                                                              $
                                                              0.04
                                                              
                                                              
                                                              $
                                                              0.04
                                                              
                                                              
                                                              $
                                                              0.15
                                                              
                                                              
                                                              $
                                                              (0.31
                                                              )Diluted
      earnings (loss) per common share:Continuing
      operations
                                                              
                                                              $
                                                              0.05
                                                              
                                                              
                                                              $
                                                              0.07
                                                              
                                                              
                                                              $
                                                              0.17
                                                              
                                                              
                                                              $
                                                              (0.17
                                                              )Discontinued
      operations
                                                              
                                                              
                                                              (0.01
                                                              )
                                                              
                                                              
                                                              (0.03
                                                              )
                                                              
                                                              
                                                              (0.02
                                                              )
                                                              
                                                              
                                                              (0.14
                                                              )Net
      earnings (loss)
                                                              
                                                              $
                                                              0.04
                                                              
                                                              
                                                              $
                                                              0.04
                                                              
                                                              
                                                              $
                                                              0.15
                                                              
                                                              
                                                              $
                                                              (0.31
                                                              )Weighted
      average common shares outstanding:Basic
                                                              
                                                              
                                                              29,153
                                                              
                                                              
                                                              
                                                              27,797
                                                              
                                                              
                                                              
                                                              29,519
                                                              
                                                              
                                                              
                                                              27,689Diluted
                                                              
                                                              
                                                              29,155
                                                              
                                                              
                                                              
                                                              28,497
                                                              
                                                              
                                                              
                                                              29,524
                                                              
                                                              
                                                              
                                                              27,689Amounts attributable
      to Sanders Morris Harris Group Inc. common shareholders:Income
      (loss) from continuing operations, net of income taxes
                                                              
                                                              $
                                                              1,318
                                                              
                                                              
                                                              $
                                                              1,939
                                                              
                                                              
                                                              $
                                                              4,959
                                                              
                                                              
                                                              $
                                                              (4,673
                                                              )Discontinued
      operations, net of income taxes
                                                              
                                                              
                                                              (172
                                                              )
                                                              
                                                              
                                                              (840
                                                              )
                                                              
                                                              
                                                              (430
                                                              )
                                                              
                                                              
                                                              (3,934
                                                              )Net
      income (loss)
                                                              
                                                              $
                                                              1,146
                                                              
                                                              
                                                              $
                                                              1,099
                                                              
                                                              
                                                              $
                                                              4,529
                                                              
                                                              
                                                              $
                                                              (8,607
                                                              )
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.




3




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 For
the Nine Months Ended September 30, 2010
 (in
thousands, except share and per share amounts)
 (unaudited)
 
 Amounts
                                                
                                                
                                                SharesCommon
      stock:Balance,
      beginning of period
                                                
                                                $
                                                299
                                                
                                                
                                                
                                                29,882,238Stock
      issued pursuant to stock-based compensation plan
                                                
                                                
                                                1
                                                
                                                
                                                
                                                160,933Balance,
      end of period
                                                
                                                
                                                300
                                                
                                                
                                                
                                                30,043,171Additional
      paid-in capital:Balance,
      beginning of period
                                                
                                                
                                                240,450Stock
      issued pursuant to stock-based compensation plan; including tax
      benefit
                                                
                                                
                                                88Cash
      settlement of stock options
                                                
                                                
                                                (140
                                                )Tax
      adjustment related to stock-based compensation plan
                                                
                                                
                                                690Stock-based
      compensation expense
                                                
                                                
                                                1,464Balance,
      end of period
                                                
                                                
                                                242,552Accumulated
      deficit:Balance,
      beginning of period
                                                
                                                
                                                (16,555
                                                )Cumulative
      effect of adoption of a new accounting principle
                                                
                                                
                                                483Cash
      dividends ($0.135 per share)
                                                
                                                
                                                (3,968
                                                )Net
      income attributable to Sanders Morris Harris Group Inc.
                                                
                                                
                                                4,529Balance,
      end of period
                                                
                                                
                                                (15,511
                                                )Treasury
      stock:Balance,
      beginning of period
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Acquisition
      of treasury stock
                                                
                                                
                                                (5,695
                                                )
                                                
                                                
                                                (1,066,512
                                                )Balance,
      end of period
                                                
                                                
                                                (5,695
                                                )
                                                
                                                
                                                (1,066,512
                                                )Noncontrolling
      interest:Balance,
      beginning of period
                                                
                                                
                                                16,433Cumulative
      effect of adoption of a new accounting principle
                                                
                                                
                                                (584
                                                )Purchase
      of membership interest
                                                
                                                
                                                410Contributions
                                                
                                                
                                                -Distributions
                                                
                                                
                                                (2,137
                                                )Net
      income attributable to the noncontrolling interest
                                                
                                                
                                                3,631Balance,
      end of period
                                                
                                                
                                                17,753Total
      equity and common shares outstanding
                                                
                                                $
                                                239,399
                                                
                                                
                                                
                                                28,976,659
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.




4





SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (unaudited)
 
 Nine Months EndedSeptember 30,2010
                                      
                                      
                                      2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                      
                                      $
                                      8,160
                                      
                                      
                                      $
                                      (4,942
                                      )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Loss
      on sales of assets
                                      
                                      
                                      1
                                      
                                      
                                      
                                      12Depreciation
                                      
                                      
                                      3,255
                                      
                                      
                                      
                                      3,280Provision
      for bad debts
                                      
                                      
                                      1,874
                                      
                                      
                                      
                                      127Stock-based
      compensation expense
                                      
                                      
                                      1,464
                                      
                                      
                                      
                                      2,921Goodwill
      and other intangible assets impairment charges
                                      
                                      
                                      -
                                      
                                      
                                      
                                      14,928Amortization
      of other intangible assets
                                      
                                      
                                      1,335
                                      
                                      
                                      
                                      962Deferred
      income taxes
                                      
                                      
                                      4,343
                                      
                                      
                                      
                                      (2,225
                                      )Equity
      in income of limited partnerships
                                      
                                      
                                      (5,331
                                      )
                                      
                                      
                                      (2,760
                                      )Gain
      on step acquisition
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,000
                                      )Unrealized
      and realized (gain) loss on not readily marketable securities owned,
      net
                                      
                                      
                                      (759
                                      )
                                      
                                      
                                      58Not
      readily maketable securities owned received for payment of investment
      banking fees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (21
                                      )Net
      change in:Receivables
                                      
                                      
                                      (9,467
                                      )
                                      
                                      
                                      (4,238
                                      )Deposits
      with clearing organizations
                                      
                                      
                                      554
                                      
                                      
                                      
                                      (501
                                      )Marketable
      securities owned
                                      
                                      
                                      8,198
                                      
                                      
                                      
                                      9,156Other
      assets and prepaid expenses
                                      
                                      
                                      (814
                                      )
                                      
                                      
                                      (702
                                      )Accounts
      payable and accrued liabilities
                                      
                                      
                                      (2,946
                                      )
                                      
                                      
                                      (2,359
                                      )Securities
      sold, not yet purchased
                                      
                                      
                                      (1,388
                                      )
                                      
                                      
                                      (7,386
                                      )Payable
      to broker-dealers and clearing organizations
                                      
                                      
                                      (22
                                      )
                                      
                                      
                                      (2,029
                                      )Net
      cash provided by operating activities
                                      
                                      
                                      8,457
                                      
                                      
                                      
                                      1,281CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                      
                                      
                                      (2,404
                                      )
                                      
                                      
                                      (1,607
                                      )Acquisitions,
      net of cash acquired of $0 and $210, respectively
                                      
                                      
                                      (750
                                      )
                                      
                                      
                                      (25,324
                                      )Cumulative
      effect of adoption of a new accounting principle
                                      
                                      
                                      344
                                      
                                      
                                      
                                      -Purchases
      of not readily marketable securities owned
                                      
                                      
                                      (149
                                      )
                                      
                                      
                                      (493
                                      )Proceeds
      from sales of not readily marketable securities owned
                                      
                                      
                                      2,220
                                      
                                      
                                      
                                      7,341Proceeds
      from sales of assets
                                      
                                      
                                      8
                                      
                                      
                                      
                                      110Net
      cash used in investing activities
                                      
                                      
                                      (731
                                      )
                                      
                                      
                                      (19,973
                                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchases
      of treasury stock
                                      
                                      
                                      (5,695
                                      )
                                      
                                      
                                      (28
                                      )Proceeds
      from shares issued pursuant to stock-based compensation plan
                                      
                                      
                                      86
                                      
                                      
                                      
                                      225Tax
      benefit of stock options exercised
                                      
                                      
                                      3
                                      
                                      
                                      
                                      17Tax
      adjustment related to stock-based compensation plan
                                      
                                      
                                      690
                                      
                                      
                                      
                                      (971
                                      )Cash
      settlement of stock options
                                      
                                      
                                      (140
                                      )
                                      
                                      
                                      -Proceeds
      from borrowings
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25,000Repayment
      of borrowings
                                      
                                      
                                      (5,357
                                      )
                                      
                                      
                                      (2,976
                                      )Contributions
      by noncontrolling interest
                                      
                                      
                                      -
                                      
                                      
                                      
                                      20Distributions
      to noncontrolling interest
                                      
                                      
                                      (2,137
                                      )
                                      
                                      
                                      (4,151
                                      )Payments
      of cash dividends
                                      
                                      
                                      (3,934
                                      )
                                      
                                      
                                      (3,817
                                      )Net
      cash (used in) provided by financing activities
                                      
                                      
                                      (16,484
                                      )
                                      
                                      
                                      13,319Net
      decrease in cash and cash equivalents
                                      
                                      
                                      (8,758
                                      )
                                      
                                      
                                      (5,373
                                      )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                      
                                      
                                      41,926
                                      
                                      
                                      
                                      30,224CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                      
                                      $
                                      33,168
                                      
                                      
                                      $
                                      24,851
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.


5




SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            BASIS
      OF PRESENTATION





Nature
of Operations




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





Principles
of Consolidation




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




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




On
January 1, 2010, we deconsolidated an investment in one of the Company’s
limited partnerships as a result of the foregoing change in accounting policy.
This entity had previously been consolidated due to financial support provided
by the Company. The Company does not have the power to direct the activities of
the entity that most significantly impact the entity’s economic performance.
Consequently, subsequent to the change in accounting policy, the Company
deconsolidated this entity.  The Company has accounted for this
limited partnership investment at fair value since January 1,
2010.  This investment will now be reported on the Condensed
Consolidated Balance Sheet within securities owned at fair value with the change
in fair value included in equity in income of limited partnerships on the
Condensed Consolidated Statements of Operations.  In prior periods,
this entity’s results, assets, and liabilities were reflected in each of the
Company’s line items in the Condensed Consolidated Statements of Operations and
Balance Sheet.  The Company recorded a $4.6 million cumulative
adjustment to accumulated deficit that represents the fair value of this limited
partnership at January 1, 2010.




6




In
addition, the Company concluded that it was a primary beneficiary of two VIEs at
January 1, 2010.  The Company has a 50% direct ownership in one of
these entities and a 65% direct ownership in the other.  These
entities are professional sports agencies that assist professional athletes with
contract negotiation, marketing, and public relations.  The Company
provided significant financial support, which it was not contractually obligated
to do, beginning on January 1, 2010, to assist these entities to continue
operating as a going concern and also became significantly more involved with
the day-to-day operations of managing the businesses.  The Company
intends to provide additional financial support when necessary in the
future.  These facts enabled the Company to conclude that it has the
power to direct the activities that significantly impact these entities’
economic performance and has the obligation to absorb the significant losses and
receive benefits related to these entities due to its increased
support.  The Company has provided $1.3 million in financial support
as of September 30, 2010, which has been eliminated in
consolidation.  The results of these entities have been included in
the Condensed Consolidated Statements of Operations since January 1,
2010.  The carrying amounts of the assets and liabilities consolidated
at January 1, 2010 are as follows:





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





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





In
management's opinion, the unaudited condensed consolidated financial statements
include all adjustments necessary for a fair presentation of our consolidated
financial position at September 30, 2010 and December 31, 2009, our consolidated
results of operations for the three and nine months ended September 30, 2010 and
2009, our consolidated changes in equity for the nine months ended September 30,
2010, and our consolidated cash flows for the nine months ended September 30,
2010 and 2009.  All adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full
year.





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





Management’s
Estimates





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





Fair
Values of Financial Instruments





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




7





New
Authoritative Accounting Guidance





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





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





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





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





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




8




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




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


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




ASU No.
2010-20, Receivables (Topic
310) – Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses, enhances disclosures about the credit
quality of a creditor’s financing receivables and the adequacy of its allowance
for credit losses.  The amended guidance is effective for period-end
balances beginning with the first interim or annual reporting period on or after
December 15, 2010.  The amended guidance is effective for activity
during a reporting period beginning with the first interim or annual reporting
period beginning on or after December 15, 2010.  The Company expects
the amended guidance to impact its disclosures in future periods, but to
otherwise not have a material impact on the Company’s consolidated financial
statements.


2.
            ACQUISITIONS
      AND DISPOSITIONS





Acquisitions





On
January 1, 2010, the Company completed the acquisition of a 51% interest in
Investor Financial Solutions, LLC (“IFS”), a wealth management firm based in
Huntington Beach, California for cash consideration of $1.0 million, $750,000 of
which was payable at acquisition with the remainder, subject to adjustment based
on gross revenue of IFS during the three months ended June 30, 2011, payable in
July 2011.   The additional purchase price is expected to be
between $0 and $250,000.  The liability for the additional purchase
price was recorded at its January 1, 2010 fair value of $204,000.  The
fair value of the consideration exceeded the fair market value of identifiable
net tangible assets by $954,000, $409,000 of which has been recorded as
goodwill, $955,000 of which has been recorded as other intangible assets, and
$410,000 of which has been recorded as noncontrolling interest.  All
of the goodwill associated with the IFS acquisition is expected to be deductible
for tax purposes.  The acquisition was conducted in an arm’s length
transaction to expand the Company’s high net worth business.  As of
September 30, 2010, IFS had approximately $102.0 million in assets under
management.




9




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





In
December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
LLC (“EFA”), to expand the Edelman financial platform into additional markets
outside the Washington, D.C. metropolitan area, in which the company owned a 10%
membership interest.  On April 1, 2009, the Company acquired an
additional 66% membership interest in EFA for an aggregate consideration of
$25.5 million in cash and a subordinated promissory note in the principal amount
of $10.0 million.  The fair value of the Company’s previously-held
noncontrolling interest in EFA on April 1, 2009 was $3.0 million.  The
consideration paid exceeded the fair market value of identifiable net tangible
assets by $36.3 million, $24.2 million of which has been recorded as goodwill,
$22.3 million of which has been recorded as other intangible assets, $7.2
million of which has been recorded as noncontrolling interest, and $3.0 million
of which has been recorded as a gain on step acquisition.  All of the
goodwill associated with the EFA acquisition is expected to be deductible for
tax purposes.  On August 24, 2009, EFA was merged with and into
another Edelman subsidiary, Edelman Financial Services, LLC
(“EFS”).  As of September 30, 2010, Edelman, based in Fairfax,
Virginia, managed approximately $5.4 billion in assets.





The EFA
acquisition was accounted for using the acquisition method and, accordingly, the
financial information of EFA has been included in the Company’s Condensed
Consolidated Financial Statements from April 1, 2009.  During the
measurement period, the Company must recognize adjustments to the provisional
amounts as if the accounting for the business combination had been completed at
the acquisition date.  Thus, the Company must recognize all purchase
accounting transactions related to this acquisition as of the second quarter of
2009 for comparative financial statements.  The gain on step
acquisition of $3.0 million and other intangible assets amortization of $255,000
are included in the nine months ended September 30, 2009, in accordance with the
business combination standards to recognize these amounts as of the acquisition
date, April 1, 2009.





The pro
forma combined historical results as if the EFA acquisition had been included in
operations commencing January 1, 2009, are as follows:





Nine Months EndedSeptember 30,2010
                              
                              
                              2009(in thousands, except per share amounts)Total
      revenue
                              
                              $
                              133,901
                              
                              
                              $
                              126,878Net
      income (loss) attributable toSanders
      Morris Harris Group Inc.
                              
                              
                              4,529
                              
                              
                              
                              (9,428
                              )Earnings
      (loss) per common share:Basic
                              
                              $
                              0.15
                              
                              
                              $
                              (0.34
                              )Diluted
                              
                              $
                              0.15
                              
                              
                              $
                              (0.34
                              )





10


Dispositions





On
November 9, 2009, the Company and SMH entered into an Amended and Restated
Contribution Agreement with Pan Asia China Commerce Corp. (“PAC3”), Madison
Williams Capital LLC (“New BD”), Madison Williams and Company, LLC (“Madison
Williams”),  and Fletcher Asset Management, Inc. (“Fletcher”), with
respect to the formation of the New BD. Pursuant to the Amended and Restated
Contribution Agreement, (a) PAC3 agreed to subscribe for and purchase a 3.1%
Class A membership interest and 28.0% Class B membership interest, (b) SMH
agreed to contribute to New BD its Capital Markets business, including a
specified amount of working capital (as adjusted for any profits or losses
incurred in the Capital Markets business between January 1, 2009, and the
date of closing) less (i) the value of the accounts receivable contributed
to Madison Williams, (ii) the value of the certain assets in SMH’s New
Orleans, Louisiana office, (iii) the value of certain money security
deposits and any advance payments, and (iv) the value of certain securities
to be mutually agreed upon by the parties in exchange for a 17.5% Class A
membership interest in Madison Williams, cash, and a note issued by Madison
Williams to SMH, and, (c) Fletcher agreed to subscribe for and purchase a 40.5%
Class A membership interest in Madison Williams in exchange for a cash
contribution. Members of management of the Capital Markets Business retained the
remaining 6.5% membership interest in Madison Williams.  SMH’s
membership interest is subject to call for $4.0 million through December 31,
2010.  The Class A membership interests have a distribution preference
over the Class B membership interests until a total of $8.5 million of
distributions to the Class A membership interests have been made, and no
distributions may be made to any class of Class B membership interests until the
SMH note for $8.0 million has been repaid.  This transaction closed on
December 9, 2009.  The Company expects to receive its share of profits
if and when distributions are made by Madison Williams.





3.
            SECURITIES
      OWNED AND SECURITIES SOLD, NOT YET
PURCHASED





Securities
owned and securities sold, not yet purchased as of September 30, 2010 and
December 31, 2009 were as follows:





September 30, 2010
                                              
                                              
                                              December 31, 2009Sold, Not Yet
                                              
                                              
                                              
                                              
                                              
                                              Sold, Not YetOwned
                                              
                                              
                                              Purchased
                                              
                                              
                                              Owned
                                              
                                              
                                              Purchased(in thousands)Marketable:Corporate
      stocks and options
                                              
                                              $
                                              9,017
                                              
                                              
                                              $
                                              6,951
                                              
                                              
                                              $
                                              12,695
                                              
                                              
                                              $
                                              8,339Corporate
      bond
                                              
                                              
                                              1,003
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,861
                                              
                                              
                                              
                                              -Total
      marketable
                                              
                                              
                                              10,020
                                              
                                              
                                              
                                              6,951
                                              
                                              
                                              
                                              16,556
                                              
                                              
                                              
                                              8,339Not
      readily marketable:Limited
      partnerships-consolidated management companies
                                              
                                              
                                              11,724
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              10,911
                                              
                                              
                                              
                                              -Limited
      partnerships-other
                                              
                                              
                                              10,728
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              9,058
                                              
                                              
                                              
                                              -Warrants
                                              
                                              
                                              1,686
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,429
                                              
                                              
                                              
                                              -Equities
      and options
                                              
                                              
                                              430
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              426
                                              
                                              
                                              
                                              -Total
      not readily marketable
                                              
                                              
                                              24,568
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              22,824
                                              
                                              
                                              
                                              -Total
                                              
                                              $
                                              34,588
                                              
                                              
                                              $
                                              6,951
                                              
                                              
                                              $
                                              39,380
                                              
                                              
                                              $
                                              8,339




Securities
not readily marketable include investment securities (a) for which there is no
market on a securities exchange or no independent publicly quoted market, (b)
that cannot be publicly offered or sold unless registration has been effected
under the Securities Act of 1933 or other applicable securities acts, or (c)
that cannot be offered or sold because of other arrangements, restrictions, or
conditions applicable to the securities or to the company.  Not
readily marketable securities consist of investments in limited partnerships,
equities, options, and warrants. The Company is restricted from exiting their
investments in limited partnerships-consolidated management companies
("private investment limited partnerships") prior to dissolution of the fund
partnership; however, limited partners can sell their interest in the private
investment partnership to qualified investors. The Company does not intend to
exit the private investment limited partnerships until
dissolution.  Unfunded commitments in the private investment limited
partnerships were $334,000 as of September 30, 2010.  In accordance
with FASB ASC Topic 323, Investments – Equity Method and
Joint Ventures, direct investments in limited partnerships are accounted
for using the equity method which approximates fair
value.  Proprietary investments in limited partnerships held by the
Company’s broker-dealer subsidiary are accounted for at fair
value.  The Company expects to receive its interests in the private
investment limited partnerships over the remaining one to ten year life of the
private investment limited partnerships. Investments in limited
partnerships-other principally consists of an investment in PTC Houston
Management and Madison Williams.




11




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





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





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





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





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





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





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





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





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





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




12




The
following table sets forth by level within the fair value hierarchy securities
owned and securities sold, not yet purchased as of September 30,
2010:




Level 1
                                    
                                    
                                    Level 2
                                    
                                    
                                    Level 3
                                    
                                    
                                    Total(in
      thousands)Securities
      owned:Corporate
      stocks and options
                                    
                                    $
                                    8,855
                                    
                                    
                                    $
                                    162
                                    
                                    
                                    $
                                    430
                                    
                                    
                                    $
                                    9,447Corporate
      bond
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,003
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,003Limited
      partnerships-consolidated management companies
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    11,724
                                    
                                    
                                    
                                    11,724Limited
      partnerships-other
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,395
                                    
                                    
                                    
                                    9,395Warrants
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,671
                                    
                                    
                                    
                                    15
                                    
                                    
                                    
                                    1,686Total
      securities owned
                                    
                                    $
                                    8,855
                                    
                                    
                                    $
                                    2,836
                                    
                                    
                                    $
                                    21,564
                                    
                                    
                                    $
                                    33,255Securities
      sold, not yet purchased:Corporate
      stocks and options
                                    
                                    $
                                    6,822
                                    
                                    
                                    $
                                    129
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    6,951Total
      securities sold, not yet purchased
                                    
                                    $
                                    6,822
                                    
                                    
                                    $
                                    129
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    6,951




The
following table sets forth a summary of changes in the fair value of the
Company’s Level 3 securities owned for the three months ended September 30,
2010:




Limited
      Partnerships Consolidated Management Companies
                            
                            
                            Limited
      Partnerships Other
                            
                            
                            Warrants
                            
                            
                            Equities and
                              Options
                            
                            
                            Total(in thousands)Balance,
      beginning of period
                            
                            $
                            11,001
                            
                            
                            $
                            9,391
                            
                            
                            $
                            17
                            
                            
                            $
                            468
                            
                            
                            $
                            20,877Realized
      gains (losses)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Unrealized
      gains (losses) relating to securities still held at the reporting
      date
                            
                            
                            729
                            
                            
                            
                            3
                            
                            
                            
                            (2
                            )
                            
                            
                            (38
                            )
                            
                            
                            692Purchases,
      issuances, and settlements
                            
                            
                            (6
                            )
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5
                            )Balance,
      end of period
                            
                            $
                            11,724
                            
                            
                            $
                            9,395
                            
                            
                            $
                            15
                            
                            
                            $
                            430
                            
                            
                            $
                            21,564





The
following table sets forth a summary of changes in the fair value of the
Company’s Level 3 securities owned for the nine months ended September 30,
2010:




Limited
                            Partnerships
      Consolidated Management Companies
                          
                          
                          Limited
                            Partnerships
      Other
                          
                          
                          Warrants
                          
                          
                          Equities and
                            Options
                          
                          
                          Total(in thousands)Balance,
      beginning of period
                          
                          $
                          10,913
                          
                          
                          $
                          2,340
                          
                          
                          $
                          5
                          
                          
                          $
                          426
                          
                          
                          $
                          13,684Cumulative
      effect of adoption of a new accounting principle
                          
                          
                          -
                          
                          
                          
                          4,650
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,650Realized
      gains
                          
                          
                          -
                          
                          
                          
                          118
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          118Unrealized
      gains relating to securities still held at the reporting
    date
                          
                          
                          880
                          
                          
                          
                          2,593
                          
                          
                          
                          10
                          
                          
                          
                          1
                          
                          
                          
                          3,484Purchases,
      issuances, and settlements
                          
                          
                          (69
                          )
                          
                          
                          (306
                          )
                          
                          
                          -
                          
                          
                          
                          3
                          
                          
                          
                          (372
                          )Balance,
      end of period
                          
                          $
                          11,724
                          
                          
                          $
                          9,395
                          
                          
                          $
                          15
                          
                          
                          $
                          430
                          
                          
                          $
                          21,564





Transfers
between levels of the fair value hierarchy are recognized on the actual date of
the event or circumstances that caused the transfer, which generally coincides
with the Company’s quarterly valuation process. There were no significant
transfers into or out of Level 1, Level 2, or Level 3 of the fair value
hierarchy during the three and nine months ended September 30,
2010.





13




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





Three Months Ended
                          
                          
                          Nine Months EndedSeptember 30, 2010
                          
                          
                          September 30, 2010Equity in Income
                          
                          
                          
                          
                          
                          Equity in IncomePrincipal
                          
                          
                          of Limited
                          
                          
                          Principal
                          
                          
                          of LimitedTransactions
                          
                          
                          Partnerships
                          
                          
                          Transactions
                          
                          
                          Partnerships(in thousands)
                          
                          
                          (in thousands)Unrealized
      gains (losses) relating to securities still held at the reporting
      date
                          
                          $
                          23
                          
                          
                          $
                          669
                          
                          
                          $
                          (30
                          )
                          
                          $
                          3,514





At
September 30, 2010, the Company had $279,000 and $1.1 million in securities
owned that are valued using the equity method and at cost basis,
respectively.  The fair value of these investments has not been
estimated since there are no events or changes in circumstances that may have a
significant adverse effect on the fair value, and it is not practicable to
estimate the fair value of these investments.





4.
            RECEIVABLES





September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(in
      thousands)Notes
      Receivable:Nonaffiliates
                    
                    $
                    5,713
                    
                    
                    $
                    6,127Employees
      and executives
                    
                    
                    2,174
                    
                    
                    
                    2,670Other
      affiliates
                    
                    
                    9,529
                    
                    
                    
                    8,556Receivables
      from affiliated limited partnerships
                    
                    
                    1,625
                    
                    
                    
                    337Receivables
      from other affiliates
                    
                    
                    5,199
                    
                    
                    
                    2,946Receivable
      from Endowment Advisers
                    
                    
                    62,234
                    
                    
                    
                    65,398Receivables
      from broker-dealers
                    
                    
                    1,898
                    
                    
                    
                    1,112Receivables
      from customers
                    
                    
                    23,820
                    
                    
                    
                    22,569Current
      tax receivable
                    
                    
                    10,896
                    
                    
                    
                    5,901Allowances
      for bad debts
                    
                    
                    (2,266
                    )
                    
                    
                    (2,544
                    )Receivables,
      net
                    
                    $
                    120,822
                    
                    
                    $
                    113,072





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


14


5.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS, NET





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





Nine Months Ended September 30, 2010Amortizable Intangible Assets:
                        
                        
                        
                        
                        
                        Total OtherCovenants Not
                        
                        
                        Customer
                        
                        
                        
                        
                        
                        IntangibleGoodwill
                        
                        
                        Trade Names
                        
                        
                        To Compete
                        
                        
                        Relationships
                        
                        
                        Subtotal
                        
                        
                        Assets(in thousands)Balance,
      beginning of period
                        
                        $
                        73,455
                        
                        
                        $
                        18,422
                        
                        
                        $
                        3,683
                        
                        
                        $
                        10,093
                        
                        
                        $
                        13,776
                        
                        
                        $
                        32,198Acquisition
      of IFS
                        
                        
                        409
                        
                        
                        
                        166
                        
                        
                        
                        22
                        
                        
                        
                        767
                        
                        
                        
                        789
                        
                        
                        
                        955Amortization
      of other intangible assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (652
                        )
                        
                        
                        (683
                        )
                        
                        
                        (1,335
                        )
                        
                        
                        (1,335
                        )Balance,
      end of period
                        
                        $
                        73,864
                        
                        
                        $
                        18,588
                        
                        
                        $
                        3,053
                        
                        
                        $
                        10,177
                        
                        
                        $
                        13,230
                        
                        
                        $
                        31,818





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





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





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





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





As of
September 30, 2010, the remaining weighted-average amortization period was 3.58
years for covenants not to compete and 11.46 years for customer relationships
included in the table above.





6.
            BORROWINGS





In May
2009, the Company borrowed $25.0 million under a credit agreement with a bank,
the proceeds of which were used to complete the EFA acquisition.  The
credit agreement matures on October 31, 2012, and bears interest at the greater
of the prime rate or 5%.  Principal of $1.8 million plus interest is
payable quarterly.  The credit agreement is secured by substantially
all of the assets of the Company.  The credit agreement contains
various covenants customary for transactions of this type including the
requirement that the Company maintain minimum financial ratios, net worth,
liquid assets, and cash balances, as well as minimum assets under management,
and meet monthly, quarterly, and annual reporting requirements.  The
credit agreement also contains covenants that restrict the ability of the
Company, among other things, to incur indebtedness, pay dividends or
distributions, make capital expenditures and other restricted payments,
including investments, and consummate asset sales.  At September 30,
2010, the Company was in compliance with all covenants.


15





7.
            INCOME
      TAXES





The
difference between the effective tax rate reflected in the income tax provision
(benefit) from continuing operations attributable to the Company and the
statutory federal rate is analyzed as follows:





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(in
      thousands)
                  
                  
                  (in
      thousands)Expected
      federal tax at statutory rate of 34%
                  
                  $
                  725
                  
                  
                  $
                  1,056
                  
                  
                  $
                  2,757
                  
                  
                  $
                  (2,264
                  )State
      and other income taxes
                  
                  
                  90
                  
                  
                  
                  110
                  
                  
                  
                  394
                  
                  
                  
                  277Total
                  
                  $
                  815
                  
                  
                  $
                  1,166
                  
                  
                  $
                  3,151
                  
                  
                  $
                  (1,987
                  )





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





The
Company files income tax returns in the U.S. federal
jurisdiction.  The Company is no longer subject to U.S. federal income
tax examination by the taxing authorities for years before 2006.  The
Company files in several state tax jurisdictions.  The Company is no
longer subject to state income tax examination by the taxing authorities for
years before 2006.





8.
            ACCOUNTING
      FOR STOCK-BASED COMPENSATION PLANS





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





The
following table sets forth pertinent information regarding stock option
transactions for the nine months ended September 30, 2010:





WeightedNumber
                          
                          
                          Averageof Shares
                          
                          
                          Exercise PriceOutstanding
      at January 1, 2010
                          
                          
                          601,141
                          
                          
                          $
                          9.95Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          (17,807
                          )
                          
                          
                          4.82Settled
                          
                          
                          (140,000
                          )
                          
                          
                          4.44Cancelled/Forfeited
                          
                          
                          (58,334
                          )
                          
                          
                          6.70Outstanding
      at September 30, 2010
                          
                          
                          385,000
                          
                          
                          
                          11.98Options
      exercisable at September 30, 2010
                          
                          
                          385,000
                          
                          
                          
                          11.98Incentive
      award shares available for grant at September 30, 2010
                          
                          
                          2,486,053
 16




During
the nine months ended September 30, 2010 and 2009, 17,807 and 42,500 options
were exercised for which the Company received proceeds of $86,000 and $195,000,
respectively.  The Company recognized pretax compensation expense of
$27,000, during the nine months ended September 30 2009, related to stock
options.  No such expense was recognized during the nine months ended
September 30, 2010.  There was no unrecognized stock-based
compensation expense related to stock options at September 30,
2010.





The
following table summarizes certain information related to restricted common
stock grants at September 30, 2010:





WeightedAverageNumber of
                      
                      
                      Grant DateShares
                      
                      
                      Fair ValueNonvested
      at January 1, 2010
                      
                      
                      490,076
                      
                      
                      $
                      8.17Nonvested
      at September 30, 2010
                      
                      
                      352,758
                      
                      
                      
                      7.20For
      the nine months ended September 30, 2010:Granted
                      
                      
                      162,290
                      
                      
                      
                      5.56Vested
                      
                      
                      280,444
                      
                      
                      
                      7.96Forfeited
                      
                      
                      19,164
                      
                      
                      
                      7.00





Employees
deferred compensation of $30,000 during the nine months ended September 30,
2009, which was used to purchase restricted common stock.  No such
compensation was deferred during the nine months ended September 30,
2010.  The Company recognized pretax compensation expense of $1.5
million and $2.9 million during the nine months ended September 30, 2010 and
2009, respectively, related to its restricted common stock plan.  At
September 30, 2010, total unrecognized compensation cost, net of estimated
forfeitures, related to nonvested restricted stock was $1.5 million and is
expected to be recognized over the next 4.50 years.





9.
            TREASURY
      STOCK





On
November 6, 2007, the Company’s board of directors approved a program to
repurchase up to 1,000,000 shares of the Company’s common stock. On May 27,
2010, the Company’s board of directors approved the repurchase of up to another
1,000,000 shares of the Company’s common stock, subject to a maximum expenditure
of $2.5 million under the credit agreement.  Under the program, shares
are repurchased in the open market or privately negotiated transactions from
time to time at prevailing market prices.  Such repurchases are
accounted for using the cost method.  The Company repurchased
1,066,512 shares of its common stock at an average price of $5.34 per share
during the nine months ended September 30, 2010, related to this
program.


17


10.
              EARNINGS
      (LOSS) PER COMMON SHARE





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





Three Months Ended September30,
                    
                    
                    Nine Months Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(in thousands, except per shareamounts)
                    
                    
                    (in thousands, except per share amounts)Income
      (loss) from continuing operations, net of income taxes
                    
                    $
                    1,318
                    
                    
                    $
                    1,939
                    
                    
                    $
                    4,959
                    
                    
                    $
                    (4,673
                    )Loss
      from discontinued operations, net of income taxes
                    
                    
                    (172
                    )
                    
                    
                    (840
                    )
                    
                    
                    (430
                    )
                    
                    
                    (3,934
                    )Net
      income (loss) attributable to the Company
                    
                    $
                    1,146
                    
                    
                    $
                    1,099
                    
                    
                    $
                    4,529
                    
                    
                    $
                    (8,607
                    )Basic
      earnings (loss) per common share:Continuing
      operations
                    
                    $
                    0.05
                    
                    
                    $
                    0.07
                    
                    
                    $
                    0.17
                    
                    
                    $
                    (0.17
                    )Discontinued
      operations
                    
                    
                    (0.01
                    )
                    
                    
                    (0.03
                    )
                    
                    
                    (0.02
                    )
                    
                    
                    (0.14
                    )Net
      earnings (loss)
                    
                    $
                    0.04
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.15
                    
                    
                    $
                    (0.31
                    )Diluted
      earnings (loss) per common share:Continuing
      operations
                    
                    $
                    0.05
                    
                    
                    $
                    0.07
                    
                    
                    $
                    0.17
                    
                    
                    $
                    (0.17
                    )Discontinued
      operations
                    
                    
                    (0.01
                    )
                    
                    
                    (0.03
                    )
                    
                    
                    (0.02
                    )
                    
                    
                    (0.14
                    )Net
      earnings (loss)
                    
                    $
                    0.04
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.15
                    
                    
                    $
                    (0.31
                    )Weighted
      average number of common shares outstanding:Basic
                    
                    
                    29,153
                    
                    
                    
                    27,797
                    
                    
                    
                    29,519
                    
                    
                    
                    27,689Potential
      dilutive effect of stock-based awards
                    
                    
                    2
                    
                    
                    
                    700
                    
                    
                    
                    5
                    
                    
                    
                    -Diluted
                    
                    
                    29,155
                    
                    
                    
                    28,497
                    
                    
                    
                    29,524
                    
                    
                    
                    27,689





Outstanding
stock options of 365,000 and 440,000 for the three months ended September 30,
2010 and 2009, respectively, and 365,000 and 617,807 for the nine months ended
September 30, 2010 and 2009, respectively, have not been included in diluted
earnings per common share because to do so would have been anti-dilutive for the
periods presented.  Warrants outstanding at September 30, 2010, to
purchase shares of common stock in an aggregate value of up to $7.5 million at
an exercise price of $5.75 per common share have also not been included in
diluted earnings per common share for the three and nine months ended September
30, 2010 because to do so would have been anti-dilutive for the
period.  There were no warrants outstanding at September 30,
2009.





11.
              COMMITMENTS
      AND CONTINGENCIES





The
Company has issued letters of credit in the amounts of $250,000, $245,000,
$230,000, $230,000, and $48,000 to the owners of five of the offices that we
lease to secure payment of our lease obligations for those
facilities.





The
Company has uncommitted financing arrangements with clearing brokers that
finance our customer accounts, certain broker-dealer balances, and firm trading
positions.  Although these customer accounts and broker-dealer
balances are not reflected on the Consolidated Balance Sheet for financial
reporting purposes, the Company has generally agreed to indemnify these clearing
brokers for losses they may sustain in connection with the accounts, and
therefore retains risk on these accounts.  The Company is required to
maintain certain cash or securities on deposit with our clearing
brokers.





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


18





As
previously reported, in July 2008, the Dallas regional office of the Financial
Industry Regulatory authority (“FINRA”) conducted a routine examination of SMH’s
broker-dealer activities.  SMH received an examination report on
December 31, 2008, which identified a number of deficiencies in SMH’s
operations.  In April 2009, SMH resolved half of the deficiencies
noted through a compliance conference procedure. On October 5, 2010, SMH
received a “Wells letter” notification from FINRA, which states that the staff
of FINRA has made a preliminary determination to recommend that disciplinary
action be brought against SMH and two former employees based on alleged
violations of certain federal securities laws and FINRA rules based on the
deficiencies identified in the 2008 examination. Under the Wells procedure, SMH
has an opportunity to respond to FINRA before any action is taken against it.
Discussions have commenced between the staff of FINRA and our legal counsel with
respect to the alleged violations and resolution of the matter. There is no
assurance that a prompt resolution can be reached or that the ultimate impact on
SMH and the Company will not be material





In May
2007, two purchasers of Ronco Corporation convertible preferred stock filed a
complaint against SMH alleging common law fraud, statutory fraud in a stock
transaction, violations of the Texas Securities Act, and negligent
misrepresentation in connection with the plaintiffs’ purchase of $2.0 million in
Ronco convertible preferred stock. On March 17, 2009, a third purchaser of Ronco
convertible preferred stock filed a complaint against SMH. The claims are
similar to the above referenced case. The third purchaser invested $1.9 million
in Ronco convertible preferred stock.  In addition, in July 2009, the
Bankruptcy Trustee filed a derivative action on behalf of the shareholders of
Ronco against two former directors of Ronco (who were employees of SMH) for
negligently authorizing the closing of the purchase of the assets of Ronco
Marketing Corp. in breach of their fiduciary duties of care and loyalty and
against SMH for negligent misrepresentation, breach of fiduciary duties, breach
of contract, and violation of the Texas Fraudulent Transfer Act.  On
April 23, 2010, following a two-week trial, the jury returned a defense verdict
in favor of SMH on all claims made by the plaintiffs, in the first
lawsuit.  Following the trial, the plaintiffs filed a motion for new
trial, which we opposed.  On August 16, 2010, the plaintiffs withdrew
their motion for new trial and this matter was concluded.  In
addition, in August 2010, following mediation, we have reached an agreement in
principle to resolve the two remaining cases.





In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be.  Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved.  At September 30, 2010,
the Company has accrued $1.5 million for potential legal liabilities that are
probable and can be reasonably estimated based on a review of existing claims
and arbitrations, which is included in “Accounts payable and accrued
liabilities” in the Condensed Consolidated Balance Sheet.  There is no
assurance that this amount will be adequate to cover actual costs that may be
subsequently incurred.





The
Company and its subsidiaries have obligations under operating leases that expire
through 2020 with initial noncancelable terms in excess of one
year.





12.
            BUSINESS
      SEGMENT INFORMATION





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


19





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





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





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





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





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





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


20





The
following summarizes certain financial information of each reportable business
segment for the three and nine months ended September 30, 2010 and 2009,
respectively.  SMHG does not analyze asset information in all business
segments.





Three
      Months Ended
                      
                      
                      Nine
      Months EndedSeptember
      30,
                      
                      
                      September
      30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009(in
      thousands)
                      
                      
                      (in
      thousands)Revenue:Wealth
      Management
                      
                      $
                      30,457
                      
                      
                      $
                      26,355
                      
                      
                      $
                      91,494
                      
                      
                      $
                      72,090Institutional
      Services:Institutional
      brokerage
                      
                      
                      946
                      
                      
                      
                      1,244
                      
                      
                      
                      3,253
                      
                      
                      
                      3,828Prime
      brokerage services
                      
                      
                      8,127
                      
                      
                      
                      12,566
                      
                      
                      
                      35,025
                      
                      
                      
                      46,929Institutional
      Services Total
                      
                      
                      9,073
                      
                      
                      
                      13,810
                      
                      
                      
                      38,278
                      
                      
                      
                      50,757Corporate
      Support and Other
                      
                      
                      1,562
                      
                      
                      
                      1,248
                      
                      
                      
                      4,129
                      
                      
                      
                      2,494Total
                      
                      $
                      41,092
                      
                      
                      $
                      41,413
                      
                      
                      $
                      133,901
                      
                      
                      $
                      125,341Income
      (loss) from continuing operations before equity in income (loss)of
      limited partnerships and income taxes:Wealth
      Management
                      
                      $
                      7,290
                      
                      
                      $
                      7,228
                      
                      
                      $
                      24,272
                      
                      
                      $
                      19,052Institutional
      Services:Institutional
      brokerage
                      
                      
                      (194
                      )
                      
                      
                      (23
                      )
                      
                      
                      (465
                      )
                      
                      
                      (524
                      )Prime
      brokerage services
                      
                      
                      (856
                      )
                      
                      
                      (416
                      )
                      
                      
                      (1,488
                      )
                      
                      
                      361Institutional
      Services Total
                      
                      
                      (1,050
                      )
                      
                      
                      (439
                      )
                      
                      
                      (1,953
                      )
                      
                      
                      (163
                      )Corporate
      Support and Other
                      
                      
                      (4,586
                      )
                      
                      
                      (4,047
                      )
                      
                      
                      (15,909
                      )
                      
                      
                      (27,644
                      )Total
                      
                      $
                      1,654
                      
                      
                      $
                      2,742
                      
                      
                      $
                      6,410
                      
                      
                      $
                      (8,755
                      )Equity
      in income (loss) of limited partnerships:Wealth
      Management
                      
                      $
                      669
                      
                      
                      $
                      356
                      
                      
                      $
                      1,212
                      
                      
                      $
                      (799
                      )Institutional
      Services:Institutional
      brokerage
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Prime
      brokerage services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Institutional
      Services Total
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Corporate
      Support and Other
                      
                      
                      1,072
                      
                      
                      
                      1,416
                      
                      
                      
                      4,119
                      
                      
                      
                      3,559Total
                      
                      $
                      1,741
                      
                      
                      $
                      1,772
                      
                      
                      $
                      5,331
                      
                      
                      $
                      2,760Gain
      on step acquisition:Wealth
      Management
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Institutional
      Services:Institutional
      brokerage
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Prime
      brokerage services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Institutional
      Services Total
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Corporate
      Support and Other
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,000Total
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      3,000Income
      (loss) from continuing operations before income taxes:Wealth
      Management
                      
                      $
                      7,959
                      
                      
                      $
                      7,584
                      
                      
                      $
                      25,484
                      
                      
                      $
                      18,253Institutional
      Services:Institutional
      brokerage
                      
                      
                      (194
                      )
                      
                      
                      (23
                      )
                      
                      
                      (465
                      )
                      
                      
                      (524
                      )Prime
      brokerage services
                      
                      
                      (856
                      )
                      
                      
                      (416
                      )
                      
                      
                      (1,488
                      )
                      
                      
                      361Institutional
      Services Total
                      
                      
                      (1,050
                      )
                      
                      
                      (439
                      )
                      
                      
                      (1,953
                      )
                      
                      
                      (163
                      )Corporate
      Support and Other
                      
                      
                      (3,514
                      )
                      
                      
                      (2,631
                      )
                      
                      
                      (11,790
                      )
                      
                      
                      (21,085
                      )Total
                      
                      $
                      3,395
                      
                      
                      $
                      4,514
                      
                      
                      $
                      11,741
                      
                      
                      $
                      (2,995
                      )Net
      income attributable to the noncontrolling interest:Wealth
      Management
                      
                      $
                      (1,262
                      )
                      
                      $
                      (1,409
                      )
                      
                      $
                      (3,631
                      )
                      
                      $
                      (3,665
                      )Institutional
      Services:Institutional
      brokerage
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Prime
      brokerage services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Institutional
      Services Total
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Corporate
      Support and Other
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      (1,262
                      )
                      
                      $
                      (1,409
                      )
                      
                      $
                      (3,631
                      )
                      
                      $
                      (3,665
                      )




21





13.
              SUPPLEMENTAL
      CASH FLOW INFORMATION





Nine Months Ended September 30,2010
                    
                    
                    2009(in
      thousands)Cash
      payment (refund) for income taxes, net
                    
                    $
                    2,669
                    
                    
                    $
                    (2,407
                    )Cash
      paid for interest
                    
                    
                    644
                    
                    
                    
                    903Noncash
      investing activities:Cumulative
      effect of adoption of a new accounting principle
                    
                    
                    445
                    
                    
                    
                    -Acquisition:Goodwill
      and other intangible assets, net
                    
                    
                    -
                    
                    
                    
                    10,000Subordinated
      promissory note
                    
                    
                    -
                    
                    
                    
                    (10,000
                    )Noncash
      financing activities:Increase
      (decrease) in dividends declared not yet paid
                    
                    
                    (34
                    )
                    
                    
                    15





14.
              RELATED
      PARTY TRANSACTIONS





The
Company had receivables from related parties totaling $18.5 million at September
30, 2010, primarily consisting of $3.2 million of advances to unconsolidated
related entities to fund operating expenses, $2.2 million of notes receivable
from employees and consultants representing loans made to induce the employees
and consultants to affiliate with the Company, and $1.6 million of management
fees receivable from the limited partnerships that the Company
manages.  The September 30, 2010 related party receivables balance also includes an $8.0
million note issued by Madison Williams to the Company in connection with the
Capital Markets transaction and a $1.2 million note issued by Concept Capital
Holdings, LLC to the Company in connection with the planned separation of the
Concept Capital division.





15.
              DISCONTINUED
      OPERATIONS





During
the first quarter of 2009, SMH closed three retail offices.  This
decision was made due to the offices’ inability to achieve sufficient revenue to
offset their costs.  The results of operations for these offices have
been reclassified as discontinued operations for all periods
presented.





During
the fourth quarter of 2009, SMH contributed to Madison Williams the Capital
Markets business in exchange for a 17.5% Class A membership interest in Madison
Williams, cash, and a note issued by Madison Williams to the
Company.  The results of operations for the Capital Markets business
have been reclassified as discontinued operations for all periods
presented.  A summary of selected financial information of
discontinued operations is as follows for the three and nine months ended
September 30, 2010 and 2009:





Three Months Ended September30,
                  
                  
                  Nine Months Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(in thousands)
                  
                  
                  (in thousands)Operating
      activities:Revenue
                  
                  $
                  4
                  
                  
                  $
                  6,454
                  
                  
                  $
                  16
                  
                  
                  $
                  19,096Expenses
                  
                  
                  286
                  
                  
                  
                  7,922
                  
                  
                  
                  721
                  
                  
                  
                  25,793Loss
      from discontinued operations before noncontrolling interest and income
      taxes
                  
                  
                  (282
                  )
                  
                  
                  (1,468
                  )
                  
                  
                  (705
                  )
                  
                  
                  (6,697
                  )Noncontrolling
      interest in net loss of consolidated companies
                  
                  
                  -
                  
                  
                  
                  80
                  
                  
                  
                  -
                  
                  
                  
                  192Loss
      from discontinued operations before income taxes
                  
                  
                  (282
                  )
                  
                  
                  (1,388
                  )
                  
                  
                  (705
                  )
                  
                  
                  (6,505
                  )Benefit
      for income taxes
                  
                  
                  (110
                  )
                  
                  
                  (548
                  )
                  
                  
                  (275
                  )
                  
                  
                  (2,571
                  )Loss
      from discontinued operations, net of income taxes
                  
                  $
                  (172
                  )
                  
                  $
                  (840
                  )
                  
                  $
                  (430
                  )
                  
                  $
                  (3,934
                  )




22





Major
classes of assets and liabilities of the offices and the Capital Markets
business accounted for as discontinued operations in the accompanying Condensed
Consolidated Balance Sheets at September 30, 2010 and December 31, 2009 were as
follows:





September 30,
                              
                              
                              December 31,2010
                              
                              
                              2009(in
      thousands)Furniture,
      equipment, and leasehold improvements, net
                              
                              $
                              123
                              
                              
                              $
                              179Total
      assets of discontinued operations
                              
                              $
                              123
                              
                              
                              $
                              179Total
      liabilities of discontinued operations
                              
                              $
                              55
                              
                              
                              $
                              89





16.
              SUBSEQUENT
      EVENTS





Concept
Capital Holdings, LLC received approval from FINRA of its New Member
Application in October 2010. SMH sold the Washington Research Group, a
division of Concept Capital to MF Global Inc. on October 26,
2010.


23





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





Special
Cautionary Notice Regarding Forward-Looking Statements





This
quarterly report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements may relate to such matters as anticipated financial
performance, future revenue or earnings, business prospects, projected ventures,
new products, anticipated market performance, and similar matters. We caution
you that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to (1) trading volume in the
securities markets; (2) volatility of the securities markets and interest rates;
(3) changes in regulatory requirements that could affect the demand for our
services or the cost of doing business; (4) general economic conditions, both
domestic and foreign, especially in the regions where we do business; (5)
changes in the rate of inflation and related impact on securities markets; (6)
competition from existing financial institutions and other new participants in
the securities markets; (7) legal developments affecting the litigation
experience of the securities industry; (8) successful implementation of
technology solutions; (9) changes in valuations of our trading and warrant
portfolios resulting from mark-to-market adjustments; (10) dependence on key
personnel; (11) demand for our services; and (12) litigation and securities law
liabilities. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2009.  The Company does not
undertake to publicly update or revise any forward-looking
statements.





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





Overview





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





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





Our
Institutional Services segment provides institutional equity brokerage and prime
brokerage services to institutional clients, and third party management of a
portion of our assets.





Institutional Brokerage
provides institutional equity brokerage and hedge funds research to a broad
array of institutions, including banks, retirement funds, mutual funds,
endowments, investment advisors, and insurance companies.





Prime Brokerage Servicesprovides trade execution, clearing, bookkeeping, reporting, custodial,
securities borrowing, financing, research, and fund raising to hedge fund
clients.  The Company maintains a small number of asset management
accounts on behalf of individual asset managers through this
division.  The Washington Research Group provides research, sales, and
trading services to a broad range of institutional investors.


24





We are
exposed to volatility and trends in the general securities market and the
economy.  Due to the downturn in the market and the economic recession
that began during the second half of 2008, client assets declined during the
last half of 2008 and into the first quarter of 2009.  However, during
the second quarter of 2009, the market began to improve and client assets have
recovered resulting in, among other things, higher fee and commission
revenue.  While many economists believe the recession ended some time
during the first quarter of fiscal 2010, unemployment and tight credit markets
continue to create an unstable economic environment, and there is no guarantee
that conditions will not worsen again.  All of these factors have had
an impact on our operations.  Client assets were as
follows:





Client Assets(1)(in
      millions)December
      31, 2008
                    
                    $
                    8,627March
      31, 2009
                    
                    
                    8,501June
      30, 2009
                    
                    
                    9,534September
      30, 2009
                    
                    
                    10,595December
      31, 2009
                    
                    
                    11,273March
      31, 2010
                    
                    
                    11,904June
      30, 2010
                    
                    
                    11,085September
      30, 2010
                    
                    
                    12,072





(1)
              Client
      assets include the gross value of assetsunder
      management directly or via outside managersand
      assets held in brokerage accounts for clients byoutside
      clearing firms.





Client assets increased by $987.0
million in the third quarter of 2010, of which $848.0 million was due to market
appreciation and net inflows of $139.0 million.  The Company’s
7.6% market-related increase in client assets compares with an 11.3% increase in
the S&P 500 and a 7.9% increase in a 60/40 portfolio.





Three Months Ended September 30,2010
                        
                        
                        2009(in millions)Client
      assets at June 30
                        
                        $
                        11,085
                        
                        
                        $
                        9,534Inflows:Asset
      Inflows
                        
                        
                        431
                        
                        
                        
                        472New
      Businesses
                        
                        
                        -
                        
                        
                        
                        4Total
      Asset Inflows
                        
                        
                        431
                        
                        
                        
                        476Outflows:Asset
      Outflows
                        
                        
                        (292
                        )
                        
                        
                        (299
                        )Closed
      Businesses
                        
                        
                        -
                        
                        
                        
                        (69
                        )Total
      Asset Outflows
                        
                        
                        (292
                        )
                        
                        
                        (368
                        )Net
      Inflows
                        
                        
                        139
                        
                        
                        
                        108Market
      Appreciation
                        
                        
                        848
                        
                        
                        
                        953Net
      Change
                        
                        
                        987
                        
                        
                        
                        1,061Client
      Assets at September 30
                        
                        $
                        12,072
                        
                        
                        $
                        10,595


25





Growth
Strategy





Our expansion of Edelman offices
continues on plan.  Nine new branches have been added in 2010 in
metropolitan New York, greater Washington, D.C., Chicago and South
Florida.  Additional expansion offices are slated for the Richmond,
Boston and Detroit areas with one opening planned before the end of the
year.  Although the expansion costs will impact earnings over the
short term, we believe this investment will add enormously to the Company’s
future results of operations.





In addition, the Company plans to
further build on this expansion success by seeking to acquire other high-caliber
practices and has established reserves to fund this
mission.  Initiatives to attract new broker-dealers and advisors who
we feel add to the success and profitability of the Company are also
underway.  The Company is also working to attract new clients and
assets to existing businesses and is preparing a significant marketing
initiative for this year.





The recent economic turmoil and
upheaval in the credit markets resulted in significant dislocation in our
industry.  We believe this presents a time of opportunity for
us.  The considerable changes and challenges that many larger national
firms are experiencing give us an advantage in hiring highly qualified and
experienced financial advisors who have either become dislocated or disheartened
with their current employer.  Financial advisors at these firms are
faced with the challenge of convincing customers that their parent firm is
strong and financially stable despite negative media coverage.  These
financial professionals now consider regional firms like ours as serious
alternatives for their business.  Our pipeline of new recruits and the
quality of new recruits has increased significantly over the past two
years.





Having
divested the Company of the primary capital markets units that do not complement
our concentration on wealth management, we are well aligned for
expansion.  The sale of non-core businesses continues to provide
income that keeps the Company well capitalized and poised for
growth.  Concept Capital, our prime brokerage and institutional
services unit, has had its independent broker-deal application approved during
the fourth quarter of 2010.  We anticipate completion of the sale of
Concept Capital by the end of 2010.  We will continue to own an
interest in Concept Capital, but it will not be an operating unit of the
Company.





Business
Environment





Our business is sensitive to financial
market conditions, which have been very volatile over the past twenty-four
months.  As of September 30, 2010, equity market indices reflected an
average increase from a year ago with the Dow Jones Industrial Average, the
Standard & Poor’s 500 Index and the NASDAQ Composite Index up.  In
contrast, the average daily volume on the New York Stock Exchange declined
during the third quarter of 2010.  Despite the rally in the markets in
the first quarter of 2010, the economic environment is challenging, with the
national unemployment rate at approximately 9.6% at September 30, 2010, a
decrease from the high of 10% at the end of December 2009.  The
Federal Reserve Board reduced the federal funds target rate to 0 – 0.25% on
December 16, 2008, and has not yet begun increasing rates.  Most
economists do not expect the federal funds rate will increase significantly
during the fourth quarter of 2010.





Investors initially responded to the
volatile markets with a flight to quality which, in turn, reduced yields on
short-term U.S. treasury securities and produced a dramatic reduction in
commercial paper issuance.  Investors are slowly moving back to high
yielding investments, but this has been a slow progression.





The disruptions and developments in the
general economy and the credit markets over the past twenty-four months have
resulted in a range of actions by the U.S. and foreign governments to attempt to
bring liquidity and order to the financial markets and to prevent a long
recession in the world economy.  The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Act”) was passed by Congress on July 15, 2010 and
was signed into law on July 21, 2010.  The Act, among other things,
established a Financial Stability Oversight Council and a Consumer Financial
Protection Bureau whose duties will include the monitoring of domestic and
international financial regulatory proposals and developments, as well as the
protection of consumers.  Many regulations will be issued to implement
the Act over the next twelve to twenty-four months.  We
have  reviewed the Act but are unable to determine the final impact
that the Act will have on our operations until these regulations have been
issued.


26


Components
of Revenue and Expenses





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





Expenses.Our expenses
consist of (1) compensation and benefits, (2) floor brokerage, exchange, and
clearance fees, and (3) other expenses. Compensation and benefits have both a
variable component, based on revenue production, and a fixed component. The
variable component includes institutional and retail sales commissions, bonuses,
overrides, and other incentives. Wealth advisory and institutional commissions
are based on competitive commission schedules. The fixed component includes
administrative and executive salaries, payroll taxes, employee benefits, and
temporary employee costs. Compensation and benefits is our largest expense item
and includes wages, salaries, and benefits. During the third quarter of 2010,
compensation and benefits represented 62.2% of total expenses and 59.7% of total
revenue, compared to 61.5% of total expenses and 57.4% of total revenue during
the third quarter of 2009.  The increase in compensation and benefits
as a percentage of expenses, and the increase in compensation and benefits as a
percentage of total revenue is principally due to the addition of personnel to
enable the expansion of Edelman.





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





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





Results
of Operations





Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009





Edelman
opened six new offices in September 2009, four new offices during the three
months ended March 31, 2010, three new offices during the three months ended
June 30, 2010, and two additional offices during the three months ended
September 30, 2010.





Total
revenue was $41.1 million for the third quarter of 2010 and $41.4 million for
the third quarter of 2009, primarily reflecting increases of $4.4 million in
investment advisory and related services revenue, offset by decreases of $2.3
million in commission revenue, and a decrease in principal transactions revenue
of $2.0 million.  Total expenses for the third quarter of 2010
increased $767,000 or 2.0%, to $39.4 million from $38.7 million in the same
quarter of the previous year principally due to an increase in compensation
expense related to the Edelman expansion.  The increase in
compensation expense was partially offset by decreased interest expense and
decreased floor brokerage, exchange, and clearance fees.  Equity in
income of limited partnerships decreased to $1.7 million for the third quarter
of 2010 from $1.8 million for the third quarter of 2009.  Income from
continuing operations, net of income taxes, was $2.6 million, or $0.05 per
diluted common share, for the third quarter of 2010 compared to $3.3 million, or
$0.07 per diluted common share, for the third quarter of 2009.




27


Revenue
from investment advisory and related services increased to $23.9 million in the
third quarter of 2010 from $19.4 million in the same quarter of 2009 as a result
of an increase in client assets.  Commission revenue decreased to $9.2
million in the third quarter of 2010 from $11.5 million for the same period in
2009 as a result of a decrease in trading volume in the Institutional Services
segment.  Investment banking revenue, consisting of sales credits from
our participation in syndicate transactions, was $502,000 in the third quarter
of 2010 and $508,000 in the third quarter of 2009.  Principal
transactions revenue decreased from $4.9 million for the third quarter of 2009
to $2.9 million for the third quarter of 2010 as the result of a decrease in
fixed income trading at our Concept Capital division.  Other income
decreased from $2.6 million during the third quarter of 2009 to $2.2 million
during the same period in 2010 reflecting a decrease of $385,000 in insurance
commission activity during the quarter.





During
the three months ended September 30, 2010, employee compensation and benefits
increased to $24.5 million from $23.8 million in the same period last year
principally due to the Edelman expansion.  During the three months
ended September 30, 2010, floor brokerage, exchange, and clearance fees
decreased to $1.1 million from $1.4 million in the same period last year due to
a lower commission revenue.  Communications and data processing costs
increased to $3.2 million in the third quarter of 2010 compared to $2.6 million
in the same period last year due to the Edelman expansion.  Occupancy
costs increased to $3.5 million in the third quarter of 2010 compared to $3.2
million in the third quarter of 2009 due to the Edelman
expansion.  Interest expense decreased to $479,000 for the third
quarter of 2010 compared to $1.3 million in the third quarter of 2009 due to a
decline in our funded debt from $22.0 million at September 30, 2009 to $14.9
million at September 30, 2010.  Other general and administrative
expenses increased to $6.3 million during the third quarter of 2010 from $6.2
million in the third quarter of 2009 due to an increase in advertising and other
expenses related to the Edelman expansion.





Our
effective tax rate from continuing operations was 38.2% for the three months
ended September 30, 2010 compared to 37.6% for the three months ended September
30, 2009.  The effective tax rate exceeds the federal statutory income
tax rate primarily as a result of state income taxes and certain nondeductible
expenses.





During
the first quarter of 2009, the Company closed three retail
offices.  The decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs.  During the fourth
quarter of 2009, the Company completed its sale of most of its capital markets
businesses.  The Company recorded a net loss from discontinued
operations of $172,000 in the third quarter of 2010 compared to $840,000 in the
third quarter of 2009 related to the closed offices and the sale of the capital
markets business.





Results
by Segment





Wealth
Management





Three Months Ended September
      30,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    30,457
                    
                    
                    $
                    26,355Income
      from continuing operations before income taxes
                    
                    $
                    7,959
                    
                    
                    $
                    7,584


28


Revenue
from wealth management increased to $30.5 million from $26.4 million and income
from continuing operations before income taxes increased to $8.0 million from
$7.6 million.  Edelman opened six new offices in September 2009, four
new offices during the three months ended March 31, 2010, three new offices
during the three months ended June 30, 2010 and two additional offices during
the three months ended September 30, 2010.  Investment advisory and
related services fees increased to $23.8 million from $19.4 million reflecting
an increase in the size of our client portfolios primarily due to improvement in
the general securities market and the economy.  Sales credits from our
participation in syndicate transactions increased to $502,000 from $444,000 as a
result of an increase in sales credits from syndicate
transactions.  Total expenses increased to $23.2 million from $19.1
million due to higher employee compensation costs of $2.7 million and occupancy
costs of $690,000 associated with the Edelman expansion, and the increase in
revenue.  Equity in loss of limited partnerships decreased to $669,000
from $356,000. The improvement in equity in income of limited partnerships is
attributable to an increase in the value of the limited partnerships we
manage.





Institutional
Services





Institutional
Brokerage


Three Months Ended September
      30,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    946
                    
                    
                    $
                    1,244Loss
      from continuing operations before income taxes
                    
                    $
                    (194
                    )
                    
                    $
                    (23
                    )





Revenue
from institutional brokerage decreased to $946,000 for the three
months ended September 30, 2010, from $1.2 million for the three months ended
September 30, 2009. The decrease in revenue was the result of a decline in
commission revenue from a reduced volume of shares traded. The loss from
continuing operations before income taxes increased to $194,000 from
$23,000.  Total expenses declined to $1.1 million from $1.3 million,
due to a decrease in employee compensation costs related to the lower
revenue.





Prime Brokerage
Services





Three Months Ended September
      30,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    8,127
                    
                    
                    $
                    12,566Loss
      from continuing operations before income taxes
                    
                    $
                    (856
                    )
                    
                    $
                    (416
                    )





Revenue
from prime brokerage services decreased to $8.1 million from $12.6 million and
loss from continuing operations before income taxes increased to $856,000 from
$416,000.  Principal transactions revenue decreased to $1.4 million
from $3.9 million reflecting a decrease in revenue earned from the sale of fixed
income products.  Total expenses decreased to $9.0 million from $13.0
million primarily due to reduced compensation costs related to the lower
revenue.


29





Corporate
Support and Other


Three Months Ended September
      30,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    1,562
                    
                    
                    $
                    1,248Loss
      from continuing operations before income taxes
                    
                    $
                    (3,514
                    )
                    
                    $
                    (2,631
                    )





Revenue
from corporate support and other increased to $1.6 million from $1.2 million,
and loss from continuing operations before income taxes increased to $3.5
million from $2.6 million.  Revenue from principal transactions, which
consists of changes in the values of our investment portfolios, increased to
$1.0 million from $696,000.  Total expenses increased to $6.1 million
from $5.6 million due to an increase in employee compensation costs of $497,000
and an increase in other general and administrative costs of $782,000, offset by
a decrease in interest expense of $776,000.





Results
of Operations





Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009





Total
revenue was $134.0 million for the nine months ended September 30, 2010 compared
to $125.3 million for the same period in 2009, an increase of $8.6 million, or
6.8%, reflecting increases of $18.0 million in investment advisory and related
services revenue, $1.5 million in sales credits from our participation in
syndicate transactions, partially offset by a decrease in principal transactions
revenue of $11.1 million.  Total expenses for the nine months ended
September 30, 2010, decreased $6.6 million, or 4.9%, to $127.5 million from
$134.1 million in the same period of the previous year principally due to $14.9
million in goodwill and other intangible assets impairment charges that were
recognized in the first quarter of 2009.  The decrease in expenses
related to the 2009 impairment charges was partially offset by increased
employee compensation and benefits, communications and data processing costs,
and other general and administrative expenses.  Equity in income of
limited partnerships increased to $5.3 million for the nine months ended
September 30, 2010, compared to $2.8 million for the same period of 2009,
reflecting an increase in the fair value of our investment in PTC Houston
Management due to a change in the ownership structure as well as an increase in
the value of partnership investments.  Income (loss) from continuing
operations, net of income taxes, was $8.6  million, or $0.17 per
diluted common share, for the nine months ended September 30, 2010 compared to a
loss of $1.0 million, or $(0.17) per diluted common share, for the nine months
ended September 30, 2009.





Revenue
from investment advisory and related services increased to $68.9 million for the
nine months ended September 30, 2010, from $50.9 million in the same period of
2009 as a result of an increase in client assets.  Commission revenue
decreased to $32.8 million for the nine months ended September 30, 2010, from
$33.0 million for the same period in 2009 as a result of an increase in trading
volume in the Wealth Management segment.  Sales credits from our
participation in syndicate transactions increased to $2.9 million during the
nine months ended September 30, 2010 from $1.4 million in the same period of
2009 due to an increase in our participation in syndicate
transactions.  Principal transactions revenue decreased from $25.0
million for the nine months ended September 30, 2009, to $13.9 million for the
same period of 2010 as a result of the decrease in the sale of fixed income
products.  Other income increased from $7.1 million during the nine
months ended September 30, 2009 to $7.5 million during the same period in 2010
reflecting an increase of $1.7 million in hedge fund servicing revenue and
third-party marketing fees partially offset by a decrease in insurance
commissions.


30





During
the nine months ended September 30, 2010, employee compensation and benefits
increased to $80.9 million from $78.0 million in the same period last year
principally due to higher commission expense related to higher revenue and to
additional personnel related to the EFA acquisition and the Edelman
expansion.  During the nine months ended September 30, 2009, floor
brokerage, exchange, and clearance fees decreased from $4.6 million to $4.0
million in the same period in 2010 due to a decrease in clearance fees in the
institutional brokerage division due to lower trading
volume.  Communications and data processing costs increased to $9.3
million for the nine months ended September 30, 2010, compared to $7.4 million
in the same period last year due to higher clearing firm service fees resulting
from the increase in trading volume in the Wealth Management segment and
additional customer accounts related to the EFA acquisition and the Edelman
expansion.  Occupancy costs increased to $10.0 million in the nine
months ended September 30, 2010 compared to $8.7 million in the same period of
2009 due to the Edelman expansion.  Interest expense decreased to
$1.4 million during the nine months ended September 30, 2010, from $2.1
million in the same period of 2009 due to a decrease in the average balance of
our funded debt from the first nine months of 2009 to the first nine months of
2010.  Amortization of other intangible assets increased to $1.3
million for the nine months ended September 30, 2010, compared to $962,000 for
the same period of 2009 due to the acquisition of the additional 66% membership
interest in EFA and to the acquisition of IFS.  Other general and
administrative expenses increased to $20.7 million during the nine months ended
September 30, 2010 from $17.5 million in the same period of 2009 due to an
increase in advertising and other expenses related to the acquisition of EFA and
to the Edelman expansion.





Our
effective tax rate from continuing operations was 38.9% for the nine months
ended September 30, 2010, compared to 29.8% for the nine months ended September
30, 2009.  The effective tax rate exceeds the federal statutory income
tax rate primarily as a result of state income taxes and certain nondeductible
expenses.





During
the first quarter of 2009, the Company closed three retail
offices.  The decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs.  During the fourth
quarter of 2009, the Company completed its sale of most of its capital markets
businesses.  The Company recorded a net loss from discontinued
operations of $430,000 in the nine months ended September 30, 2010, compared to
$3.9 million in the same period of 2009 related to the closed offices and the
sale of the capital markets business.





Results
by Segment





Wealth
Management





Nine
      Months Ended September 30,2010
                        
                        
                        2009(in
      thousands)Revenue
                        
                        $
                        91,494
                        
                        
                        $
                        72,090Income
      from continuing operations before income taxes
                        
                        $
                        25,484
                        
                        
                        $
                        18,253





Revenue
from wealth management increased to $91.5 million from $72.1 million and income
from continuing operations before income taxes increased to $25.5 million from
$18.3 million.  On April 1, 2009, the Company increased its ownership
of EFA from 10% to 76%, which required a change in our method of accounting for
EFA’s results to consolidation from the cost method.  Edelman opened
six new offices in September 2009 and an additional nine new offices during the
nine months ended September 30, 2010.  Investment advisory and related
services fees increased to $68.3 million from $50.8 million reflecting an
increase in the size of our client portfolios primarily due to improvement in
the general securities market and the economy.  Sales credits from
syndicate transactions increased $1.7 million as a result of an increase in
syndicate transactions.  Total expenses increased to $67.2 million
from $53.0 million due to higher employee compensation and occupancy costs
associated with the EFA acquisition, the Edelman expansion, and the increase in
revenue.  Equity in income (loss) of limited partnerships increased to
$1.2 million from a loss of $799,000. The increase in equity in income (loss) of
limited partnerships is attributable to an increase in the value of the limited
partnerships we manage.


31





Institutional
Services





Institutional
Brokerage





Nine Months Ended September
    30,2010
                      
                      
                      2009(in
      thousands)Revenue
                      
                      $
                      3,253
                      
                      
                      $
                      3,828Loss
      from continuing operations before income taxes
                      
                      $
                      (465
                      )
                      
                      $
                      (524
                      )





Revenue
from institutional services decreased to $3.3 million from $3.8 million.
Commission revenue decreased as a result of a decline in the number of shares
traded.  Total expenses decreased to $3.7 million from $4.4 million
due to decreased employee compensation related to the lower
revenue.  Loss from continuing operations before income taxes
decreased to $465,000 from $524,000.





Prime Brokerage
Services





Nine Months Ended September
    30,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    35,025
                    
                    
                    $
                    46,929Income
      (loss) from continuing operations before income taxes
                    
                    $
                    (1,488
                    )
                    
                    $
                    361





Revenue
from prime brokerage services decreased to $35.0 million from $46.9 million and
income (loss) from continuing operations before income taxes decreased to a loss
of $1.5 million from income of $361,000.  Principal transactions
revenue decreased to $10.8 million from $23.2 million reflecting a decrease in
proprietary trading revenue and a decrease in revenue earned from the sale of
fixed income products.  Total expenses decreased to $36.5 million from
$46.6 million due to the revenue decline.


32





Corporate
Support and Other





Nine Months Ended September
    30,2010
                    
                    
                    2009(in
      thousands)Revenue
                    
                    $
                    4,129
                    
                    
                    $
                    2,494Loss
      from continuing operations before income taxes
                    
                    $
                    (11,790
                    )
                    
                    $
                    (21,085
                    )





Revenue
from corporate support and other increased to $4.1 million from $2.5 million and
loss from continuing operations before income taxes decreased to $11.8 million
from $21.1 million.  Revenue from principal transactions, which
consists of changes in the values of our investment portfolios, increased to
income of $1.6 million from $393,000.  Total expenses decreased to
$20.0 million from $30.1 million due to $14.9 million of goodwill and other
intangible assets impairment charges recognized in 2009.  This
decrease was partially offset by an increase in the provision for bad debts of
$1.4 million due to the write off of a note receivable made in conjunction
with the Company’s investment in iProOne, Inc.  The deconsolidation of
one of the limited partnerships that we manage and the fair value
measurement of that investment resulted in equity in income of limited
partnerships of $4.1 million for the nine months ended September 30,
2010. Equity in income of limited partnerships of $3.6 million for the nine
months ended September 30, 2009, was principally related to
an increase in the value of the Company’s investment in high yield fixed
income products.  The Company recognized a $3.0 million gain on step
acquisition in 2009 related to its previously-held noncontrolling interest in
EFA.


33





Liquidity
and Capital Resources





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





We intend
to satisfy our funding needs with our own capital resources, consisting largely
of internally generated earnings and liquid assets, and with borrowings from
outside parties.  At September 30, 2010, we had $33.2 million in cash
and cash equivalents, which together with receivables from broker-dealers and
clearing organizations, deposits with clearing organizations, and marketable
securities owned represented 15.0% of our total assets at the end of our third
quarter.





Receivables
turnover, calculated as annualized revenue divided by average receivables, was
1.5 for the nine months ended September 30, 2010, compared to 1.4 for the same
period in the prior year.  The increase in the receivables turnover
was the result of an increase in investment advisory revenue that is typically
collected as earned.  The allowance for doubtful accounts as a
percentage of receivables was 1.9% at September 30, 2010, compared to 2.2% at
December 31, 2009, reflecting an improvement in the credit quality of the
Company’s receivables.





For the
nine months ended September 30, 2010, net cash provided by operations was $8.5
million versus $1.3 million during the same period in
2009.  Marketable securities owned decreased by $8.2 million during
the first nine months of 2010, securities sold, not yet purchased decreased by
$1.4 million and payables to broker-dealers and clearing organizations decreased
by $22,000.  The change in marketable securities owned, securities
sold, not yet purchased, and payables to broker-dealers and clearing
organizations reflects the Company’s reduction of its net security
positions.  The Company’s portfolio includes both long and short
equity positions.  Our asset managers generally seek to generate
profits based on trading spreads, rather than through speculation on the
direction of the market and employ hedging strategies designed to insulate the
net value of our portfolios from fluctuations in the general level of interest
rates and equity price variances.  We finance a portion of our
positions through our clearing broker-dealers.





Not
readily marketable securities owned, primarily investments in limited
partnerships, were $24.6 million at September 30, 2010 compared to $22.8 million
at December 31, 2009.  This increase is the result of changes in the
values of our investment portfolios.  These limited partnerships
typically have a ten-year life.





Capital
expenditures for the first nine months of 2010 were $2.4 million, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for the Edelman expansion.





SMH is
subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC
rule 15c3-1), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1 (and the rule of the “applicable” exchange also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed 10 to 1).  At September 30, 2010, SMH had
net capital, as defined, of $10.3 million, which was $9.7 million in excess of
its required net capital of $603,000.





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


34





Critical
Accounting Policies/Estimates




Investment – Valuation of Not
Readily Marketable Securities.  Securities not readily
marketable consist primarily of investments in private companies, limited
partnerships, equities, options, and warrants.  Investments in private
investment limited partnerships are carried at fair value and based on quarterly
valuations prepared by the General Partner of such partnerships, and reviewed by
their Valuation Committee. Investments in other limited partnerships are valued
at fair value based on either internal valuation models or management’s estimate of
amounts that could be realized under current market conditions assuming an
orderly liquidation over a reasonable period of time.
  Investments
in not readily marketable securities, marketable securities with insufficient
trading volumes, and restricted securities are carried at their estimated fair
value by the Company in the absence of readily ascertainable market
values.  These estimated values may differ significantly from the
values that would have been used had a readily available market existed for
these investments.  Such differences could be material to the
financial statements.   At September 30, 2010, the investment
portfolio included investments totaling $21.6 million whose values had been
estimated by the Company in the absence of readily ascertainable market
values.


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





Factors
considered in determining fair value include, among other things, the Company’s
market capitalization as determined by quoted market prices for its common stock
and the value of the Company’s reporting units.  The Company uses
several methods to value its reporting units, including discounted cash flows,
comparisons with valuations of public companies in the same industry, and
multiples of assets under management.  If the fair value of the
reporting unit exceeds its carrying value, step two does not need to be
performed.





In
performing the first step of the goodwill impairment test, the estimated fair
values of the reporting units were developed using the methods listed
above.  When performing the discounted cash flow analysis, the Company
utilized observable market data to the extent available.  Future cash
flow projections are based primarily on actual results and, at April 30, 2009,
included negative future cash flows for one reporting unit.  This
reporting unit has no recorded goodwill.  For the February 28, 2009,
and April 30, 2009, goodwill analyses, the cash flow estimates reflect zero
growth for all projected future periods.





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





For the
April 30, 2010, goodwill analyses, the cash flow estimates reflect 6% revenue
growth and 3% expense growth for all entities, other than Edelman entities,
which were based on historical growth rates and future
forecasts.  Edelman reflected higher growth rates of 10% based on the
Edelman expansion plan to continue expansion by opening new offices throughout
the country.  The discount rates utilized in the April 30, 2010
analysis ranged from 13% to 15%.  The Company also calculates
estimated fair values of the reporting units utilizing multiples of earnings,
book value, and assets under management of the reporting unit.  The
estimated fair value using these techniques is compared with the carrying value
of the reporting unit to determine if there is an indication of
impairment.  A sensitivity analysis was also performed, which did not
impact management’s conclusion that there is no indication of goodwill
impairment.





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


35





Remaining
amounts of goodwill at September 30, 2010, were as follows:  Edelman -
$67.2 million, Kissinger - $2.4 million, Dickenson - $2.1 million, SMH Colorado
- $1.5 million, Leonetti - $225,000, and IFS $409,000.  Future
goodwill impairment tests may result in a future charge to
earnings.





Other
intangible assets consist primarily of customer relationships and trade names
acquired in business combinations.  Other intangible assets acquired
that have indefinite lives (trade names) are not amortized but are tested for
impairment annually, or if certain circumstances indicate a possible impairment
may exist.  Certain other intangible assets acquired (customer
relationships and covenants not to compete) are amortized on a straight line
basis over their estimated useful lives and tested for impairment if certain
circumstances indicate an impairment may exist.  Other intangible
assets are tested for impairment by comparing expected future cash flows to the
carrying amount of the intangible assets.  The Company recognized a
trade name impairment of $1.1 million during the quarter ended March 31,
2009.  Other intangible assets were tested for impairment as of April
30, 2010.  Based on the analyses performed, there was no indication of
impairment of other intangible assets.


36




Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Market
Risk





During
the nine months ended September 30, 2010, there have been no material changes to
the information contained in Part II, Item 7A of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009.





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





At
September 30, 2010, securities owned by the Company were $34.6 million,
including $10.0 million in marketable securities, $22.5 million representing the
Company’s investments in limited partnerships, and $2.1 million representing
other not readily marketable securities.





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





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





Item 4.Controls and
Procedures





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


37


PART
II.   OTHER INFORMATION





Item
1.  Legal
Proceedings





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





The
following information supplements and amends our discussion set forth under Part
I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 and under Part 2, Item 1 “Legal Proceedings” in our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.





As
previously reported, in May 2007, two purchasers of Ronco convertible preferred
stock filed a complaint against SMH, US Special Opportunities
Trust PLC and Renaissance US Growth Investment Trust PLC vs. Sanders Morris
Harris Inc., in the 193rd Judicial District Court, Dallas County, Texas,
alleging common law fraud, statutory fraud in a stock transaction, violations of
the Texas Securities Act, and negligent misrepresentation in connection with
their purchase of $2.0 million in Ronco convertible preferred stock. On April
23, 2010, following a two-week trial, the jury returned a defense verdict in
favor of SMH on all claims made by the plaintiffs.  Following the
trial, the plaintiffs filed a motion for new trial, which we
opposed.  On August 16, 2010, the plaintiffs withdrew their motion for
new trial and this matter was concluded.





In
addition, as previously reported, in March 2009, a third purchaser of Ronco
convertible preferred stock filed a complaint against SMH, Palisades Master Fund, L.P.
and PEF Advisors, LLC vs. Sanders Morris Harris Inc., in the 11th
Judicial District Court of Harris County, Texas.  The claims are
similar to the above referenced case.  Palisades Master Fund, L.P.
invested $1.9 million in Ronco convertible preferred stock. Following mediation,
this matter was settled and the action dismissed in October 2010.





As
previously reported, in July 2009, the Bankruptcy Trustee filed a derivative
action on behalf of the shareholders of Ronco against two former directors of
Ronco (who were employees of SMH) for negligently authorizing the closing of the
purchase of the assets of Ronco Marketing Corp. in breach of their fiduciary
duties of care and loyalty and against SMH for negligent misrepresentation,
breach of fiduciary duties, breach of contract, and violation of the Texas
Fraudulent Transfer Act, Diane Weil, Solely in Her
Capacity as Trustee of Ronco Corporation and Ronco Marketing Corporation vs. A.
Emerson Martin II, Gregg Mockenhaupt, and Sanders Morris Harris Inc., in
the 190th Judicial District Court of Harris County, Texas. Following mediation,
the parties to this matter have agreed in principle to a settlement and
dismissal, which is required to be approved by the U.S. Bankruptcy Court that
has jurisdiction over the Ronco bankruptcy proceeding.





Also, as
previously reported, in July 2008, the Dallas regional office of the Financial
Industry Regulatory authority (“FINRA”) conducted a routine examination of SMH’s
broker-dealer activities.  SMH received an examination report on
December 31, 2008, which identified a number of deficiencies in SMH’s
operations.  In April 2009, SMH resolved half of the deficiencies
noted through a compliance conference procedure. On October 5, 2010, SMH
received a “Wells letter” notification from FINRA, which states that the staff
of FINRA has made a preliminary determination to recommend that disciplinary
action be brought against SMH and two former employees based on alleged
violations of certain federal securities laws and FINRA rules based on the
deficiencies identified in the 2008 examination. Under the Wells procedure, SMH
has an opportunity to respond to FINRA before any action is taken against it.
Discussions have commenced between the staff of FINRA and our legal counsel with
respect to the alleged violations and resolution of the matter. There is no
assurance that a prompt resolution can be reached or that the ultimate impact on
SMH and the Company will not be material


38





Item
1A.  Risk
Factors





There
have been no material changes in the Company’s risk factors from those disclosed
in the Annual Report on Form 10-K for the year ended December 31,
2009.





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





The following table provides
information about the Company’s share repurchase activity for the three months
ended September 30, 2010:


Total
      number ofTotal
                  
                  
                  
                  
                  
                  shares
      purchased
                  
                  
                  Maximum
      number ofnumber
      of
                  
                  
                  Average
                  
                  
                  as
      part of publicly
                  
                  
                  shares
      that may yetshares
                  
                  
                  price
      paid
                  
                  
                  announced
      plans
                  
                  
                  be
      purchased underPeriod
                  
                  purchased
                  
                  
                  per share
                  
                  
                  or programs (1)
                  
                  
                  the plans or programsJuly
      1 to July 31, 2010
                  
                  
                  223,367
                  
                  
                  $
                  5.25
                  
                  
                  
                  223,367
                  
                  
                  
                  780,964August
      1 to August 31, 2010
                  
                  
                  3,617
                  
                  
                  
                  5.17
                  
                  
                  
                  3,617
                  
                  
                  
                  777,347September
      1 to September 30, 2010
                  
                  
                  160,342
                  
                  
                  
                  5.47
                  
                  
                  
                  160,342
                  
                  
                  
                  617,005Total
                  
                  
                  387,326
                  
                  
                  $
                  5.34
                  
                  
                  
                  387,326
                  
                  
                  
                  617,005
  
 (1)
                The
      Company announced a share repurchase program on November 7, 2007, to
      purchase up to 1.0 million shares of the Company's shares of common stock.
      On May 27, 2010, the board of directors approved the repurchase of up to
      an additional 1.0 million shares of common stock, subject to maximum
      expenditure of $2.5 million under our credit
  agreement.




Item
5. Other
Information





None.


39


Item
6.  Exhibits





INDEX
TO EXHIBITS





ExhibitNumber
            
            Description3.1
            
            Articles
      of Incorporation of the Company, as amended (Filed as Exhibit 3.1 to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2001
      (File No. 000-30066), and incorporated herein by
    reference).3.2
            
            Amended
      and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended September 30, 2007
      (File No. 000-30066), and incorporated herein by
    reference).†10.01
            
            Sanders
      Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as Appendix
      A to the Definitive Proxy Statement on Schedule 14A of the Company dated
      May 3, 2002 (File No. 000-30066), and incorporated herein by
      reference).†10.02
            
            Sanders
      Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2001 (File No. 000-30066), and incorporated herein by
      reference).†10.03
            
            Form
      of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
      10.03 to the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.04
            
            Form
      of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed as
      Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005 (File No. 000-30066), and incorporated herein by
      reference).†10.05
            
            Employment
      Agreement dated as of May 10, 2005, between The Edelman Financial Center,
      LLC and Fredric M. Edelman.  (Filed as Exhibit 10.05 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).†10.06
            
            Sanders
      Morris Harris Group Inc. 2009 Management Incentive
      Program.  (Filed as Exhibit 10.06 to the Company’s Annual Report
      on Form 10-K for the year ended December 31, 2009 (File No. 000-30066),
      and incorporated herein by reference).†10.07
            
            Sanders
      Morris Harris Group Inc. 2009 Supplemental Bonus Plan.  (Filed
      as Exhibit 10.06 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.08
            
            Office
      Lease Agreement and related amendments dated September 25, 1996, between
      Texas Tower Limited and Sanders Morris Mundy Inc. (Filed as Exhibit 10.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2000 (File No. 000-30066), and incorporated herein by
      reference).10.09
            
            Eleventh
      Amendment to Lease Agreement dated as of December 21, 2006, between Texas
      Tower Limited and Sanders Morris Harris Inc. (Filed as Exhibit 10.06 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007 (File No. 000-30066), and incorporated herein by
      reference).10.10
            
            Reorganization
      and Purchase Agreement dated as of May 10, 2005, among Sanders Morris
      Harris Group Inc., The Edelman Financial Center, Inc., The Edelman
      Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1 to the
      Company’s Current Report on Form 8-K dated May 10, 2005 (File No.
      000-30066), and incorporated herein by reference).10.11
            
            Contribution
      Agreement dated as of April 28, 2003, by and between Salient Partners,
      L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas limited
      partnership, Salient Capital, L.P., a Texas limited partnership, Salient
      Partners GP, LLC, a Texas limited liability company, John A. Blaisdell,
      Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag
      Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc. (Filed
      as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007 (File No. 000-30066), and incorporated herein by
      reference).10.12
            
            Agreement
      to Retire Partnership Interest and Second Amendment to the Limited
      Partnership Agreement of Endowment Advisers, L.P. dated as of August 29,
      2008, among Sanders Morris Harris Group Inc. and Endowment Advisers, L.P.,
      The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC, and
      their respective partners and members (Filed as Exhibit 99.2 to the
      Company’s Current Report on Form 8-K dated August 29, 2008 (File No.
      000-30066), and incorporated herein by
  reference).


40





10.13
            
            Letter
      agreement dated as of January 1, 2009, among Sanders Morris Harris Group,
      Inc., Fredric M. Edelman, and Edward Moore  (Filed as Exhibit
      99.2 to the Company’s Current Report on Form 8-K dated January 29, 2009
      (File No. 000-30066), and incorporated herein by
    reference).10.14
            
            Credit
      Agreement dated as of May 11, 2009, between Sanders Morris Harris Group
      Inc. and Prosperity Bank.  (Filed as Exhibit 10.08 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009 (File No. 000-30066), and incorporated herein by
      reference).10.15
            
            First
      Amendment to Credit Agreement dated as of June 23, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.09 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.16
            
            Second
      Amendment to Credit Agreement dated as of July 15, 2009, between Sanders
      Morris Harris Group Inc. and Prosperity Bank.  (Filed as Exhibit
      10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 (File No. 000-30066), and incorporated herein by
      reference).10.17
            
            Third
      Amendment to Credit Agreement dated as of September 15, 2009, between
      Sanders Morris Harris Group Inc. and Prosperity Bank.  (Filed as
      Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2009 (File No. 000-30066), and incorporated
      herein by reference).10.18
            
            Fourth
      Amendment to Credit Agreement dated as of September 30, 2009, between
      Sanders Morris Harris Group Inc. and Prosperity Bank.  (Filed as
      Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2009 (File No. 000-30066), and incorporated
      herein by reference).†10.19
            
            2010
      Executive Incentive Plan (Filed as Exhibit 10.19 to the Company’s Current
      Report on Form 8-K filed on June 3, 2010, (File No. 000-30066), and
      incorporated herein by reference).†10.20
            
            2010
      Executive and Key Manager Restricted Stock Unit Sub-Plan (Filed as Exhibit
      10.20 to the Company’s Current Report on Form 8-K filed on June 3, 2010
      (File No. 000-30066), and incorporated herein by
    reference).†10.21
            
            Long-term
      Incentive Plan (Filed as Appendix A to the Definitive Proxy Statement on
      Schedule 14A of the Company dated April 15, 2010 (File No. 000-30066), and
      incorporated herein by reference).*31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.*31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.*32.1
            
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*32.2
            
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*    Filed
      herewith.
              †   
      Management contract or compensation plan or
  arrangement.


41


SIGNATURES





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





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





Date:   
November 9, 2010


42