**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**










**FORM
      10-Q**




**(mark
      one)**




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




**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2007**




**OR**




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




**Commission
      File No. 0-30066**




**SANDERS
      MORRIS HARRIS GROUP INC.**




(Exact
      name of registrant as specified in its charter)


**Texas**
              **76-0583569**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)**600
                  Travis, Suite 3100**
              ******Houston,
                  Texas**
              **77002**(Address
                  of principal executive offices)
              (Zip
                  code)




**(713)
      993-4610**




(Registrant’s
      telephone number, including area code)




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer o
      Accelerated
      filer x
      Non-accelerated filer o




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




As
      of
      August 7, 2007, the registrant had 24,749,661 outstanding shares of common
      stock, par value $0.01 per share.














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





**INDEX**


Page**PART
                  I.FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  Statements
              2Condensed
                  Consolidated Balance Sheet as of June 30, 2007 (unaudited) and
                  December
                  31, 2006
              2Condensed
                  Consolidated Statement of Income for the Three and Six Months Ended
                  June
                  30, 2007 and 2006 (unaudited)
              3Condensed
                  Consolidated Statement of Shareholders' Equity for the Six Months
                  Ended
                  June 30, 2007 (unaudited)
              4Condensed
                  Consolidated Statement of Cash Flows for the Six Months Ended June
                  30,
                  2007 and 2006 (unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results
                  ofOperations
              16Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              24Item
                  4.
              Controls
                  and Procedures
              24**PART
                  II.OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              25Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              26Item
                  6.
              Exhibits
              27
 1


**PART
      I. FINANCIAL INFORMATION**





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


**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED BALANCE SHEET****As
                  of June 30, 2007 and December 31, 2006**(in
                  thousands, except share and per share amounts)
  **June
                  30,**
              
              **December
                  31,****2007**
              
              **2006****(unaudited)****ASSETS**Cash
                  and cash equivalents
              
              $
              43,711
              
              $
              68,861Receivables,
                  net of allowance of $3,283 and $227, respectivelyBroker-dealers
                  and clearing organizations
              
              
              263
              
              
              505Customers
              
              
              21,527
              
              
              16,720Related
                  parties
              
              
              9,936
              
              
              6,212Other
              
              
              6,251
              
              
              5,587Deposits
                  with clearing organizations
              
              
              1,091
              
              
              1,084Securities
                  owned
              
              
              101,062
              
              
              82,462Securities
                  available for sale
              
              
              1,177
              
              
              1,467Furniture,
                  equipment, and leasehold improvements, net
              
              
              12,306
              
              
              12,323Other
                  assets and prepaid expenses
              
              
              2,418
              
              
              2,048Goodwill
                  and other intangible assets
              
              
              89,055
              
              
              84,773Total
                  assets
              
              $
              288,797
              
              $
              282,042**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                  payable and accrued liabilities
              
              $
              22,345
              
              $
              25,550Borrowings
              
              
              200
              
              
              555Deferred
                  tax liability, net
              
              
              2,393
              
              
              3,037Securities
                  sold, not yet purchased
              
              
              17,777
              
              
              20,107Payable
                  to broker-dealers and clearing organizations
              
              
              10,762
              
              
              733Total
                  liabilities
              
              
              53,477
              
              
              49,982Commitments
                  and contingenciesMinority
                  interests
              
              
              13,258
              
              
              12,124Shareholders'
                  equity:Preferred
                  stock, $0.10 par value; 10,000,000 sharesauthorized;
                  no shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $0.01 par value; 100,000,000 sharesauthorized;
                  25,488,372 and 25,273,437 shares issued,respectively
              
              
              255
              
              
              253Additional
                  paid-in capital
              
              
              200,755
              
              
              199,176Retained
                  earnings
              
              
              24,422
              
              
              23,902Accumulated
                  other comprehensive income
              
              
              111
              
              
              86Treasury
                  stock, at cost, 739,411 shares
              
              
              (3,481
              )
              
              (3,481
              )Total
                  shareholders' equity
              
              
              222,062
              
              
              219,936Total
                  liabilities and shareholders' equity
              
              $
              288,797
              
              $
              282,042
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  2


**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF INCOME**(in
                  thousands, except per share amounts)(unaudited)
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Revenues:Commissions
              
              $
              13,808
              
              $
              15,227
              
              $
              27,326
              
              $
              30,009Investment
                  banking
              
              
              9,086
              
              
              12,022
              
              
              19,245
              
              
              21,947Investment
                  advisory and related services
              
              
              17,010
              
              
              8,199
              
              
              31,870
              
              
              16,510Principal
                  transactions
              
              
              2,776
              
              
              3,805
              
              
              6,098
              
              
              9,975Interest
                  and dividends
              
              
              1,958
              
              
              1,600
              
              
              3,898
              
              
              3,019Other
                  income
              
              
              1,559
              
              
              1,587
              
              
              3,243
              
              
              2,983Total
                  revenues
              
              
              46,197
              
              
              42,440
              
              
              91,680
              
              
              84,443Expenses:Employee
                  compensation and benefits
              
              
              27,236
              
              
              24,982
              
              
              53,752
              
              
              50,011Floor
                  brokerage, exchange, and clearance fees
              
              
              1,876
              
              
              1,949
              
              
              3,381
              
              
              3,729Communications
                  and data processing
              
              
              2,861
              
              
              1,958
              
              
              5,131
              
              
              3,958Occupancy
              
              
              2,936
              
              
              2,792
              
              
              5,967
              
              
              5,268Interest
              
              
              9
              
              
              276
              
              
              21
              
              
              477Amortization
                  of intangible assets
              
              
              139
              
              
              -
              
              
              139
              
              
              -Other
                  general and administrative
              
              
              8,708
              
              
              5,561
              
              
              14,381
              
              
              10,688Total
                  expenses
              
              
              43,765
              
              
              37,518
              
              
              82,772
              
              
              74,131Income
                  from continuing operations before equity inincome
                  of limited partnerships, minority interests,and
                  income taxes
              
              
              2,432
              
              
              4,922
              
              
              8,908
              
              
              10,312Equity
                  in income of limited partnerships
              
              
              3,902
              
              
              748
              
              
              3,587
              
              
              2,573Income
                  from continuing operations before minorityinterests
                  and income taxes
              
              
              6,334
              
              
              5,670
              
              
              12,495
              
              
              12,885Minority
                  interests in net income of consolidatedcompanies
              
              
              (4,521
              )
              
              (1,629
              )
              
              (6,360
              )
              
              (3,032
              )Income
                  from continuing operations before income taxes
              
              
              1,813
              
              
              4,041
              
              
              6,135
              
              
              9,853Provision
                  for income taxes
              
              
              708
              
              
              1,547
              
              
              2,289
              
              
              3,900Income
                  from continuing operations
              
              
              1,105
              
              
              2,494
              
              
              3,846
              
              
              5,953Loss
                  from discontinued operations, net of tax
              
              
              -
              
              
              (4,196
              )
              
              -
              
              
              (4,895
              )Net
                  income (loss)
              
              $
              1,105
              
              $
              (1,702
              )
              $
              3,846
              
              $
              1,058Basic
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.04
              
              $
              0.13
              
              $
              0.16
              
              $
              0.31Discontinued
                  operations
              
              
              -
              
              
              (0.22
              )
              
              -
              
              
              (0.25
              )Net
                  earnings (loss)
              
              $
              0.04
              
              $
              (0.09
              )
              $
              0.16
              
              $
              0.06Diluted
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.04
              
              $
              0.13
              
              $
              0.15
              
              $
              0.30Discontinued
                  operations
              
              
              -
              
              
              (0.22
              )
              
              -
              
              
              (0.25
              )Net
                  earnings (loss)
              
              $
              0.04
              
              $
              (0.09
              )
              $
              0.15
              
              $
              0.05Weighted
                  average common shares outstanding:Basic
              
              
              24,731
              
              
              19,119
              
              
              24,671
              
              
              19,054Diluted
              
              
              25,075
              
              
              19,581
              
              
              25,007
              
              
              19,532
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  3


**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS'
                  EQUITY****For
                  the six months ended June 30, 2007**(in
                  thousands, except share and per share amounts)(unaudited)
  Amounts
              
              
              
              Shares**Common
                  stock**Balance,
                  beginning of period
              
              $
              253
              
              
              
              
              
              25,273,437Stock
                  issued pursuant to employee benefit plan
              
              
              2
              
              
              
              
              
              214,935Balance,
                  end of period
              
              
              255
              
              
              
              
              
              25,488,372**Additional
                  paid-in capital**Balance,
                  beginning of period
              
              
              199,176Stock
                  issued pursuant to employee benefit plan; including tax
                  benefit
              
              
              386Stock-based
                  compensation expense
              
              
              1,193Balance,
                  end of period
              
              
              200,755**Retained
                  earnings**Balance,
                  beginning of period
              
              
              23,902Cash
                  dividends ($0.135 per share)
              
              
              (3,326
              )Net
                  income
              
              
              3,846
              
              
              3,846Balance,
                  end of period
              
              
              24,422
              
              
              3,846**Accumulated
                  other comprehensive income**Balance,
                  beginning of period
              
              
              86Net
                  change in unrealized appreciationon
                  securities available for sale
              
              
              42
              
              
              42Income
                  tax benefit on change in unrealizedappreciation
                  on securities available for sale
              
              
              (17
              )
              
              (17
              )Balance,
                  end of period
              
              
              111
              
              
              25**Comprehensive
                  income**
              
              
              
              
              
              3,871**Treasury
                  stock**Balance,
                  beginning of period
              
              
              (3,481
              )
              
              
              
              
              (739,411
              )Balance,
                  end of period
              
              
              (3,481
              )
              
              
              
              
              (739,411
              )**Total
                  shareholders' equity and common shares outstanding**
              
              **$**
              **222,062**
              
              
              
              
              
              **24,748,961**
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  4


**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF CASH FLOWS****For
                  the six months ended June 30, 2007 and 2006**(in
                  thousands)(unaudited)
  **2007**
              
              **2006****(Restated)**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              3,846
              
              $
              1,058Adjustments
                  to reconcile net income to net cash used inoperating
                  activities:Realized
                  gain on securities available for sale
              
              
              (1
              )
              
              (9
              )Gain
                  on sales of assets
              
              
              (3
              )
              
              -Depreciation
              
              
              1,647
              
              
              1,403Provision
                  for bad debts
              
              
              3,047
              
              
              214Stock-based
                  compensation expense
              
              
              1,193
              
              
              1,067Goodwill
                  impairment charge
              
              
              -
              
              
              4,456Amortization
                  of intangible assets
              
              
              139
              
              
              -Deferred
                  income taxes
              
              
              (661
              )
              
              (528
              )Equity
                  in income of limited partnerships
              
              
              (3,587
              )
              
              (2,573
              )Minority
                  interests in net income of consolidated companies
              
              
              6,360
              
              
              3,022Net
                  change in:Receivables
              
              
              (11,601
              )
              
              (2,618
              )Deposits
                  with clearing organizations
              
              
              (7
              )
              
              (5
              )Securities
                  owned
              
              
              (15,013
              )
              
              (125,823
              )Other
                  assets and prepaid expenses
              
              
              (382
              )
              
              (268
              )Accounts
                  payable and accrued liabilities
              
              
              (4,375
              )
              
              (2,480
              )Securities
                  sold, not yet purchased
              
              
              (2,330
              )
              
              88,380Payable
                  to broker-dealers and clearing organizations
              
              
              10,029
              
              
              29,508Net
                  cash used in operating activities
              
              
              (11,699
              )
              
              (5,196
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (1,662
              )
              
              (3,462
              )Acquisitions,
                  net of cash acquired of $59
              
              
              (4,649
              )
              
              -Proceeds
                  from sales and maturities of securities available for sale
              
              
              333
              
              
              167Proceeds
                  from sales of assets
              
              
              35
              
              
              -Net
                  cash used in investing activities
              
              
              (5,943
              )
              
              (3,295
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from shares issued pursuant to employee benefit plan
              
              
              302
              
              
              965Tax
                  benefit of stock options exercised
              
              
              86
              
              
              400Collection
                  of receivables for shares issued
              
              
              -
              
              
              15Proceeds
                  from borrowings
              
              
              145
              
              
              7,844Repayment
                  of borrowings
              
              
              (500
              )
              
              (3,470
              )Investments
                  by minority interests
              
              
              40
              
              
              40Distributions
                  to minority interests
              
              
              (5,367
              )
              
              (1,932
              )Payments
                  of cash dividends
              
              
              (2,214
              )
              
              (2,568
              )Net
                  cash (used in) provided by financing activities
              
              
              (7,508
              )
              
              1,294Net
                  decrease in cash and cash equivalents
              
              
              (25,150
              )
              
              (7,197
              )CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              68,861
              
              
              17,867CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              43,711
              
              $
              10,670Supplemental
                  cash flow information:Cash
                  paid for income taxes, net
              
              $
              3,748
              
              $
              733Cash
                  paid for interest
              
              $
              16
              
              $
              388Noncash
                  financing activities:Dividends
                  declared not yet paid
              
              $
              1,112
              
              $
              -
  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*




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





During
      the third and fourth quarters of 2006, the Company closed the activities of
      the
      division known as Fixed Income National, which began operations during the
      first
      quarter of 2006. Fixed Income National provided fixed income brokerage services
      to institutional clients. The operating results of the Fixed Income National
      division are included in loss from discontinued operations, net of tax, and
      are
      not included in the segment disclosures for all periods presented.





During
      the fourth quarter of 2006, the Company closed Charlotte Capital, LLC
      (“Charlotte Capital”). The operating results of Charlotte Capital are included
      in loss from discontinued operations, net of tax, and are not included in the
      segment disclosures for all periods presented.





*Principles
      of Consolidation*




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





In
      management's opinion, the unaudited condensed consolidated financial statements
      include all adjustments necessary for a fair presentation of our consolidated
      financial position at June 30, 2007, our results of operations for the three
      and
      six months ended June 30, 2007 and 2006, and our cash flows for the six months
      ended June 30, 2007 and 2006. All adjustments are of a normal recurring nature.
      Interim results are not necessarily indicative of results for a full
      year.





These
      financial statements and notes should be read in conjunction with the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2006.





*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 revenues and
      expenses during the reporting periods. Actual results could differ from those
      estimates.





*Recent
      Accounting Pronouncements*




In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48, *Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
      109* .
      FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition.




6





The
      evaluation of a tax position in accordance with FIN 48 is a two-step process.
      The first step is a recognition process whereby the enterprise determines
      whether it is more likely than not that a tax position will be sustained upon
      examination, including resolution of any related appeals or litigation
      processes, based on the technical merits of the position. In evaluating whether
      a tax position has met the more-likely-than-not recognition threshold, the
      enterprise should presume that the position will be examined by the appropriate
      taxing authority that has full knowledge of all relevant information. The second
      step is a measurement process whereby a tax position that meets the
      more-likely-than-not recognition threshold is calculated to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50% likely of
      being realized upon ultimate settlement.





The
      provisions of FIN 48 were effective for the Company on January 1, 2007. The
      adoption of FIN 48 did not have a significant impact on the Company’s
      consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements.* SFAS
      No.
      157 defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 is effective for the Company on January 1,
      2008. The Company is evaluating the impact that SFAS No. 157 will have on its
      consolidated financial statements.





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





**2.**
            **RESTATEMENT**





During
      2006, the Company restated its 2005 consolidated balance sheet to correct an
      understatement of the Company’s previously reported cash balances resulting from
      the manner in which cash in the Company’s clearing firm accounts was offset
      against margin balances related to unsettled trades; and certain payables to
      broker-dealers for unsettled trades that were netted against its cash and margin
      balances in some of the Company’s clearing firm accounts. The result of this
      restatement on the 2006 condensed consolidated statement of cash flows is as
      follows.




**Six
                  Months Ended**
                **June
                  30, 2006****As
                  Reported**
              
              **As
                  Restated**Change
                  in payable to broker-dealers and clearingorganizations
              
              $
              32,763
              
              $
              29,508Net
                  cash used in operating activities
              
              
              (1,941
              )
              
              (5,196
              )Net
                  decrease in cash and cash equivalents
              
              
              (3,942
              )
              
              (7,197
              )Cash
                  and cash equivalents at beginning of period
              
              
              14,612
              
              
              17,867Cash
                  and cash equivalents at end of period
              
              
              10,670
              
              
              10,670


**3.**
            **ACQUISITION**





On
      May
      24, 2007, the Company acquired a 75% interest in The Rikoon Group, LLC
      (“Rikoon”) for cash consideration of $6.0 million of which $1.3 million was
      deemed to be compensation expense. The Company agreed to purchase an additional
      5% interest in February 2011 for cash consideration ranging from a minimum
      of
      $3.0 million to a maximum of $5.0 million based on the amount by which Rikoon’s
      average EBITDA varies from the threshold EBITDA specified in the Purchase
      Agreement. Rikoon, based in Santa Fe, New Mexico, manages approximately $400
      million in assets. The consideration exceeded the fair market value of
      identifiable net tangible assets by $4.4 million.




7





**4.**
            **SECURITIES
                OWNED AND SECURITIES SOLD, NOT YET
                PURCHASED**





Securities
      owned and securities sold, not yet purchased as of June 30, 2007 and December
      31, 2006 were as follows:


**June
                  30, 2007**
              
              **December
                  31, 2006****Sold,
                  Not Yet**
              
              
              
              **Sold,
                  Not Yet****Owned**
              
              **Purchased**
              
              **Owned**
              
              **Purchased****(in
                  thousands)**Marketable:U.S.
                  government and agency
              
              $
              30
              
              $
              15
              
              $
              260
              
              $
              15Corporate
                  stocks and options
              
              
              33,865
              
              
              17,722
              
              
              36,843
              
              
              20,051Corporate
                  bonds
              
              
              -
              
              
              40
              
              
              -
              
              
              4133,895
              
              
              17,777
              
              
              37,103
              
              
              20,107Not
                  readily marketable:Limited
                  partnerships
              
              
              56,517
              
              
              -
              
              
              36,095
              
              
              -Warrants
              
              
              9,399
              
              
              -
              
              
              8,795
              
              
              -Equities
                  and options
              
              
              1,251
              
              
              -
              
              
              469
              
              
              -67,167
              
              
              -
              
              
              45,359
              
              
              -$
              101,062
              
              $
              17,777
              
              $
              82,462
              
              $
              20,107


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





**5.**
            **SECURITIES
                AVAILABLE FOR SALE**





Securities
      available for sale at June 30, 2007 were as follows:




**Amortized**
              
              **Gross
                  Unrealized**
              
              **Estimated****Cost**
              
              **Gains**
              
              **Losses**
              
              **Fair
                  Value****(in
                  thousands)**U.S.
                  government and agency obligations
              
              $
              384
              
              $
              2
              
              $
              (1
              )
              $
              385Corporate
                  bond
              
              
              250
              
              
              -
              
              
              (1
              )
              
              249Marketable
                  equity securities
              
              
              359
              
              
              184
              
              
              -
              
              
              543Total
              
              $
              993
              
              $
              186
              
              $
              (2
              )
              $
              1,177


The
      contractual maturities of debt securities available for sale at June 30, 2007
      were as follows:


**Amortized**
              
              **Estimated****Cost**
              
              **Fair
                  Value****(in
                  thousands)**Within
                  one year
              
              $
              500
              
              $
              498Over
                  25 years
              
              
              134
              
              
              136Total
              
              $
              634
              
              $
              634
  8


Gross
      realized gains on sales of securities available for sale were $1,000 and $9,000
      for the six months ended June 30, 2007 and 2006, respectively. No realized
      losses on securities available for sale were recorded for the six months ended
      June 30, 2007 and 2006.





**6.**
            **BORROWINGS**





During
      May 2005, the Company entered into a $15.0 million revolving credit facility
      with a bank. In May 2006, this credit agreement was amended to increase the
      revolving credit facility to $18.0 million. The line of credit expires in May
      2008. Borrowings under the line of credit bear interest at LIBOR plus 150 basis
      points. Interest is payable quarterly on this line of credit. The credit
      facility is secured by a pledge of ownership interests in two of the Company’s
      subsidiaries. Debt covenants require the Company to maintain certain
      debt-to-EBITDA and liquidity to funded debt ratios, as well as minimum assets
      under management. At June 30, 2007, the Company was in compliance with all
      covenants. The line of credit has a commitment fee of 1/8% per annum. There
      was
      no outstanding balance on the line of credit at June 30, 2007.





During
      December 2005, Salient entered into a $2.5 million revolving credit facility
      with a bank. The line of credit expires in December 2007. Borrowings under
      the
      line of credit bear interest at LIBOR plus 165 basis points. The interest rate
      of Salient’s borrowings was 6.97% during 2007 and at June 30, 2007. Interest is
      payable quarterly on this line of credit. The credit facility is unsecured
      and
      not subject to financial covenants; however, payment is guaranteed by SMHG
      and
      the principals of Salient. The outstanding balance on the line of credit was
      $200,000 at June 30, 2007.





**7.**
            **INCOME
                TAXES**





The
      difference between the effective tax rate reflected in the provision for income
      taxes from continuing operations and the statutory federal rate is analyzed
      as
      follows:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****(in
                  thousands)**Expected
                  federal tax at statutory rate of 35% for 2007and
                  34% for 2006
              
              $
              635
              
              $
              1,374
              
              $
              2,147
              
              $
              3,350State
                  and other income taxes
              
              
              73
              
              
              173
              
              
              142
              
              
              550Total
              
              $
              708
              
              $
              1,547
              
              $
              2,289
              
              $
              3,900


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 2003.





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 2003, with the exception of New York state in which the 2002 statute
      has
      been voluntarily extended. New York state is currently examining the 2002,
      2003,
      and 2004 state returns filed by the Company. The New York City taxing
      authorities are currently examining the 2003 and 2004 city returns filed by
      the
      Company. The Company does not anticipate these examinations to result in any
      adjustments that would have a significant impact on the Company’s financial
      statements.




9





**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 six months ended June 30, 2007:




**Weighted****Number**
              
              **Average****of
                  Shares**
              
              **Exercise
                  Price**Outstanding
                  at January 1, 2007
              
              
              911,585
              
              $
              8.08Granted
              
              
              -
              
              
              -Exercised
              
              
              (37,500
              )
              
              4.71Outstanding
                  at June 30, 2007
              
              
              874,085
              
              $
              8.22Options
                  exercisable at June 30, 2007
              
              
              762,835
              
              $
              7.20Incentive
                  award shares available for grant at June 30, 2007
              
              
              2,201,300


During
      the six months ended June 30, 2007 and 2006, 37,500 and 111,436 options were
      exercised for which the Company received proceeds of $176,000 and $590,000,
      respectively. The Company recognized pretax compensation expense of $85,000
      during each of the six months ended June 30, 2007 and 2006 related to stock
      options. The portion of stock-based compensation expense related to stock
      options that was unrecognized at June 30, 2007 was $272,000.





The
      following table summarizes certain information related to restricted common
      stock grants at June 30, 2007:




**Weighted****Average****Number
                  of**
              
              **Grant
                  Date****Shares**
              
              **Fair
                  Value**Nonvested
                  at January 1, 2007
              
              
              523,302
              
              $
              14.46Nonvested
                  at June 30, 2007
              
              
              556,459
              
              $
              13.58For
                  the six months ended June 30, 2007:Granted
              
              
              183,085
              
              $
              10.97Vested
              
              
              144,378
              
              $
              13.44Forfeited
              
              
              5,550
              
              $
              13.66


Employees
      deferred compensation of $126,000 and $375,000 during the six months ended
      June
      30, 2007 and 2006, respectively, that was used to purchase restricted common
      stock. The Company recognized pretax compensation expense of $1.1 million and
      $983,000 during the six months ended June 30, 2007 and 2006, respectively,
      related to its restricted common stock plan. At June 30, 2007, total
      unrecognized compensation cost, net of estimated forfeitures, related to
      nonvested restricted stock totaled $5.4 million.




10





**9.**
            **EARNINGS
                (LOSS) PER COMMON SHARE**





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





**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****(in
                  thousands, except per share amounts)**Income
                  from continuing operations
              
              $
              1,105
              
              $
              2,494
              
              $
              3,846
              
              $
              5,953Loss
                  from discontinued operations, net of tax
              
              
              -
              
              
              (4,196
              )
              
              -
              
              
              (4,895
              )Net
                  income (loss)
              
              $
              1,105
              
              $
              (1,702
              )
              $
              3,846
              
              $
              1,058Basic
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.04
              
              $
              0.13
              
              $
              0.16
              
              $
              0.31Discontinued
                  operations
              
              
              -
              
              
              (0.22
              )
              
              -
              
              
              (0.25
              )Net
                  earnings (loss)
              
              $
              0.04
              
              $
              (0.09
              )
              $
              0.16
              
              $
              0.06Diluted
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.04
              
              $
              0.13
              
              $
              0.15
              
              $
              0.30Discontinued
                  operations
              
              
              -
              
              $
              (0.22
              )
              
              -
              
              $
              (0.25
              )Net
                  earnings (loss)
              
              $
              0.04
              
              $
              (0.09
              )
              $
              0.15
              
              $
              0.05Weighted
                  average number of common sharesoutstanding:Basic
              
              
              24,731
              
              
              19,119
              
              
              24,671
              
              
              19,054Incremental
                  common shares issuableunder
                  stock option plan, net
              
              
              344
              
              
              462
              
              
              336
              
              
              478Diluted
              
              
              25,075
              
              
              19,581
              
              
              25,007
              
              
              19,532


Outstanding
      stock options of 230,000 and 72,500 for the three months ended June 30, 2007
      and
      2006, respectively, and 305,000 and 22,500 for the six months ended June 30,
      2007 and 2006, respectively, have not been included in diluted earnings per
      common share because to do so would have been antidilutive for the periods
      presented.





**10.**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Company has issued letters of credit in the amounts of $830,000, $250,000,
      $199,000, $144,000, and $92,000 to the owners of five of the offices that we
      lease to secure payment of our lease obligations for those facilities. The
      Company has issued a letter of credit in the amount of $100,000 to secure the
      payment of the deductible portion of the Company’s workers compensation
      insurance policy.





The
      Company and Ric Edelman have organized a new entity, Edelman Personal Financial
      Advisors, LLC (“EPFA”), to expand the Edelman financial platform into additional
      markets outside the Washington, D.C. metropolitan area. We committed to
      initially loan EPFA up to $10 million to cover its start-up expenses for 2007
      and an additional $10 million, if necessary, commencing December 1, 2007. The
      loans to EPFA are payable on May 12, 2009. Mr. Edelman has guaranteed repayment
      of the EPFA obligation to the extent of funds that will be owed to him by the
      Company in connection with the purchase of Edelman. The outstanding balance
      of
      the Company’s loan to EPFA was $4.0 million at June 30, 2007. EPFA has entered
      into an agreement with Radio Networks, LLC, an affiliate of ABC, Inc. and The
      Walt Disney Company, to nationally syndicate Mr. Edelman’s weekly radio program.
      The program is being syndicated into fifteen additional markets, including
      Atlanta, Baltimore, Chicago, Columbus, Dallas, Detroit, Houston, Indianapolis,
      Los Angeles, Miami, New York City, Orlando, Phoenix, Portland, Oregon and San
      Francisco.




11




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





In
      the
      normal course of business, the Company enters into underwriting commitments.
      There were no firm underwriting commitments open at June 30, 2007.





The
      NASD
      initially conducted an inspection of our prime brokerage and private investment
      or hedge fund support operations based in our New York office in November 2004.
      Subsequent to such inspection, the NASD opened an investigation and requested
      the production of additional documents and materials on twelve occasions in
      2005
      and 2006 with respect to our prime brokerage and related hedge fund operations
      and has conducted formal interviews
      of a number of our employees involved in these operations. On August 16, 2006,
      SMH received a “Wells letter” notification from the NASD, which states that the
      staff of the NASD has made a preliminary determination to recommend that
      disciplinary action be brought against SMH and four of its employees based
      on
      alleged violations of certain conduct rules of the NASD, including NASD Conduct
      Rule 2110 relating
      to the alleged improper payment of soft dollar commissions to a fund manager
      and
      relating to the alleged improper sharing of commissions by two employees
      contrary to a written contract with an investment advisor and representations
      to
      the investors in one private investment partnership; NASD Conduct Rule 2210
      relating to the content of hedge fund advertising materials; SEC Rule 17a-4
      and
      NASD Conduct Rules 2210 and 3110 relating to the retention of certain email,
      instant messages, and advertising materials; NASD Conduct Rules 1031 and 2110
      relating to the activities of an unregistered employee; and NASD Conduct Rules
      2110 and 3010 relating to the written supervisory procedures of SMH for its
      hedge fund and prime brokerage operations. Under the Wells procedure, SMH has
      an
      opportunity to respond to the NASD before any action is taken against it. SMH
      submitted its response to the NASD on October 11, 2006. Discussions are ongoing
      between the staff of the NASD and our legal counsel with respect to the alleged
      violations and possible settlement of the matter. There is no assurance that
      an
      acceptable resolution can be reached or that the ultimate impact on the Company
      will not be material.





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





On
      February 5, 2007, Richard F. Allen, the former Chief Executive Officer of Ronco,
      filed a complaint against SMH, Richard
      F. Allen, Sr. v. Sanders Morris Harris Inc. ,
      Case
      No. BC365969, in the Superior Court of California, Central District, Los
      Angeles, alleging that SMH caused Ronco to breach Mr. Allen’s employment
      agreement with Ronco and by such interference caused Ronco to terminate Mr.
      Allen without paying him his $1.0 million severance payment and $600,000 bonus.
      SMH has filed a general denial. SMH believes it has valid defenses to all claims
      made by Mr. Allen.





On
      April
      4, 2007, four individual purchasers of Ronco convertible preferred stock
      commenced an NASD arbitration proceeding against SMH with respect to their
      investment in Ronco convertible preferred stock. The claimants have an aggregate
      claim of $250,000 and allege negligence by SMH in making the offering as
      submitted to the claimants, common law fraud, state and federal securities
      fraud, and breach of fiduciary duty. SMH believes it has valid defenses to
      all
      the claims.





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




12




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




The
      Company and its subsidiaries have obligations under operating leases that expire
      by 2017 with initial noncancelable terms in excess of one year.





**11.**
            **BUSINESS
                SEGMENT INFORMATION**





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




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





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





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





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





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





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




13


The
      following summarizes certain financial information of each reportable business
      segment for the three and six months in the periods ended June 30, 2007 and
      2006, respectively. SMHG does not analyze asset information in all business
      segments.








**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **(in
                thousands)**Revenues:Asset/Wealth
                Management
            
            $
            26,021
            
            $
            19,643
            
            $
            49,705
            
            $
            38,254Capital
                Markets:Investment
                banking
            
            
            6,580
            
            
            8,288
            
            
            13,804
            
            
            15,340Institutional
                brokerage
            
            
            3,721
            
            
            6,084
            
            
            8,365
            
            
            12,260Prime
                brokerage services
            
            
            8,802
            
            
            8,021
            
            
            17,671
            
            
            16,168Capital
                Markets Total
            
            
            19,103
            
            
            22,393
            
            
            39,840
            
            
            43,768Corporate
                Support
            
            
            1,073
            
            
            404
            
            
            2,135
            
            
            2,421Total
            
            $
            46,197
            
            $
            42,440
            
            $
            91,680
            
            $
            84,443Income
                (loss) from continuing operations beforeequity
                in income of limited partnerships, minorityinterests,
                and income taxes:Asset/Wealth
                Management
            
            $
            6,773
            
            $
            3,050
            
            $
            13,205
            
            $
            6,552Capital
                Markets:Investment
                banking
            
            
            1,634
            
            
            2,939
            
            
            3,205
            
            
            5,547Institutional
                brokerage
            
            
            185
            
            
            992
            
            
            811
            
            
            1,752Prime
                brokerage services
            
            
            936
            
            
            651
            
            
            2,009
            
            
            1,120Capital
                Markets Total
            
            
            2,755
            
            
            4,582
            
            
            6,025
            
            
            8,419Corporate
                Support
            
            
            (7,096
            )
            
            (2,710
            )
            
            (10,322
            )
            
            (4,659
            )Total
            
            $
            2,432
            
            $
            4,922
            
            $
            8,908
            
            $
            10,312Equity
                in income of limited partnerships:Asset/Wealth
                Management
            
            $
            3,907
            
            $
            647
            
            $
            3,319
            
            $
            2,122Capital
                Markets:Investment
                banking
            
            
            -
            
            
            -
            
            
            -
            
            
            -Institutional
                brokerage
            
            
            -
            
            
            -
            
            
            -
            
            
            -Prime
                brokerage services
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                Markets Total
            
            
            -
            
            
            -
            
            
            -
            
            
            -Corporate
                Support
            
            
            (5
            )
            
            101
            
            
            268
            
            
            451Total
            
            $
            3,902
            
            $
            748
            
            $
            3,587
            
            $
            2,573Minority
                interests in net income ofconsolidated
                companies:Asset/Wealth
                Management
            
            $
            (4,521
            )
            $
            (1,629
            )
            $
            (6,360
            )
            $
            (3,032
            )Capital
                Markets:Investment
                banking
            
            
            -
            
            
            -
            
            
            -
            
            
            -Institutional
                brokerage
            
            
            -
            
            
            -
            
            
            -
            
            
            -Prime
                brokerage services
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                Markets Total
            
            
            -
            
            
            -
            
            
            -
            
            
            -Corporate
                Support
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            (4,521
            )
            $
            (1,629
            )
            $
            (6,360
            )
            $
            (3,032
            )Income
                (loss) from continuing operations beforeincome
                taxes:Asset/Wealth
                Management
            
            $
            6,159
            
            $
            2,068
            
            $
            10,164
            
            $
            5,642Capital
                Markets:Investment
                banking
            
            
            1,634
            
            
            2,939
            
            
            3,205
            
            
            5,547Institutional
                brokerage
            
            
            185
            
            
            992
            
            
            811
            
            
            1,752Prime
                brokerage services
            
            
            936
            
            
            651
            
            
            2,009
            
            
            1,120Capital
                Markets Total
            
            
            2,755
            
            
            4,582
            
            
            6,025
            
            
            8,419Corporate
                Support
            
            
            (7,101
            )
            
            (2,609
            )
            
            (10,054
            )
            
            (4,208
            )Total
            
            $
            1,813
            
            $
            4,041
            
            $
            6,135
            
            $
            9,853


14


**12.**
            **RELATED
                PARTIES**





The
      Company had receivables from related parties totaling $9.9 million at June
      30,
      2007, primarily consisting of $5.6 million of advances to unconsolidated related
      entities to fund operating expenses, $3.3 million of notes receivable from
      employees and consultants representing loans made to induce the employees and
      consultants to affiliate with the Company, and $567,000 of management fees
      receivable from the limited partnerships that the Company manages.





**13.**
            **DISCONTINUED
                OPERATIONS**





During
      the third and fourth quarters of 2006, the Company made the decision to close
      and closed the activities in the division known as Fixed Income National, which
      began operations during the first quarter of 2006. This decision was made due
      to
      the division’s inability to achieve sufficient revenues to offset its costs,
      many of which were in the form of guaranteed salaries and bonuses. During the
      six months ended June 30, 2006, Fixed Income National recorded an operating
      loss
      of $2.2 million, net of tax.





During
      the fourth quarter of 2006, the Company made the decision to close and closed
      Charlotte Capital. This decision was made due to the continuing decline of
      assets under management and to the fact that Charlotte Capital was not
      profitable. During the six months ended June 30, 2006, Charlotte Capital
      recorded an operating loss of $2.7 million, net of tax.





A
      summary
      of selected financial information of discontinued operations is as follows
      for
      the three and six months ended June 30, 2006.




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30, 2006**
              
              **June
                  30, 2006****(in
                  thousands)**Operating
                  activities:Revenues
              
              $
              731
              
              $
              2,171Expenses
              
              
              3,204
              
              
              5,824Goodwill
                  impairment charge
              
              
              4,456
              
              
              4,456Loss
                  from discontinued operationsbefore
                  minority interests and income taxes
              
              
              (6,929
              )
              
              (8,109
              )Minority
                  interests in net loss ofconsolidated
                  companies
              
              
              2
              
              
              7Loss
                  from discontinued operationsbefore
                  income taxes
              
              
              (6,927
              )
              
              (8,102
              )Benefit
                  for income taxes
              
              
              (2,731
              )
              
              (3,207
              )Loss
                  from discontinued operations
              
              $
              (4,196
              )
              $
              (4,895
              )


**14.**
            **SUBSEQUENT
                EVENTS**





On
      August
      7, 2007, the Company’s board of directors declared a cash dividend for the third
      quarter of 2007 in the amount of $0.045 per share of common stock. The cash
      dividend will be payable on October 17, 2007, to holders of record as of the
      close of business on October 3, 2007.




15


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





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





**Overview**





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





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





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




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





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





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




16





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





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





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





**Components
      of Revenues and Expenses**





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





*Expenses.* Our
      expenses consist of (1) compensation and benefits, (2) floor brokerage,
      exchange, and clearing fees, and (3) other expenses. Compensation and benefits
      have both a variable component, based on revenue production, and a fixed
      component. The variable component includes institutional and retail sales
      commissions, bonuses, overrides, and other incentives. Wealth advisory and
      institutional commissions are based on competitive commission schedules.
      Employees of the investment banking group and the research group receive a
      salary and discretionary bonuses as compensation. The fixed component includes
      administrative and executive salaries, payroll taxes, employee benefits, and
      temporary employee costs. Compensation and benefits is our largest expense
      item
      and includes wages, salaries, and benefits. During the second quarter of 2007,
      compensation and benefits represented 62.2% of total expenses and 59.0% of
      total
      revenues, compared to 66.6% of total expenses and 58.9% of total revenues during
      the second quarter of 2006. During the first six months 2007, compensation
      and
      benefits represented 64.9% of total expenses and 58.6% of total revenues,
      compared to 67.5% of total expenses and 59.2% of total revenues for the same
      period in 2006.





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





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




17


**Results
      of Operations**





*Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006*





Total
      revenues were $46.2 million in the second quarter of 2007 compared to $42.4
      million for the same quarter in 2006, an increase of $3.8 million, or 8.9%,
      primarily reflecting the conversion of customer accounts to fee-based from
      commission-based at Edelman but partially offset by a decline in commissions
      and
      investment banking revenue. Additionally, an increase in assets under management
      at Edelman, Salient, and Capital Advisors contributed to the growth in
      investment advisory fee revenue. Total expenses for the second quarter of 2007
      increased $6.3 million, or 16.7%, to $43.8 million from $37.5 million in the
      same quarter of the previous year principally as the result of higher employee
      compensation and benefits due to the revenue growth and a $3.0 million reserve
      for uncollectible accounts recorded in the second quarter of 2007. Equity in
      income of limited partnerships was $3.9 million for the second quarter of 2007
      compared to $748,000 for the second quarter of 2006, principally due to an
      increase in the values of the investment portfolios of two of the limited
      partnerships that we manage. Income from continuing operations was $1.1 million,
      or $0.04 per diluted common share, for the second quarter of 2007 compared
      to
      $2.5 million, or $0.13 per diluted common share, for the second quarter of
      2006.
      The loss from discontinued operations was $4.2 million, or $0.22 per diluted
      common share, for the second quarter of 2006. No such loss was recorded in
      the
      second quarter of 2007.





Commission
      revenue decreased to $13.8 million in the second quarter of 2007 from $15.2
      million for the same period in 2006, primarily as a result of a decline in
      trading activity in our institutional brokerage division. Investment banking
      revenue decreased to $9.1 million during the second quarter of 2007 from $12.0
      million in the same period of 2006, principally due to a decrease in private
      placement income. Revenues from investment advisory and related services
      increased to $17.0 million in the second quarter of 2007 from $8.2 million
      in
      the same quarter of 2006 primarily due to the conversion of Edelman’s assets
      under management from a commission-based to a fee-based fee structure and to
      the
      addition of assets under management at Edelman, Salient, and Capital Advisors.
      Principal transactions revenue decreased from $3.8 million for the second
      quarter of 2006 to $2.8 million for the second quarter of 2007, primarily as
      a
      result of lower propriety trading activity at our prime brokerage services
      division. This decrease was partially offset by net realized and unrealized
      gains in the Company’s investment portfolio recognized in the current year.
      Interest and dividend income increased to $2.0 million in the second quarter
      of
      2007 from $1.6 million in the same period last year due to an increase in the
      amount of money in the Company’s interest-bearing accounts. Other income
      remained constant at $1.6 million during the second quarter of 2007 and 2006.





During
      the three months ended June 30, 2007, employee compensation and benefits
      increased to $27.2 million from $25.0 million in the same period last year
      due
      to staff increases and higher revenues during 2007. Additionally, the Company
      recorded compensation expense in the amount of $1.3 million in the 2007
      period related to the up-front payment to one of the selling shareholders
      of Rikoon. Floor brokerage, exchange, and clearance fees remained constant
      at $1.9 million in the second quarter of 2007 and 2006. Communication and data
      processing costs increased to $2.9 million in 2007 from $2.0 million in the
      same
      period last year resulting primarily from increased clearing firm service fees.
      Occupancy costs totaled $2.9 million during the second quarter of 2007 compared
      to $2.8 million in the second quarter of 2006. Interest expense decreased to
      $9,000 for the second quarter of 2007 from $276,000 for the second quarter
      of
      2006. This decrease is the result of the repayment of the majority of the
      Company’s debt in the fourth quarter of 2006. Other general and administrative
      expenses increased to $8.7 million during the second quarter of 2007 from $5.6
      million in the second quarter of last year, primarily due to a $3.0 million
      increase in the allowance for doubtful accounts related to a note
      receivable.




Our
      effective tax rate from continuing operations was 39.1% for the three months
      ended June 30, 2007 compared to 38.3% for the three months ended June 30, 2006.
      The effective tax rate exceeds the federal statutory income tax rate primarily
      as a result of state income taxes, which was partially affected by certain
      interest and dividend income not subject to tax.





During
      2006, the Company hired a 30-person fixed income team and established an
      expanded fixed income division known as Fixed Income National headquartered
      in
      New York City. Over the course of the year, the division was unable to achieve
      sufficient revenues to offset its costs, many of which were in the form of
      guaranteed salaries and bonuses. During the third and fourth quarters of 2006,
      we decided to close and closed the division. Additionally, during 2006,
      Charlotte Capital, an investment advisor subsidiary of the Company, made the
      decision to terminate its existing advisory agreements and wind up its business.
      This decision was made due to the continuing decline of assets under management
      and to the fact that Charlotte Capital was not profitable. The operating results
      of Fixed Income National and Charlotte Capital are included in loss from
      discontinued operations, net of tax.




18




R ESULTS  BY  S EGMENT


**Asset/Wealth
      Management**


**Three
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              26,021
              
              $
              19,643Income
                  from continuing operations before income taxes
              
              $
              6,159
              
              $
              2,068





Revenues
      from asset/wealth management increased to $26.0 million from $19.6 million
      and
      income from continuing operations before income taxes increased to $6.2 million
      from $2.1 million. Investment advisory and related services increased to $17.0
      million from $8.1 million while commission revenue declined from $6.9 million
      to
      $5.3 million. The increase in investment advisory and related services and
      the
      decline in commission revenue are primarily due to the conversion of Edelman’s
      assets under management from a commission-based to a fee-based structure.
      Additionally, growth in assets under management at Edelman, Salient, and Capital
      Advisors has contributed to the increase in revenues from investment advisory
      fees. Sales credits from investment banking transactions declined to $1.6
      million from $2.5 million as the result of a decrease in the number of
      investment banking transactions. Total expenses increased to $19.2 million
      from
      $16.6 million, primarily due to increased employee compensation related to
      the
      higher revenues. Equity in income of limited partnerships increased to $3.9
      million from $647,000, principally due to an increase in the values of the
      investment portfolios of two of the limited partnerships that we manage.
      Minority interests in net income of consolidated subsidiaries reflect the
      portion of net income attributable to minority interest ownership of entities
      included in this segment’s consolidated financial statements. Minority interests
      in net income of consolidated subsidiaries, which reduces the Company’s pretax
      income, increased to $4.5 million from $1.6 million principally due to the
      increase in values of the investment portfolios of the limited
      partnerships.





**Capital
      Markets**





*Investment*  *Banking*


**Three
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              6,580
              
              $
              8,288Income
                  from continuing operations before income taxes
              
              $
              1,634
              
              $
              2,939




Revenues
      from investment banking decreased to $6.6 million from $8.3 million and income
      from continuing operations before income taxes decreased to $1.6 million from
      $2.9 million. The revenue decrease is primarily due to a decrease in revenues
      from private placement transactions that was partially offset by an increase
      in
      advisory fees. Total expenses decreased to $4.9 million from $5.3 million.
      This
      decrease in expenses is primarily attributable to decreased employee
      compensation that was partially offset by referral fees paid during the
      quarter.





19




*Institutional
      Brokerage*




**Three
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              3,721
              
              $
              6,084Income
                  from continuing operations before income taxes
              
              $
              185
              
              $
              992




Revenues
      from institutional brokerage decreased to $3.7 million from $6.1 million and
      income from continuing operations before income taxes decreased to $185,000
      from
      $992,000. Commission revenue decreased to $2.4 million from $3.7 million. The
      decrease in commission revenue is due to a decrease in trading volume, which
      is
      largely the result of the growth in electronic trading strategy execution
      software that replaces, in some cases, the role of traditional traders.
      Additionally, sales credits from investment banking transactions declined to
      $535,000 from $1.2 million as the result of a decrease in the number of
      investment banking transactions. Total expenses decreased to $3.5 million from
      $5.1 million primarily due to decreased employee compensation related to the
      lower revenues.





*Prime
      Brokerage Services*


**Three
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              8,802
              
              $
              8,021Income
                  from continuing operations before income taxes
              
              $
              936
              
              $
              651


Revenues
      from prime brokerage increased to $8.8 million from $8.0 million and income
      from
      continuing operations before income taxes increased to $936,000 from $651,000.
      Commission revenue increased to $6.1 million from $4.5 million reflecting higher
      revenue from hedge fund services, while principal transaction revenue decreased
      to $1.6 million from $2.8 million, reflecting a decline in proprietary trading
      activities. Total expenses increased to $7.9 million from $7.4 million primarily
      due to increased compensation expense resulting from the increase in
      revenue.





**Corporate
      Support**


**Three
                    Months Ended June 30,****2007**
                
                **2006****(in
                    thousands)**Revenues
                
                $
                1,073
                
                $
                404Loss
                    from continuing operations before income taxes
                
                $
                (7,101
                )
                $
                (2,609
                )


Revenues
      from corporate support increased to $1.1 million from $404,000 and the loss
      from
      continuing operations before income taxes increased to $7.1 million from $2.6
      million. Revenues from principal transactions, which consist principally of
      changes in the values of our investment portfolios, increased to a loss of
      $25,000 from a loss of $598,000. Total expenses increased to $8.2 million from
      $3.1 million, primarily due to a $3.0 million increase in the allowance for
      doubtful accounts related to a note receivable recorded in the second quarter
      of
      2007. In addition, in conjunction with the acquisition of a 75% ownership
      interest in Rikoon, the Company recorded compensation expense in the amount
      of
      $1.3 million related to the up-front payment to one of the selling
      shareholders who became an employee of Rikoon subsequent to the
      acquisition.





*Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006*





Total
      revenues were $91.7 million for the six months ended June 30, 2007 compared
      to
      $84.4 million for the same period in 2006, an increase of $7.3 million, or
      8.6%,
      primarily reflecting an increase in assets under management in the firm’s
      asset/wealth management division. Total expenses for the six months ended June
      30, 2007 increased $8.7 million, or 11.7%, to $82.8 million from $74.1 million
      in the same period in 2006 principally due to the revenue growth and the $3.0
      million increase in the allowance for doubtful accounts recorded in the second
      quarter of 2007. Equity in income of limited partnerships was $3.6 million
      for
      the six months ended June 30, 2007 versus $2.6 million for the same period
      in
      2006, principally due to an increase in the values of the investment portfolios
      of two of the limited partnerships that we manage. Income from continuing
      operations was $3.8 million, or $0.15 per diluted common share, for the six
      months ended June 30, 2007 compared to $6.0 million, or $0.30 per diluted common
      share, for the same period in 2006. The loss from discontinued operations was
      $4.9 million, or $0.25 per diluted common share, for the six months ended June
      30, 2006. No such loss was recorded in the six months ended June 30,
      2007.





Commission
      revenue decreased to $27.3 million for the six months ended June 30, 2007 from
      $30.0 million for the same period in 2006, primarily as a result of a decrease
      in trading volume in the institutional brokerage division which was partially
      offset by an increase in hedge fund trading activity at our prime brokerage
      services division. Investment banking revenue decreased to $19.2 million for
      the
      six months ended June 30, 2007 from $21.9 million in the same period of 2006,
      due to fewer transactions completed in 2007. Revenues from investment advisory
      and related services increased to $31.9 million for the six months ended June
      30, 2007 from $16.5 million in the same period of 2006 primarily due to the
      conversion of Edelman’s assets under management from a commission-based to a
      fee-based fee structure and to the addition of assets under management at
      Edelman, Salient, and Capital Advisors. Principal transactions revenue decreased
      from $10.0 million for the six months ended June 30, 2006 to $6.1 million for
      the same period in 2007, primarily as a result of lower propriety trading
      activity at our prime brokerage services division. Interest and dividend income
      increased to $3.9 million for the six months ended June 30, 2007 from $3.0
      million in the same period last year due to an increase in the amount of money
      in the Company’s interest-bearing accounts. Other income increased from $3.0
      million during the six months ended June 30, 2006 to $3.2 million during the
      same period in 2007 due to an increase in fees earned on the sale of insurance
      products.





During
      the six months ended June 30, 2007, employee compensation and benefits increased
      to $53.8 million from $50.0 million in the same period last year due to staff
      increases and higher revenues during 2007. Additionally,
      the Company recorded compensation expense in the amount of $1.3 million in
      the 2007 period related to the up-front payment to one of the selling
      shareholders of Rikoon. Floor
      brokerage, exchange, and clearance fees decreased to $3.4 million for the six
      months ended June 30, 2007 from $3.7 million in the same period in 2006
      reflecting lower clearing and execution costs resulting from the decreased
      trading volume. Communication and data processing costs increased to $5.1
      million for the six months ended June 30, 2007 from $4.0 million in the same
      period last year resulting primarily from increased clearing firm service fees.
      Occupancy costs totaled $6.0 million during the six months ended June 30, 2007
      compared to $5.3 million for the same period last year primarily due to the
      increase in the amount of rental space necessary for the expansion of our
      asset/wealth management operations. Interest expense decreased to $21,000 for
      the six months ended June 30, 2007 from $477,000 for the same period in 2006.
      This decrease is the result of the repayment of the majority of the Company’s
      debt in the fourth quarter of 2006. Other general and administrative expenses
      increased to $14.4 million for the six months ended June 30, 2007 from $10.7
      million in the same period last year primarily due to the $3.0 million increase
      in the allowance for doubtful accounts recorded in the second quarter of
      2007.




Our
      effective tax rate from continuing operations was 37.3% for the six months
      ended
      June 30, 2007 compared to 39.6% for the six months ended June 30, 2006. The
      effective tax rate exceeds the federal statutory income tax rate primarily
      as a
      result of state income taxes, which was partially affected by certain interest
      and dividend income not subject to tax.




20




During
      2006, the Company hired a 30-person fixed income team and established an
      expanded fixed income division known as Fixed Income National headquartered
      in
      New York City. Over the course of the year, the division was unable to achieve
      sufficient revenues to offset its costs, many of which were in the form of
      guaranteed salaries and bonuses. During the third and fourth quarters of 2006,
      we decided to close and closed the division. Additionally, during 2006,
      Charlotte Capital, an investment advisor subsidiary of the Company, made the
      decision to terminate its existing advisory agreements and wind up its business.
      This decision was made due to the continuing decline of assets under management
      and to the fact that Charlotte Capital was not profitable. The operating results
      of Fixed Income National and Charlotte Capital are included in loss from
      discontinued operations, net of tax.




R ESULTS  BY  S EGMENT


**Asset/Wealth
      Management**


**Six
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              49,705
              
              $
              38,254Income
                  from continuing operations before income taxes
              
              $
              10,164
              
              $
              5,642




Revenues
      from asset/wealth management increased to $49.7 million from $38.3 million
      and
      income from continuing operations before income taxes increased to $10.2 million
      from $5.6 million. Investment advisory and related services increased to $31.7
      million from $16.4 million while commission revenue declined from $13.3 million
      to $10.1 million. The increase in investment advisory and related services
      and
      the decline in commission revenue are primarily due to the conversion of
      Edelman’s assets under management from a commission-based to a fee-based
      structure. Additionally, growth in assets under management at Edelman, Salient,
      and Capital Advisors has contributed to the increase in revenues from investment
      advisory fees. Sales credits from investment banking transactions declined
      to
      $3.4 million from $4.5 million as the result of a reduction in investment
      banking transactions. Total expenses increased to $36.5 million from $31.7
      million, primarily due to increased employee compensation related to the higher
      revenues. Equity in income of limited partnerships increased to $3.3 million
      from $2.1 million, principally due to an increase in the values of the
      investment portfolios of two of the limited partnerships that we manage.
      Minority interests in net income of consolidated subsidiaries reflect the
      portion of net income attributable to minority interest ownership of entities
      included in this segment’s consolidated financial statements. Minority interests
      in net income of consolidated subsidiaries, which reduces the Company’s pretax
      income, increased to $6.4 million from $3.0 million principally due to Edelman’s
      increase in profits and the increase in values of the investment portfolios
      of
      the limited partnerships.


21





**Capital
      Markets**




*Investment*  *Banking*




**Six
                Months Ended June 30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            13,804
            
            $
            15,340Income
                from continuing operations before income taxes
            
            $
            3,205
            
            $
            5,547




Revenues
      from investment banking decreased to $13.8 million from $15.3 million and income
      from continuing operations before income taxes decreased to $3.2 million from
      $5.5 million. The revenue decrease is primarily due to a decrease in revenues
      from private placement transactions that was partially offset by an increase
      in
      merger and acquisition fees. Total expenses increased to $10.6 million from
      $9.8
      million. This increase in expenses is primarily attributable to increased
      outside sales commissions and an increase in legal expenses related to the
      settlement of two lawsuits.





*Institutional
      Brokerage*


**Six
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              8,365
              
              $
              12,260Income
                  from continuing operations before income taxes
              
              $
              811
              
              $
              1,752




Revenues
      from institutional brokerage decreased to $8.4 million from $12.3 million and
      income from continuing operations before income taxes decreased to $811,000
      from
      $1.8 million. Commission revenue decreased to $5.5 million from $8.2 million
      and
      principal transaction revenue decreased to $1.3 million from $1.7 million.
      The
      decrease in commission revenue and principal transaction revenue is due to
      a
      decrease in trading volume, which is largely the result of the growth in
      electronic trading strategy execution software that replaces, in some cases,
      the
      role of traditional traders. Additionally, sales credits from investment banking
      transactions declined to $1.4 million from $2.1 million as the result of a
      decrease in the number of investment banking transactions. Total expenses
      decreased to $7.6 million from $10.5 million primarily due to decreased employee
      compensation related to the lower revenues.





*Prime
      Brokerage Services*




**Six
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              17,671
              
              $
              16,168Income
                  from continuing operations before income taxes
              
              $
              2,009
              
              $
              1,120




Revenues
      from prime brokerage increased to $17.7 million from $16.2 million and income
      from continuing operations before income taxes increased to $2.0 million from
      $1.1 million. Commission revenue increased to $11.6 million from $8.3 million
      reflecting higher revenue from hedge fund services and the addition of the
      preferred syndicate department. Principal transaction revenue decreased to
      $4.1
      million from $6.6 million, reflecting a decline in proprietary trading
      activities. Total expenses increased to $15.7 million from $15.0 million
      reflecting increased employee compensation and occupancy expenses.





22




**Corporate
      Support**


**Six
                  Months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Revenues
              
              $
              2,135
              
              $
              2,421Loss
                  from continuing operations before income taxes
              
              $
              (10,054
              )
              $
              (4,208
              )




Revenues
      from corporate support decreased to $2.1 million from $2.4 million and the
      loss
      from continuing operations before income taxes increased to $10.1 million from
      $4.2 million. Interest and dividend income increased to $2.0 million from $1.6
      million due to an increase in the amount of money in the Company’s
      interest-bearing accounts. Revenues from principal transactions, which consist
      principally of changes in the values of our investment portfolios, decreased
      to
      a loss of $259,000 from a gain of $481,000. Total expenses increased to $12.5
      million from $7.1 million, primarily as the result of the $3.0 million increase
      in the allowance for doubtful accounts recorded in the second quarter of 2007. In addition, in conjunction with the acquisition of
      a 75%
      ownership interest in Rikoon, the Company recorded compensation expense in
      the
      amount of $1.3 million related to the up-front payment to one of the
      selling shareholders who became an employee of Rikoon subsequent to the
      acquisition.





**Liquidity
      and Capital Resources**





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




On
      October 4, 2006, we completed a sale of 5.0 million shares of common stock
      in an
      underwritten public offering at a price to the public of $12.50 per share.
      We
      received net proceeds (before expenses) of $58.8 million, which were used to
      repay the outstanding balance of our revolving credit facility and to provide
      funds for general corporate purposes, including expansion of our business and
      working capital.




At
      June
      30, 2007, we had $43.7 million in cash and cash equivalents, which together
      with
      receivables from broker-dealers and clearing organizations, deposits with
      clearing organizations, marketable securities owned, and securities available
      for sale represented 27.7% of our total assets at the end of the second quarter.





For
      the
      six months ended June 30, 2007, net cash used in operations totaled $11.7
      million versus net cash used in operations of $5.2 million during the same
      period in 2006. Receivables increased by $11.6 million during the six months
      ended June 30, 2007, principally due to increased revenue, the $4.0 million
      loan
      to Edelman Personal Financial Advisors, LLC, and fees for investment banking
      transactions closed at the end of the quarter that were unpaid at June 30,
      2007.
      These increases are partially offset by the $3.0 increase in the allowance
      for
      doubtful accounts recorded in the second quarter of 2007. Accounts payable
      and
      accrued liabilities decreased by $4.4 million during the six months ended June
      30, 2007, principally due to the payment of accrued compensation during the
      first quarter of 2007.





Securities
      owned increased by $15.0 million during the six months ended June 30, 2007,
      while securities sold, not yet purchased decreased by $2.3 million and payables
      to broker-dealers and clearing organizations increased by $10.0 million. The
      change in securities owned, securities sold, not yet purchased, and payables
      to
      broker-dealers and clearing organizations is primarily due to the trading
      portfolios of our proprietary trading operations. The Company’s proprietary
      trading operations carry both long and short fixed income and equity securities.
      These trading operations generally seek to generate profits based on trading
      spreads, rather than through speculation on the direction of the market. We
      employ hedging strategies designed to insulate the net value of our trading
      inventories from fluctuations in the general level of interest rates and equity
      price variances. We finance a portion of our trading positions through our
      clearing broker-dealers.





23


Capital
      expenditures for the six months ended June 30, 2007 were $1.7 million, mainly
      for the purchase of furniture, computer equipment and software, as well as
      for
      leasehold improvements, necessary for our growth.





At
      June
      30, 2007, SMH, our registered broker-dealer subsidiary, was in compliance with
      the net capital requirements of the Securities and Exchange Commission's Uniform
      Net Capital Rules and had capital in excess of the required minimum. Salient
      Trust Co., LTA was in compliance with the Texas Department of Banking net
      capital requirements and had capital in excess of the required minimum.





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




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





**Market
      Risks**





During
      the six months ended June 30, 2007, 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, 2006.





At
      June
      30, 2007, securities owned by the Company were recorded at a fair value of
      $101.1 million, including $33.9 million in marketable securities, $56.5 million
      representing the Company’s investments in limited partnerships, and $10.7
      million representing other not readily marketable securities.





At
      June
      30, 2007, Salient had securities available for sale with a fair value of $1.2
      million. These securities have an original cost of $993,000 and are subject
      to
      equity price risk. At June 30, 2007, an unrealized increase in market value
      totaling $184,000 less tax of $73,000 has been included as a separate component
      of shareholders’ equity.




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





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


24


**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
      NASD
      initially conducted an inspection of our prime brokerage and private investment
      or hedge fund support operations based in our New York office in November 2004.
      Subsequent to such inspection, the NASD opened an investigation and requested
      the production of additional documents and materials on twelve occasions in
      2005
      and 2006 with respect to our prime brokerage and related hedge fund operations
      and has conducted formal interviews of a number of our employees involved in
      these operations. On August 16, 2006, SMH received a “Wells letter” notification
      from the NASD, which states that the staff of the NASD has made a preliminary
      determination to recommend that disciplinary action be brought against SMH
      and
      four of its employees based on alleged violations of certain conduct rules
      of
      the NASD, including NASD Conduct Rule 2110 relating to the alleged improper
      payment of soft dollar commissions to a fund manager and relating to the alleged
      improper sharing of commissions by two employees contrary to a written contract
      with an investment advisor and representations to the investors in one private
      investment partnership; NASD Conduct Rule 2210 relating to the content of hedge
      fund advertising materials; SEC Rule 17a-4 and NASD Conduct Rules 2210 and
      3110
      relating to the retention of certain email, instant messages, and advertising
      materials; NASD Conduct Rules 1031 and 2110 relating to the activities of an
      unregistered employee; and NASD Conduct Rules 2110 and 3010 relating to the
      written supervisory procedures of SMH for its hedge fund and prime brokerage
      operations. Under the Wells procedure, SMH has an opportunity to respond to
      the
      NASD before any action is taken against it. SMH submitted its response to the
      NASD on October 11, 2006. Discussions are ongoing between the staff of the
      NASD
      and our legal counsel with respect to the alleged violations and possible
      settlement of the matter. There is no assurance that a prompt resolution can
      be
      reached or that the ultimate impact on the Company will not be
      material.





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





On
      February 5, 2007, Richard F. Allen, the former Chief Executive Officer of Ronco,
      filed a complaint against SMH, Richard
      F. Allen, Sr. v. Sanders Morris Harris Inc. ,
      Case
      No. BC365969, in the Superior Court of California, Central District, Los
      Angeles, alleging that SMH caused Ronco to breach Mr. Allen’s employment
      agreement with Ronco and by such interference caused Ronco to terminate Mr.
      Allen without paying him his $1.0 million severance payment and $600,000 bonus.
      SMH has filed a general denial. SMH believes it has valid defenses to all claims
      made by Mr. Allen.





On
      April
      4, 2007, four individual purchasers of Ronco convertible preferred stock
      commenced an NASD arbitration proceeding against SMH with respect to their
      investment in Ronco convertible preferred stock. The claimants have an aggregate
      claim of $250,000 and allege negligence by SMH in making the offering as
      submitted to the claimants, common law fraud, state and federal securities
      fraud, and breach of fiduciary duty. SMH believes it has valid defenses to
      all
      the claims.





25


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




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





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





On
      May
      24, 2007, the Company held its annual meeting of shareholders to vote for
      election of directors to the Company’s Board of Directors. Each nominee was
      elected and the results of the votes were as follows:


**Number
                  of**
              
              **Number
                  of**
              
              **Number
                  of**
              
              **Number
                  of****Shares**
              
              **Shares**
              
              **Shares**
              
              **Broker****Voted
                  For**
              
              **Voted
                  Against**
              
              **Withheld**
              
              **Non-Votes**Election
                  of directors:Don
                  A. Sanders
              
              
              22,138,119
              
              
              -
              
              
              390,477
              
              
              -George
                  L. Ball
              
              
              22,137,854
              
              
              -
              
              
              390,742
              
              
              -Richard
                  E. Bean
              
              
              21,994,283
              
              
              -
              
              
              534,313
              
              
              -Charles
                  W. Duncan III
              
              
              21,994,283
              
              
              -
              
              
              534,313
              
              
              -Scott
                  B. McClelland
              
              
              22,197,731
              
              
              -
              
              
              330,865
              
              
              -Ben
                  T. Morris
              
              
              22,138,119
              
              
              -
              
              
              390,477
              
              
              -Dr.
                  Albert W. Niemi, Jr.
              
              
              22,112,031
              
              
              -
              
              
              416,565
              
              
              -W.
                  Blair Waltrip
              
              
              21,801,460
              
              
              -
              
              
              727,136
              
              
              -Nolan
                  Ryan
              
              
              16,694,987
              
              
              -
              
              
              5,833,609
              
              
              -


26




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


**INDEX
                  TO EXHIBITS****Exhibit**
                **Number**
              
              **Description**3.1
              
              Articles
                  of Incorporation of the Company, as amended (Filed as Exhibit 3.1
                  to the
                  Company’sAnnual
                  Report on Form 10-K for the year ended December 31, 2001 (File
                  No.
                  000-30066), andincorporated
                  herein by reference).3.2
              
              Amended
                  and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the
                  Company’s
                  QuarterlyReport
                  on Form 10-Q for the quarter ended June 30, 2004 (File No. 000-30066),
                  and
                  incorporatedherein
                  by reference).†10.01
              
              Sanders
                  Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed
                  as Appendix
                  A to theDefinitive
                  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 theCompany’s
                  Form 10-Q for the quarter ended September 30, 2001 (File No. 000-30066),
                  andincorporated
                  herein by reference).†10.03
              
              Form
                  of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
                  10.03 to theCompany’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 theCompany’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
              
              Sublease
                  Agreement dated January 19, 1994, between Texas Commerce Bank NationalAssociation
                  and Harris Webb & Garrison, Inc., as amended by that certain First
                  Amendment toSublease
                  Agreement dated February 23, 1994, the Second Amendment to Sublease
                  Agreementdated
                  April 26, 1994, and the Third Amendment to Sublease Agreement dated
                  January 19, 1995(Filed
                  as Exhibit 10.16 to the Proxy  Statement/Prospectus of the Company
                  dated December 31,1998
                  (File No. 333-65417), and incorporated herein by
                  reference).10.06
              
              On-Line
                  Services Agreement dated as of June 1, 2005, between Innovest Systems,
                  LLC
                  andPinnacle
                  Trust Co., LTA. (Filed as Exhibit 10.05 to the Company’s Quarterly Report
                  on Form 10-Q
                  for the quarter ended September 30, 2005 (File No. 000-30066),
                  and
                  incorporated herein byreference).10.07
              
              Office
                  Lease Agreement and related amendments dated September 25, 1996,
                  between
                  TexasTower
                  Limited and Sanders Morris Mundy Inc. (Filed as Exhibit 10.3 to
                  the
                  Company’s QuarterlyReport
                  on Form 10-Q for the quarter ended March 31, 2000 (File No. 000-30066),
                  andincorporated
                  herein by reference).10.08
              
              Credit
                  Agreement dated as of May 9, 2005, between Sanders Morris Harris
                  Group
                  Inc. andJPMorgan
                  Chase Bank, National Association (Filed as Exhibit 10.7 to the
                  Company’s
                  QuarterlyReport
                  on Form 10-Q for the quarter ended June 30, 2005 (File No. 000-30066),
                  and
                  incorporatedherein
                  by reference).10.09
              
              Reorganization
                  and Purchase Agreement dated as of May 10, 2005, among Sanders
                  Morris
                  HarrisGroup
                  Inc., The Edelman Financial Center, Inc., The Edelman Financial
                  Center,
                  LLC, and FredricM.
                  Edelman (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K
                  dated May 10,2005
                  (File No. 000-30066), and incorporated herein by
                  reference).*10.10
              
              Agreement
                  and Fourth Amendment to Credit Agreement as of May 7, 2007 between
                  SandersMorris
                  Harris Group Inc. and JPMorgan Chase Bank, National
                  Association.


27


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







*  Filed
      herewith.


†  Management
      contract or compensation plan or arrangement.


28




**SIGNATURES**





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




**SANDERS
                MORRIS HARRIS GROUP INC.**By:
            /s/
              BEN
              T. MORRIS**Ben
                T. Morris**
              **Chief
                  Executive Officer**


By:
            /s/
              RICK BERRY**Rick
                Berry**
              **Chief
                Financial Officer**




Date:  August
      9,
      2007





29