**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


**(mark
      one)**




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




**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
              incorporation
                or organization)
            (I.R.S.
                Employer
              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
      November 7, 2007, the registrant had 25,021,797 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 September 30, 2007 (unaudited) and
                December 31, 2006
            2Condensed
                Consolidated Statement of Income for the Three and Nine Months Ended
                September 30, 2007 and 2006 (unaudited)
            3Condensed
                Consolidated Statement of Shareholders' Equity for the Nine Months
                Ended
                September 30, 2007 (unaudited)
            4Condensed
                  Consolidated Statement of Cash Flows for the Nine Months Ended
                  September
                  30, 2007 and 2006 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            30Item
                4.
            Controls
                and Procedures
            31**PART
                II. OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            32Item
                6.
            Exhibits
            34




1




**PART
      I. FINANCIAL INFORMATION**





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




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


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**As
      of September 30, 2007 and December 31, 2006**


**(in
      thousands, except share and per share amounts)**





**September 30,**
              **2007**
            
            **December 31,**
              **2006****(unaudited)****ASSETS**Cash
                and cash equivalents
            
            $
            38,973
            
            $
            68,861Receivables,
                net of allowance of $3,340 and $227, respectivelyBroker-dealers
                and clearing organizations
            
            
            317
            
            
            505Customers
            
            
            25,294
            
            
            16,720Related
                parties
            
            
            11,260
            
            
            6,212Other
            
            
            4,332
            
            
            5,587Deposits
                with clearing organizations
            
            
            1,093
            
            
            1,084Securities
                owned
            
            
            98,419
            
            
            82,462Securities
                available for sale
            
            
            975
            
            
            1,467Furniture,
                equipment, and leasehold improvements, net
            
            
            13,000
            
            
            12,323Deferred
                tax asset, net
            
            
            35
            
            
            -Other
                assets and prepaid expenses
            
            
            2,367
            
            
            2,048Goodwill
                and other intangible assets
            
            
            94,960
            
            
            84,773Total
                assets
            
            $
            291,025
            
            $
            282,042**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                payable and accrued liabilities
            
            $
            26,019
            
            $
            25,550Borrowings
            
            
            200
            
            
            555Deferred
                tax liability, net
            
            
            -
            
            
            3,037Securities
                sold, not yet purchased
            
            
            14,569
            
            
            20,107Payable
                to broker-dealers and clearing organizations
            
            
            7,716
            
            
            733Total
                liabilities
            
            
            48,504
            
            
            49,982Commitments
                and contingenciesMinority
                interests
            
            
            16,566
            
            
            12,124Shareholders'
                equity:Preferred
                    stock, $0.10 par value; 10,000,000 shares authorized; no shares
                    issued and
                    outstanding
            
            
            -
            
            
            -Common
                  stock, $0.01 par value; 100,000,000 shares authorized; 25,761,208
                  and
                  25,273,437 shares issued, respectively
            
            
            258
            
            
            253Additional
                paid-in capital
            
            
            203,898
            
            
            199,176Retained
                earnings
            
            
            25,139
            
            
            23,902Accumulated
                other comprehensive income
            
            
            141
            
            
            86Treasury
                stock, at cost, 739,411 shares
            
            
            (3,481
            )
            
            (3,481
            )Total
                shareholders' equity
            
            
            225,955
            
            
            219,936Total
                liabilities and shareholders' equity
            
            $
            291,025
            
            $
            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**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues:Commissions
            
            $
            12,883
            
            $
            12,856
            
            $
            40,209
            
            $
            42,865Investment
                banking
            
            
            8,449
            
            
            11,571
            
            
            27,694
            
            
            33,518Investment
                advisory and related services
            
            
            19,580
            
            
            10,790
            
            
            51,450
            
            
            27,300Principal
                transactions
            
            
            2,215
            
            
            3,137
            
            
            8,313
            
            
            13,112Interest
                and dividends
            
            
            1,374
            
            
            1,494
            
            
            5,272
            
            
            4,513Other
                income
            
            
            1,649
            
            
            1,412
            
            
            4,892
            
            
            4,395Total
                revenues
            
            
            46,150
            
            
            41,260
            
            
            137,830
            
            
            125,703Expenses:Employee
                compensation and benefits
            
            
            26,371
            
            
            25,490
            
            
            80,123
            
            
            75,501Floor
                brokerage, exchange, and clearance fees
            
            
            1,480
            
            
            1,713
            
            
            4,861
            
            
            5,442Communications
                and data processing
            
            
            2,516
            
            
            1,792
            
            
            7,647
            
            
            5,750Occupancy
            
            
            2,903
            
            
            2,733
            
            
            8,870
            
            
            8,001Interest
            
            
            9
            
            
            274
            
            
            30
            
            
            751Amortization
                of intangible assets
            
            
            95
            
            
            -
            
            
            234
            
            
            -Other
                general and administrative
            
            
            5,976
            
            
            5,693
            
            
            20,357
            
            
            16,381Total
                expenses
            
            
            39,350
            
            
            37,695
            
            
            122,122
            
            
            111,826Income
                  from continuing operations before equity in income (loss) of limited
                  partnerships, minority interests, and income taxes
            
            
            6,800
            
            
            3,565
            
            
            15,708
            
            
            13,877Equity
                in income (loss) of limited partnerships
            
            
            711
            
            
            (1,671
            )
            
            4,298
            
            
            902Income
                  from continuing operations before minority interests and income
                  taxes
            
            
            7,511
            
            
            1,894
            
            
            20,006
            
            
            14,779Minority
                  interests in net income of consolidatedcompanies
            
            
            (4,586
            )
            
            (586
            )
            
            (10,946
            )
            
            (3,618
            )Income
                from continuing operations before income taxes
            
            
            2,925
            
            
            1,308
            
            
            9,060
            
            
            11,161Provision
                for income taxes
            
            
            1,082
            
            
            521
            
            
            3,371
            
            
            4,421Income
                from continuing operations
            
            
            1,843
            
            
            787
            
            
            5,689
            
            
            6,740Loss
                from discontinued operations, net of tax
            
            
            -
            
            
            (1,085
            )
            
            -
            
            
            (5,980
            )Net
                income (loss)
            
            $
            1,843
            
            $
            (298
            )
            $
            5,689
            
            $
            760Basic
                earnings (loss) per common share:Continuing
                operations
            
            $
            0.07
            
            $
            0.04
            
            $
            0.23
            
            $
            0.35Discontinued
                operations
            
            
            -
            
            
            (0.06
            )
            
            -
            
            
            (0.31
            )Net
                earnings (loss)
            
            $
            0.07
            
            $
            (0.02
            )
            $
            0.23
            
            $
            0.04Diluted
                earnings (loss) per common share:Continuing
                operations
            
            $
            0.07
            
            $
            0.04
            
            $
            0.23
            
            $
            0.34Discontinued
                operations
            
            
            -
            
            
            (0.05
            )
            
            -
            
            
            (0.30
            )Net
                earnings (loss)
            
            $
            0.07
            
            $
            (0.01
            )
            $
            0.23
            
            $
            0.04Weighted
                average common shares outstanding:Basic
            
            
            24,801
            
            
            19,561
            
            
            24,715
            
            
            19,225Diluted
            
            
            25,095
            
            
            19,994
            
            
            25,038
            
            
            19,688




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 nine months ended September 30, 2007**


**(in
      thousands, except share and per share amounts)**


**(unaudited)**





Amounts
            
            
            
            Shares**Common
                stock**Balance,
                beginning of period
            
            $
            253
            
            
            
            
            
            25,273,437Stock
                issued for acquisition
            
            
            2
            
            
            
            
            
            242,927Stock
                issued pursuant to employee benefit plan
            
            
            3
            
            
            
            
            
            244,844Balance, end of period
            
            
            258
            
            
            
            
            
            25,761,208**Additional
                paid-in capital**Balance,
                beginning of period
            
            
            199,176Stock
                issued for acquisition
            
            
            2,398Stock
                issued pursuant to employee benefit plan; including tax
                benefit
            
            
            544Stock-based
                compensation expense
            
            
            1,780Balance, end of period
            
            
            203,898**Retained
                earnings**Balance,
                beginning of period
            
            
            23,902Cash
                dividends ($0.18 per share)
            
            
            (4,452
            )Net
                income
            
            
            5,689
            
            
            5,689Balance, end of period
            
            
            25,139
            
            
            5,689**Accumulated
                other comprehensive income**Balance,
                beginning of period
            
            
            86Net
                    change in unrealized appreciation on securities available for
                    sale
            
            
            91
            
            
            91Income
                    tax expense on change in unrealized appreciation on securities
                    available
                    for sale
            
            
            (36
            )
            
            (36
            )Balance, end of period
            
            
            141
            
            
            55**Comprehensive
                income**
            
            
            
            
            
            5,744**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**
            
            **$**
            **225,955**
            
            
            
            
            
            **25,021,797**





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 nine months ended September 30, 2007 and 2006**


**(in
      thousands)**


**(unaudited)**





**2007**
            
            **2006****(Restated)**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            5,689
            
            $
            760Adjustments
                to reconcile net income to net cash provided by operating
                activities:Realized
                gain on securities available for sale
            
            
            (1
            )
            
            (11
            )Loss
                on sales of assets
            
            
            53
            
            
            -Depreciation
                and amortization
            
            
            2,462
            
            
            2,135Provision
                for bad debts
            
            
            3,228
            
            
            360Stock-based
                compensation expense
            
            
            1,780
            
            
            1,752Goodwill
                impairment charge
            
            
            -
            
            
            4,456Amortization
                of intangible assets
            
            
            234
            
            
            -Deferred
                income taxes
            
            
            (3,108
            )
            
            (1,957
            )Equity
                in income of limited partnerships
            
            
            (4,298
            )
            
            (902
            )Minority
                interests in net income of consolidated companies
            
            
            10,946
            
            
            3,580Unrealized
                    and realized losses on not readily marketable securities owned,
                    net
            
            
            2,185
            
            
            4,200Not
                  readily marketable securities owned received for payment of investment
                  banking fees
            
            
            (1,692
            )
            
            (5,500
            )Net
                change in:Receivables
            
            
            (15,008
            )
            
            (1,792
            )Deposits
                with clearing organizations
            
            
            (9
            )
            
            (8
            )Securities
                owned
            
            
            5,824
            
            
            (12,225
            )Other
                assets and prepaid expenses
            
            
            (331
            )
            
            (505
            )Accounts
                payable and accrued liabilities
            
            
            (715
            )
            
            (275
            )Securities
                sold, not yet purchased
            
            
            (5,538
            )
            
            9,623Payable
                to broker-dealers and clearing organizations
            
            
            6,983
            
            
            (2,160
            )Net
                cash provided by operating activities
            
            
            8,684
            
            
            1,531CASH
                FLOWS FROM INVESTING ACTIVITIES:Capital
                expenditures
            
            
            (3,231
            )
            
            (4,001
            )Acquisitions,
                net of cash acquired of $59
            
            
            (8,249
            )
            
            -Proceeds
                from sales of not readily marketable securities owned
            
            
            4,476
            
            
            4,082Purchases
                of not readily marketable securities owned
            
            
            (22,452
            )
            
            (1,924
            )Proceeds
                from sales and maturities of securities available for sale
            
            
            584
            
            
            418Proceeds
                from sales of assets
            
            
            39
            
            
            -Net
                cash used in investing activities
            
            
            (28,833
            )
            
            (1,425
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from shares issued pursuant to employee benefit plan
            
            
            428
            
            
            1,163Tax
                benefit of stock options exercised
            
            
            119
            
            
            424Collection
                of receivables for shares issued
            
            
            -
            
            
            15Proceeds
                from borrowings
            
            
            145
            
            
            8,119Repayment
                of borrowings
            
            
            (500
            )
            
            (3,470
            )Investments
                by minority interests
            
            
            40
            
            
            47Distributions
                to minority interests
            
            
            (6,645
            )
            
            (2,169
            )Payments
                of cash dividends
            
            
            (3,326
            )
            
            (2,572
            )Net
                cash (used in) provided by financing activities
            
            
            (9,739
            )
            
            1,557Net
                (decrease) increase in cash and cash equivalents
            
            
            (29,888
            )
            
            1,663CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            68,861
            
            
            17,867CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            38,973
            
            $
            19,530





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”), The Dickenson Group, LLC (“Dickenson”), The Rikoon Group, LLC
      (“Rikoon”), 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 (a) the activities
      of
      the division known as Fixed Income National, which began operations during
      the
      first quarter of 2006 and (b) Charlotte Capital, LLC (“Charlotte Capital”).
      Fixed Income National provided fixed income brokerage services to institutional
      clients. The operating results of the Fixed Income National division and
      Charlotte Capital are included in loss from discontinued operations, net of
      tax,
      and are excluded from 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 September 30, 2007, our results of operations for the
      three and nine months ended September 30, 2007 and 2006, and our cash flows
      for
      the nine months ended September 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.





*Reclassifications*





Certain
      reclassifications have been made to the 2006 condensed consolidated financial
      statements to conform them to the 2007 presentation. Cash flow information
      has
      been revised to reclassify the acquisitions and dispositions of not readily
      marketable securities owned from net cash provided by operating activities
      to
      net cash used in investing activities. The total amount thus reclassified was
      $2.2 million for the nine months ended September 30, 2006. Management believes
      that the changes in the condensed consolidated statement of cash flows for
      the
      nine months ended September 30, 2006 are immaterial relative to the financial
      statements taken as a whole. The result of this reclassification on net cash
      provided by operating activities is reflected in Note 2. The result of this
      reclassification on net cash used in investing activities in the 2006 condensed
      consolidated statement of cash flows is as follows:





**Nine Months Ended****September 30, 2006****(in thousands)**Net
                cash used in investing activities (as reported)
            
            $
            (3,583
            )Impact
                    of reclassification of acquisitions and dispositions of not readily
                    marketable securities
            
            
            2,158Net
                cash used in investing activities (as reclassified)
            
            $
            (1,425
            )




7





**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:





**Nine
                Months Ended****September
                30, 2006****As
                Reported**
            
            **As
                Restated****(in
                thousands)**Change
                    in payable to broker-dealers and clearing
                    organizations
            
            $
            (1,768
            )
            $
            (2,160
            )Net
                cash provided by operating activities
            
            
            4,081
            
            
            1,531Net
                increase in cash and cash equivalents
            
            
            2,055
            
            
            1,663Cash
                and cash equivalents at beginning of period
            
            
            17,475
            
            
            17,867




The
      change in net cash provided by operating activities includes a reclassification
      of $2.2 million discussed in Note 1 - *Reclassifications* .





**3.**
            **ACQUISITIONS**





On
      September 14, 2007, the Company acquired a 50.1% interest in Dickenson, an
      insurance agency with four registered agents based in Solon, Ohio. The
      acquisition was accounted for as a purchase and, accordingly, the financial
      information of Dickenson has been included in the Company’s consolidated
      financial statements from September 14, 2007. The consideration of $6.0 million,
      consisting of a combination of cash and shares of the Company’s common stock,
      exceeded the fair market value of identifiable net tangible assets by $6.0
      million, which has been recorded as goodwill and other intangible
      assets.





On
      May
      24, 2007, the Company acquired a 75% interest in Rikoon for cash consideration
      of $6.0 million of which $1.3 million was 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 earnings before interest,
      taxes, depreciation, and amortization (“EBITDA”) varies from the threshold
      EBITDA specified in the purchase agreement. At acquisition, Rikoon, based in
      Santa Fe, New Mexico, manages approximately $400 million in assets. The
      acquisition was accounted for as a purchase and, accordingly, the financial
      information of Rikoon has been included in the Company’s consolidated financial
      statements from May 24, 2007. The consideration exceeded the fair market value
      of identifiable net tangible assets by $4.4 million which has been recorded
      as
      goodwill and other intangible assets.





On
      May
      10, 2005, the Company acquired a 51% interest in Edelman, one of the
      leading financial planning firms in the country. The Company will acquire the
      remaining 49% of Edelman over four years. At acquisition, Edelman, based in
      Fairfax, Virginia, managed over $2.6 billion in assets. At the initial closing,
      the Company bought 51% of the outstanding membership units of Edelman (“the
      First Tranche Units”). The Company paid $24.8 million, in a combination of cash
      and shares of the Company’s common stock, for the First Tranche Units, including
      contingent consideration (the “Earn-Out Consideration”) of $4.8 million accrued
      in the third quarter of 2006. The Earn-Out Consideration was based on a multiple
      of the net income of Edelman for the twelve months ended September 30, 2006.





8





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





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





**September
                30, 2007**
            
            **December
                31, 2006****Owned**
            
            **Sold,
                Not Yet**
              **Purchased**
            
            **Owned**
            
            **Sold,
                Not Yet**
              **Purchased****(in
                thousands)**Marketable:U.S.
                government and agency
            
            $
            -
            
            $
            15
            
            $
            260
            
            $
            15Corporate
                stocks and options
            
            
            33,710
            
            
            14,554
            
            
            36,843
            
            
            20,051Corporate
                bonds
            
            
            -
            
            
            -
            
            
            -
            
            
            4133,710
            
            
            14,569
            
            
            37,103
            
            
            20,107Not
                readily marketable:Limited
                partnerships
            
            
            55,327
            
            
            -
            
            
            36,095
            
            
            -Warrants
            
            
            6,871
            
            
            -
            
            
            8,795
            
            
            -Equities
                and options
            
            
            2,511
            
            
            -
            
            
            469
            
            
            -64,709
            
            
            -
            
            
            45,359
            
            
            -$
            98,419
            
            $
            14,569
            
            $
            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 September 30, 2007 were as follows:





**Amortized**
            
            **Gross
                Unrealized**
            
            **Estimated****Cost**
            
            **Gains**
            
            **Losses**
            
            **Fair
                Value****(in
                thousands)**U.S.
                government and agency obligations
            
            $
            384
            
            $
            2
            
            $
            -
            
            $
            386Marketable
                equity securities
            
            
            359
            
            
            230
            
            
            -
            
            
            589Total
            
            $
            743
            
            $
            232
            
            $
            -
            
            $
            975




9


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





**Amortized**
            
            **Estimated****Cost**
            
            **Fair
                Value****(in
                thousands)**Within
                one year
            
            $
            250
            
            $
            250Over
                25 years
            
            
            134
            
            
            136Total
            
            $
            384
            
            $
            386





Gross
      realized gains on sales of securities available for sale were $1,000 and $12,000
      for the nine months ended September 30, 2007 and 2006, respectively. No realized
      losses on securities available for sale were recorded for the nine months ended
      September 30, 2007. Gross realized losses on securities available for sale
      were
      $1,000 for the nine months ended September 30, 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 September 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 September 30, 2007. The amount
      of available borrowings under the line of credit, which is reduced by letters
      of
      credit issued by the Company, was $16.3 million at September 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 ranged from 6.78% to 7.15% during 2007 and was 6.78% at
      September 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 September 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**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(in
                thousands)**Expected
                    federal tax at statutory rate of 35% for 2007 and 34% for
                    2006
            
            $
            1,024
            
            $
            445
            
            $
            3,171
            
            $
            3,795State
                and other income taxes
            
            
            58
            
            
            76
            
            
            200
            
            
            626Total
            
            $
            1,082
            
            $
            521
            
            $
            3,371
            
            $
            4,421





The
      Company files income tax returns in the U.S. federal jurisdiction. The Company
      is no longer subject to U.S. federal income tax examination by the taxing
      authorities for years before 2004.




10




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. In conjunction with that
      examination, New York state has issued a tentative assessment of additional
      tax.
      The Company is currently reviewing the proposed deficiencies and intends to
      respond to the report in due course. 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.





**8.**
            **ACCOUNTING
                FOR STOCK-BASED COMPENSATION****PLANS**





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





The
      following table sets forth pertinent information regarding stock option
      transactions for the nine months ended September 30, 2007:





**Number**
              **of
                Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**Outstanding
                at January 1, 2007
            
            
            911,585
            
            $
            8.08Granted
            
            
            -
            
            
            -Exercised
            
            
            (55,200
            )
            
            4.66Outstanding
                at September 30, 2007
            
            
            856,385
            
            $
            8.30Options
                exercisable at September 30, 2007
            
            
            775,760
            
            $
            7.58Incentive
                award shares available for grant at September 30, 2007
            
            
            2,196,569




During
      the nine months ended September 30, 2007 and 2006, 55,200 and 119,436 options
      were exercised for which the Company received proceeds of $257,000 and $627,000,
      respectively. The Company recognized pretax compensation expense of $116,000
      and
      $213,000 during the nine months ended September 30, 2007 and 2006, respectively,
      related to stock options. The portion of stock-based compensation expense
      related to stock options that was unrecognized at September 30, 2007 was
      $233,000.





11





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





**Number**
              **of
                Shares**
            
            **Weighted**
              **Average**
              **Grant
                Date**
              **Fair
                Value**Nonvested
                at January 1, 2007
            
            
            523,302
            
            $
            14.46Nonvested
                at September 30, 2007
            
            
            548,278
            
            $
            13.47For
                the nine months ended September 30, 2007:Granted
            
            
            196,587
            
            $
            10.92Vested
            
            
            164,768
            
            $
            13.56Forfeited
            
            
            6,843
            
            $
            13.62








Employees
      deferred compensation of $171,000 and $536,000 during the nine months ended
      September 30, 2007 and 2006, respectively, that was used to purchase restricted
      common stock. The Company recognized pretax compensation expense of $1.7 million
      and $1.5 million during the nine months ended September 30, 2007 and 2006,
      respectively, related to its restricted common stock plan. At September 30,
      2007, total unrecognized compensation cost, net of estimated forfeitures,
      related to nonvested restricted stock totaled $5.0 million.





12


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





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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(in
                thousands, except per share amounts)**Income
                from continuing operations
            
            $
            1,843
            
            $
            787
            
            $
            5,689
            
            $
            6,740Loss
                from discontinued operations, net of tax
            
            
            -
            
            
            (1,085
            )
            
            -
            
            
            (5,980
            )Net
                income (loss)
            
            $
            1,843
            
            $
            (298
            )
            $
            5,689
            
            $
            760Basic
                earnings (loss) per common share:Continuing
                operations
            
            $
            0.07
            
            $
            0.04
            
            $
            0.23
            
            $
            0.35Discontinued
                operations
            
            
            -
            
            
            (0.06
            )
            
            -
            
            
            (0.31
            )Net
                earnings (loss)
            
            $
            0.07
            
            $
            (0.02
            )
            $
            0.23
            
            $
            0.04Diluted
                earnings (loss) per common share:Continuing
                operations
            
            $
            0.07
            
            $
            0.04
            
            $
            0.23
            
            $
            0.34Discontinued
                operations
            
            
            -
            
            
            (0.05
            )
            
            -
            
            
            (0.30
            )Net
                earnings (loss)
            
            $
            0.07
            
            $
            (0.01
            )
            $
            0.23
            
            $
            0.04Weighted
                  average number of common sharesoutstanding:Basic
            
            
            24,801
            
            
            19,561
            
            
            24,715
            
            
            19,225Incremental
                  common shares issuable under stock option plan, net
            
            
            294
            
            
            433
            
            
            323
            
            
            463Diluted
            
            
            25,095
            
            
            19,994
            
            
            25,038
            
            
            19,688





Outstanding
      stock options of 305,000 and 172,500 for the three months ended September 30,
      2007 and 2006, respectively, and 305,000 and 72,500 for the nine months ended
      September 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,
      $230,000, $199,000, $144,000, and $92,000 to the owners of six 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 Financial Advisors,
      LLC (“EFA”), to expand the Edelman financial platform into additional markets
      outside the Washington, D.C. metropolitan area. We committed to initially loan
      EFA 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 EFA are
      payable on May 12, 2009. Mr. Edelman has guaranteed repayment of the EFA
      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 EFA was $6.0 million at September 30, 2007. EFA 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 sixteen additional markets, including
      Atlanta, Baltimore, Chicago, Columbus, Dallas, Detroit, Houston, Indianapolis,
      Los Angeles, Miami, New York City, Orlando, Phoenix, Portland, Oregon, San
      Diego, and San Francisco.




13




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





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





The
      Financial Industry Regulatory Authority (formerly the NASD) (“FINRA”) initially
      conducted an inspection of our Concept Capital prime brokerage and private
      investment or hedge fund support operations based in our New York office in
      November 2004. Subsequent to such inspection, FINRA opened an investigation
      and
      requested the production of additional documents and materials during 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 FINRA, which stated that the
      staff of FINRA had 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 FINRA, including FINRA
      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; FINRA Conduct Rule 2210
      relating to the content of hedge fund advertising materials; SEC Rule 17a-4
      and
      Conduct Rules 2210 and 3110 relating to the retention of certain email, instant
      messages, and advertising materials; Conduct Rules 1031 and 2110 relating to
      the
      activities of an unregistered employee; and 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 FINRA before any action is taken against it. SMH submitted its
      response to FINRA on October 11, 2006. We and our legal counsel have had ongoing
      discussions with the staff of FINRA with respect to the alleged violations
      and
      possible settlement of the matter and expect that the matter will be resolved
      during the fourth quarter. 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 approved the sale of
      substantially all of Ronco’s assets in August 2007, and the case has been
      converted to a liquidation under Chapter 7. 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 a 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 a FINRA 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 has filed an answer to such proceeding
      and believes it has valid defenses to all the claims.





14


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.





The
      Company and its subsidiaries have obligations under operating leases that expire
      through 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.





15





·
            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.





16


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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September 30,**
            
            **September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(in
                thousands)**Revenues:Asset/Wealth
                Management
            
            $
            26,878
            
            $
            19,383
            
            $
            76,583
            
            $
            57,637Capital
                Markets:Investment
                banking
            
            
            5,994
            
            
            8,635
            
            
            19,798
            
            
            23,975Institutional
                brokerage
            
            
            3,936
            
            
            5,027
            
            
            12,301
            
            
            17,287Prime
                brokerage services
            
            
            8,701
            
            
            9,035
            
            
            26,372
            
            
            25,203Capital
                Markets Total
            
            
            18,631
            
            
            22,697
            
            
            58,471
            
            
            66,465Corporate
                Support
            
            
            641
            
            
            (820
            )
            
            2,776
            
            
            1,601Total
            
            $
            46,150
            
            $
            41,260
            
            $
            137,830
            
            $
            125,703Income
                (loss) from continuing operations before equity in income (loss)
                of
                limited partnerships, minority interests, and income
                taxes:Asset/Wealth
                Management
            
            $
            8,414
            
            $
            4,885
            
            $
            21,619
            
            $
            11,437Capital
                Markets:Investment
                banking
            
            
            1,327
            
            
            3,018
            
            
            4,532
            
            
            8,565Institutional
                brokerage
            
            
            306
            
            
            689
            
            
            1,117
            
            
            2,441Prime
                brokerage services
            
            
            739
            
            
            268
            
            
            2,748
            
            
            1,388Capital
                Markets Total
            
            
            2,372
            
            
            3,975
            
            
            8,397
            
            
            12,394Corporate
                Support
            
            
            (3,986
            )
            
            (5,295
            )
            
            (14,308
            )
            
            (9,954
            )Total
            
            $
            6,800
            
            $
            3,565
            
            $
            15,708
            
            $
            13,877Equity
                in income (loss) of limited partnerships:Asset/Wealth
                Management
            
            $
            2,827
            
            $
            (1,727
            )
            $
            6,146
            
            $
            395Capital
                Markets:Investment
                banking
            
            
            -
            
            
            -
            
            
            -
            
            
            -Institutional
                brokerage
            
            
            -
            
            
            -
            
            
            -
            
            
            -Prime
                brokerage services
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                Markets Total
            
            
            -
            
            
            -
            
            
            -
            
            
            -Corporate
                Support
            
            
            (2,116
            )
            
            56
            
            
            (1,848
            )
            
            507Total
            
            $
            711
            
            $
            (1,671
            )
            $
            4,298
            
            $
            902Minority
                  interests in net income of consolidated companies:Asset/Wealth
                Management
            
            $
            (4,586
            )
            $
            (586
            )
            $
            (10,946
            )
            $
            (3,618
            )Capital
                Markets:Investment
                banking
            
            
            -
            
            
            -
            
            
            -
            
            
            -Institutional
                brokerage
            
            
            -
            
            
            -
            
            
            -
            
            
            -Prime
                brokerage services
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                Markets Total
            
            
            -
            
            
            -
            
            
            -
            
            
            -Corporate
                Support
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            (4,586
            )
            $
            (586
            )
            $
            (10,946
            )
            $
            (3,618
            )Income
                  (loss) from continuing operations beforeincome
                  taxes:Asset/Wealth
                Management
            
            $
            6,655
            
            $
            2,572
            
            $
            16,819
            
            $
            8,214Capital
                Markets:Investment
                banking
            
            
            1,327
            
            
            3,018
            
            
            4,532
            
            
            8,565Institutional
                brokerage
            
            
            306
            
            
            689
            
            
            1,117
            
            
            2,441Prime
                brokerage services
            
            
            739
            
            
            268
            
            
            2,748
            
            
            1,388Capital
                Markets Total
            
            
            2,372
            
            
            3,975
            
            
            8,397
            
            
            12,394Corporate
                Support
            
            
            (6,102
            )
            
            (5,239
            )
            
            (16,156
            )
            
            (9,447
            )Total
            
            $
            2,925
            
            $
            1,308
            
            $
            9,060
            
            $
            11,161





17


**12.**
              **SUPPLEMENTAL
                  CASH FLOW
                  INFORMATION**





**Nine
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Cash
                paid for income taxes, net
            
            $
            3,671
            
            $
            606Cash
                paid for interest
            
            
            19
            
            
            631Noncash
                investing activities:Acquisitions:Goodwill
            
            
            2,400
            
            
            4,831Accounts
                payable and accrued liabilties
            
            
            -
            
            
            (67
            )Commitment
                to issue common stock
            
            
            -
            
            
            (2,382
            )Consideration
                payable
            
            
            -
            
            
            (2,382
            )Noncash
                financing activities:Dividends
                declared not yet paid
            
            
            1,126
            
            
            -Sale
                of stock:Receivable
                from broker-dealers
            
            
            -
            
            
            58,544Common
                stock
            
            
            -
            
            
            (50
            )Additional
                paid-in capital
            
            
            -
            
            
            (57,897
            )Other
                assets
            
            
            -
            
            
            (500
            )Accounts
                payable
            
            
            -
            
            
            (97
            )




**13.**
            **RELATED
                PARTIES**





The
      Company had receivables from related parties totaling $11.3 million at September
      30, 2007, primarily consisting of $7.0 million of advances to unconsolidated
      related entities to fund operating expenses, $3.2 million of notes receivable
      from employees and consultants representing loans made to induce the employees
      and consultants to affiliate with the Company, and $453,000 of management fees
      receivable from the limited partnerships that the Company manages.





**14.**
            **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
      nine months ended September 30, 2006, Fixed Income National recorded an
      operating loss of $3.2 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 nine months ended September 30, 2006, Charlotte Capital
      recorded an operating loss of $2.8 million, net of tax, primarily consisting
      of
      goodwill impairment.





18





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





**Three Months Ended****September 30, 2006**
            ****
            **Nine Months Ended****September 30, 2006****(in thousands)******Operating
                activities:Revenues
            
            $
            446
            
            $
            2,617Expenses
            
            
            2,019
            ****
            
            7,843Goodwill
                impairment charge
            
            
            -
            
            
            4,456Loss
                  from discontinued operations before minority interests and income
                  taxes
            
            
            (1,573
            )
            
            (9,682
            )Minority
                  interests in net loss of consolidated companies
            
            
            31
            
            
            38Loss
                  from discontinued operations before income taxes
            
            
            (1,542
            )
            
            (9,644
            )Benefit
                for income taxes
            
            
            (574
            )
            
            (3,781
            )Net
                loss from operations, net of tax
            
            
            (968
            )
            
            (5,863
            )Costs
                related to exit of business, net of tax
            
            
            (117
            )
            
            (117
            )Loss
                from discontinued operations
            
            $
            (1,085
            )
            $
            (5,980
            )





**15.**
            **SUBSEQUENT
                EVENTS**





On
      November 6, 2007, the Company’s board of directors declared a cash dividend for
      the fourth quarter of 2007 in the amount of $0.045 per share of common stock.
      The cash dividend will be payable on January 18, 2008, to holders of record
      as
      of the close of business on January 3, 2008.




19


**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.





20





*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.





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 third quarter of 2007,
      compensation and benefits represented 67.0% of total expenses and 57.1% of
      total
      revenues, compared to 67.6% of total expenses and 61.8% of total revenues during
      the third quarter of 2006. During the first nine months 2007, compensation
      and
      benefits represented 65.6% of total expenses and 58.1% of total revenues,
      compared to 67.5% of total expenses and 60.1% 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.





21


**Results
      of Operations**





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





Total
      revenues were $46.2 million in the third quarter of 2007 compared to $41.3
      million for the same quarter in 2006, an increase of $4.9 million, or 11.9%,
      primarily reflecting the conversion of customer accounts to
      fee-based from commission-based at Edelman but partially offset by a decline
      in
      investment banking revenue. Additionally, an increase in assets under management
      at Edelman, Salient, and Capital Advisors and the acquisition of Rikoon
      contributed to the growth in investment advisory fee revenue. Total expenses
      for
      the third quarter of 2007 increased $1.7 million, or 4.4%, to $39.4 million
      from
      $37.7 million in the same quarter of the previous year principally as the result
      of higher employee compensation and benefits due to the revenue growth. Also,
      communications and data processing expense increased as the result of an
      increase in clearing firm service fees at Edelman. Equity in income of limited
      partnerships was $711,000 for the third quarter of 2007 compared to a loss
      of
      $1.7 million for the third quarter of 2006, principally due to an increase
      in
      the values of the investment portfolios of two of the limited partnerships
      that
      we manage. These increases were partially offset by a decrease in the value
      of
      our investment in another limited partnership. Income from continuing operations
      was $1.8 million, or $0.07 per diluted common share, for the third quarter
      of
      2007 compared to $787,000, or $0.04 per diluted common share, for the third
      quarter of 2006. The loss from discontinued operations was $1.1 million, or
      $0.05 per diluted common share, for the third quarter of 2006. No such loss
      was
      recorded in the third quarter of 2007.





Commission
      revenue remained constant at $12.9 million during the third quarter of 2007
      and
      2006. Investment
      banking revenue decreased to $8.4 million during the third quarter of 2007
      from
      $11.6 million in the same period of 2006, principally due to a decrease in
      private placement income and advisory fees. Revenues from investment advisory
      and related services increased to $19.6 million in the third quarter of 2007
      from $10.8 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 and the acquisition of Rikoon. Principal transactions
      revenue decreased from $3.1 million for the third quarter of 2006 to $2.2
      million for the third quarter of 2007, primarily as a result of lower
      proprietary trading activity at our prime brokerage services division. This
      decrease was partially offset by smaller net realized and unrealized losses
      in
      the Company’s investment portfolio recognized in the current year. Interest and
      dividend income decreased to $1.4 million in the third quarter of 2007 from
      $1.5
      million in the same period last year. Other income increased to $1.6 million
      during the third quarter of 2007 from $1.4 million in the same period of 2006,
      principally due to an increase in fees earned on the sale of insurance products.





During
      the three months ended September 30, 2007, employee compensation and benefits
      increased to $26.4 million during the third quarter of 2007 from $25.5 million
      in the same period last year due to staff increases and higher revenues during
      2007. Floor brokerage, exchange, and clearance fees decreased to $1.5 million
      in
      the third quarter of 2007 from $1.7 million in the same period last year
      reflecting lower clearing and execution costs resulting from the decreased
      trading volume. Communication and data processing costs increased to $2.5
      million in 2007 from $1.8 million in the same period last year resulting
      primarily from increased clearing firm service fees at Edelman due to the higher
      servicing costs associated with fee-based accounts. Occupancy costs totaled
      $2.9
      million during the third quarter of 2007 compared to $2.7 million in the third
      quarter of 2006 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 $9,000 for the third quarter of 2007 from $274,000 for
      the
      third 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. Amortization of
      intangible assets was $95,000 for the third quarter of 2007. No such costs
      were
      recorded during the same period last year. Other general and administrative
      expenses increased to $6.0 million during the third quarter of 2007 from $5.7
      million in the third quarter of last year, primarily due to increases in
      auditing and Sarbanes-Oxley related fees.




22




Our
      effective tax rate from continuing operations was 37.0% for the three months
      ended September 30, 2007 compared to 39.8% for the three months ended September
      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.





RESULTS
      BY SEGMENT





**Asset/Wealth
      Management**





**Three
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            26,878
            
            $
            19,383Income
                from continuing operations before income taxes
            
            $
            6,655
            
            $
            2,572





Revenues
      from asset/wealth management increased to $26.9 million from $19.4 million
      and
      income from continuing operations before income taxes increased to $6.7 million
      from $2.6 million. Investment advisory and related services increased to $19.5
      million from $10.8 million while commission revenue declined from $5.3 million
      to $4.4 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 and the acquisition of Rikoon has contributed to the
      increase in revenues from investment advisory fees. Sales credits from
      investment banking transactions declined to $1.0 million from $1.4 million
      as
      the result of a decrease in the number of investment banking transactions.
      Total
      expenses increased to $18.5 million from $14.5 million, primarily due to
      increased employee compensation and commissions for outside sales related to
      the
      higher revenues. Equity in income (loss) of limited partnerships increased
      to a
      gain of $2.8 million from a loss of $1.7 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 $4.6 million from $586,000 principally due
      to the increase in values of the investment portfolios of the limited
      partnerships.





23





**Capital
      Markets**





*Investment*  *Banking*





**Three
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            5,994
            
            $
            8,635Income
                from continuing operations before income taxes
            
            $
            1,327
            
            $
            3,018




Revenues
      from investment banking decreased to $6.0 million from $8.6 million and income
      from continuing operations before income taxes decreased to $1.3 million from
      $3.0 million. The revenue decrease is primarily due to a decrease in revenues
      from private placement transactions and advisory fees. Total expenses decreased
      to $4.7 million from $5.6 million. This decrease in expenses is primarily
      attributable to decreased employee compensation that was partially offset by
      referral fees paid during the quarter.





*Institutional
      Brokerage*





**Three
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            3,936
            
            $
            5,027Income
                from continuing operations before income taxes
            
            $
            306
            
            $
            689





Revenues
      from institutional brokerage decreased to $3.9 million from $5.0 million and
      income from continuing operations before income taxes decreased to $306,000
      from
      $689,000. Commission revenue decreased to $2.4 million from $2.7 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
      $1.1 million from $1.9 million as the result of a decrease in the number of
      investment banking transactions. Total expenses decreased to $3.6 million from
      $4.3 million primarily due to decreased employee compensation related to the
      lower revenues.





*Prime
      Brokerage Services*





**Three
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            8,701
            
            $
            9,035Income
                from continuing operations before income taxes
            
            $
            739
            
            $
            268




24


Revenues
      from prime brokerage decreased to $8.7 million from $9.0 million and income
      from
      continuing operations before income taxes increased to $739,000 from $268,000.
      Commission revenue increased to $6.1 million from $4.8 million reflecting higher
      revenue from hedge fund services, while principal transaction revenue decreased
      to $1.8 million from $3.6 million, reflecting a decline in proprietary trading
      activities. Total expenses decreased to $8.0 million from $8.8 million primarily
      due to a decrease in execution charges resulting from a decrease in trading
      volume. In addition, compensation expense declined resulting from the decrease
      in revenue.





**Corporate
      Support**





**Three
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            641
            
            $
            (820
            )Loss
                from continuing operations before income taxes
            
            $
            (6,102
            )
            $
            (5,239
            )





Revenues
      from corporate support increased to $641,000 from negative $820,000 and the
      loss
      from continuing operations before income taxes increased to $6.1 million from
      $5.2 million. Revenues from principal transactions, which consist principally
      of
      changes in the values of our investment portfolios, improved to a loss of
      $531,000 from a loss of $1.4 million. Total expenses increased to $4.6 million
      from $4.5 million, primarily due to an increase in employee compensation expense
      resulting from the Rikoon acquisition partially offset by a decrease in interest
      expense recorded during the period. Equity in income (loss) of limited
      partnerships decreased to a loss of $2.1 million from a gain of $56,000,
      principally due to a decrease in the value of our investment in one limited
      partnership.





*Nine
      Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
      2006*





Total
      revenues were $137.8 million for the nine months ended September 30, 2007
      compared to $125.7 million for the same period in 2006, an increase of $12.1
      million, or 9.6%, primarily reflecting an increase in assets under management
      in
      the firm’s asset/wealth management segment partially offset by a decrease in
      revenues from the capital markets segment. Total expenses for the nine months
      ended September 30, 2007 increased $10.3 million, or 9.2%, to $122.1 million
      from $111.8 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 $4.3 million for the nine months ended September 30, 2007 versus $902,000
      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. These
      increases were partially offset by a decrease in the value of our investment
      in
      another limited partnership. Income from continuing operations was $9.1 million,
      or $0.23 per diluted common share, for the nine months ended September 30,
      2007
      compared to $11.2 million, or $0.34 per diluted common share, for the same
      period in 2006. The loss from discontinued operations was $6.0 million, or
      $0.30
      per diluted common share, for the nine months ended September 30, 2006. No
      such
      loss was recorded in the nine months ended September 30, 2007.





Commission
      revenue decreased to $40.2 million for the nine months ended September 30,
      2007
      from $42.9 million for the same period in 2006, primarily reflecting the
      conversion of customer accounts to fee-based from commission-based at Edelman.
      Investment banking revenue decreased to $27.7 million for the nine months ended
      September 30, 2007 from $33.5 million in the same period of 2006, due to fewer
      transactions completed in 2007. Revenues from investment advisory and related
      services increased to $51.5 million for the nine months ended September 30,
      2007
      from $27.3 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
      structure and to the addition of assets under management at Edelman, Salient,
      and Capital Advisors and the acquisition of Rikoon. Principal transactions
      revenue decreased from $13.1 million for the nine months ended September 30,
      2006 to $8.3 million for the same period in 2007, primarily as a result of
      lower
      proprietary trading activity at our prime brokerage services division. Interest
      and dividend income increased to $5.3 million for the nine months ended
      September 30, 2007 from $4.5 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 $4.4 million during the nine months ended September
      30, 2006 to $4.9 million during the same period in 2007 due to an increase
      in
      fees earned on the sale of insurance products.




25




During
      the nine months ended September 30, 2007, employee compensation and benefits
      increased to $80.1 million from $75.5 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 $4.9 million for
      the
      nine months ended September 30, 2007 from $5.4 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 $7.6
      million for the nine months ended September 30, 2007 from $5.8 million in the
      same period last year resulting primarily from increased clearing firm service
      fees. Occupancy costs totaled $8.9 million during the nine months ended
      September 30, 2007 compared to $8.0 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 and prime brokerage operations.
      Interest expense decreased to $30,000 for the nine months ended September 30,
      2007 from $751,000 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. Amortization of intangible assets was $234,000 for the nine months ended
      September 30, 2007. No such costs were recorded during the same period last
      year. Other general and administrative expenses increased to $20.4 million
      for
      the nine months ended September 30, 2007 from $16.4 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 37.2% for the nine months
      ended September 30, 2007 compared to 39.6% for the nine months ended September
      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.





26





RESULTS
      BY SEGMENT





**Asset/Wealth
      Management**





**Nine
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            76,583
            
            $
            57,637Income
                from continuing operations before income taxes
            
            $
            16,819
            
            $
            8,214





Revenues
      from asset/wealth management increased to $76.6 million from $57.6 million
      and
      income from continuing operations before income taxes increased to $16.8 million
      from $8.2 million. Investment advisory and related services increased to $51.2
      million from $27.2 million while commission revenue declined from $18.6 million
      to $14.5 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 and the acquisition of Rikoon has contributed to the
      increase in revenues from investment advisory fees. Sales credits from
      investment banking transactions declined to $4.4 million from $5.9 million
      as
      the result of a reduction in investment banking transactions. Total expenses
      increased to $55.0 million from $46.2 million, primarily due to increased
      employee compensation related to the higher revenues. Equity in income of
      limited partnerships increased to $6.1 million from $395,000, 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 $10.9 million from $3.6
      million principally due to Edelman’s increase in profits and the increase in
      values of the investment portfolios of the limited partnerships.





**Capital
      Markets**





*Investment*  *Banking*





**Nine
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            19,798
            
            $
            23,975Income
                from continuing operations before income taxes
            
            $
            4,532
            
            $
            8,565





Revenues
      from investment banking decreased to $19.8 million from $24.0 million and income
      from continuing operations before income taxes decreased to $4.5 million from
      $8.6 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 decreased to $15.3 million from
      $15.4 million. This decrease in expenses is primarily due to decreased employee
      compensation related to the lower revenues. This decrease in expenses is
      partially offset by increased outside sales commissions and an increase in
      legal expenses related to the settlement of two lawsuits.




27




*Institutional
      Brokerage*





**Nine
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            12,301
            
            $
            17,287Income
                from continuing operations before income taxes
            
            $
            1,117
            
            $
            2,441





Revenues
      from institutional brokerage decreased to $12.3 million from $17.3 million
      and
      income from continuing operations before income taxes decreased to $1.1 million
      from $2.4 million. Commission revenue decreased to $7.9 million from $10.9
      million and principal transaction revenue decreased to $1.8 million from $2.2
      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 $2.5 million from $4.0 million as the result
      of
      a decrease in the number of investment banking transactions. Total expenses
      decreased to $11.2 million from $14.8 million primarily due to decreased
      employee compensation related to the lower revenues and to a decrease in
      research costs.





*Prime
      Brokerage Services*





**Nine
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            26,372
            
            $
            25,203Income
                from continuing operations before income taxes
            
            $
            2,748
            
            $
            1,388








Revenues
      from prime brokerage increased to $26.4 million from $25.2 million and income
      from continuing operations before income taxes increased to $2.7 million from
      $1.4 million. Commission revenue increased to $17.6 million from $13.2 million
      reflecting higher revenue from hedge fund services and the addition of the
      preferred syndicate department. Principal transaction revenue decreased to
      $5.9
      million from $10.2 million, reflecting a decline in proprietary trading
      activities. Total expenses decreased to $23.6 million from $23.8 million
      primarily due to a decrease in execution charges resulting from a decrease
      in
      trading volume.




28




**Corporate
      Support**





**Nine
                Months Ended****September
                30,****2007**
            
            **2006****(in
                thousands)**Revenues
            
            $
            2,776
            
            $
            1,601Loss
                from continuing operations before income taxes
            
            $
            (16,156
            )
            $
            (9,447
            )





Revenues
      from corporate support increased to $2.8 million from $1.6 million and the
      loss
      from continuing operations before income taxes increased to $16.2 million from
      $9.4 million. Interest and dividend income increased to $3.0 million from $2.4
      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, improved
      to a
      loss of $789,000 from a loss of $931,000. Total expenses increased to $17.1
      million from $11.6 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. Equity in income (loss) of
      limited partnerships decreased to a loss of $1.8 million from a gain of
      $507,000, principally due to a decrease in the value of our investment in one
      limited partnership.





**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
      September 30, 2007, we had $39.0 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 25.8% of our total assets at the
      end
      of the third quarter.





Receivables
      turnover, calculated as total revenues divided by average receivables, was
      four
      for each of the nine months ended September 30, 2007 and 2006. The allowance
      for
      doubtful accounts as a percentage of receivables was 8.1% at September 30,
      2007
      compared to 0.8% at December 31, 2006. The increase in the allowance for
      doubtful accounts as a percentage of receivables was the result of a $3.0
      million provision for bad debts recorded on a note receivable from an investment
      banking client in the second quarter of 2007.





For
      the
      nine months ended September 30, 2007, net cash provided by operations totaled
      $8.7 million versus $1.5 million during the same period in 2006. Receivables
      increased by $15.0 million during the nine months ended September 30, 2007,
      principally due to increased revenue, the $6.0 million loan to Edelman Financial
      Advisors, LLC, and fees for investment banking transactions closed at the end
      of
      the quarter that were unpaid at September 30, 2007.





Marketable
      securities owned decreased by $5.8 million during the nine months ended
      September 30, 2007, while securities sold, not yet purchased decreased by $5.5
      million and payables to broker-dealers and clearing organizations increased
      by
      $7.0 million. The change in marketable securities owned, securities sold, not
      yet purchased, and payables to broker-dealers and clearing organizations is
      primarily due to the 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.




29




Not
      readily marketable securities owned, primarily investments in limited
      partnerships, were $64.7 million at September 30, 2007 compared to $45.4 million
      at December 31, 2006. This increase is primarily the result of a $20.0 million
      initial investment in a new limited partnership that we manage. Management
      believes its investment in limited partnerships is a critical part of its
      capital market investing activities that has historically generated favorable
      returns for the Company. These limited partnerships typically have a ten year
      life.





Capital
      expenditures for the nine months ended September 30, 2007 were $3.2 million,
      mainly for the purchase of furniture, computer equipment and software, as well
      as for leasehold improvements, necessary for our growth.





At
      September 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 nine months ended September 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.





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. While growth in assets under management has resulted
      in
      higher management fees, the instability in the overall stock market, lower
      trading volume, and reduced commission rates have had a negative impact on
      our
      commission revenue. In addition, the instability in the credit markets, which
      sharply widened the spreads over treasuries of certain less than investment
      grade bonds held primarily in our newly established high yield hedge fund,
      created losses in our investment portfolio during the third
      quarter.





At
      September 30, 2007, securities owned by the Company were recorded at a fair
      value of $98.4 million, including $33.7 million in marketable securities, $55.3
      million representing the Company’s investments in limited partnerships, and $9.4
      million representing other not readily marketable securities.





At
      September 30, 2007, Salient had securities available for sale with a fair value
      of $975,000. These securities have an original cost of $743,000 and are subject
      to equity price risk. At September 30, 2007, an unrealized increase in market
      value totaling $232,000 less tax of $91,000 has been included as a separate
      component of shareholders’ equity.




30




**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.




31


**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
      Financial Industry Regulatory Authority (formerly the NASD) (“FINRA”) initially
      conducted an inspection of our Concept Capital prime brokerage and private
      investment or hedge fund support operations based in our New York office in
      November 2004. Subsequent to such inspection, FINRA opened an investigation
      and
      requested the production of additional documents and materials during 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 FINRA, which stated that the staff of FINRA had 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
      FINRA, including FINRA 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; FINRA Conduct Rule 2210 relating to the content of
      hedge
      fund advertising materials; SEC Rule 17a-4 and Conduct Rules 2210 and 3110
      relating to the retention of certain email, instant messages, and advertising
      materials; Conduct Rules 1031 and 2110 relating to the activities of an
      unregistered employee; and 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 FINRA before
      any
      action is taken against it. SMH submitted its response to FINRA on October
      11,
      2006. We and our legal counsel have had ongoing discussions with the staff
      of
      FINRA with respect to the alleged violations and possible settlement of the
      matter and expect that the matter will be resolved during the fourth quarter.
      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 approved the sale of
      substantially all of Ronco’s assets in August 2007, and the case has been
      converted to a liquidation under Chapter 7. 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 a 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 a FINRA 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 has filed an answer to such proceeding
      and believes it has valid defenses to all the claims.




32




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.





33


**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’s Annual Report on Form 10-K for the year ended December 31, 2001
                (File No. 000-30066), and incorporated herein by
                reference).*3.2
            
            Amended
                and Restated Bylaws of the Company.†10.01
            
            Sanders
                Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as
                Appendix
                A to the Definitive Proxy Statement on Schedule 14A of the Company
                dated
                May 3, 2002 (File No. 000-30066), and incorporated herein by
                reference).†10.02
            
            Sanders
                Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit
                10.1
                to the Company’s Form 10-Q for the quarter ended September 30, 2001 (File
                No. 000-30066), and incorporated herein by reference).†10.03
            
            Form
                of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
                10.03 to the Company’s Annual Report on Form 10-K for the year ended
                December 31, 2005 (File No. 000-30066), and incorporated herein by
                reference).†10.04
            
            Form
                of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed
                as
                Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
                ended December 31, 2005 (File No. 000-30066), and incorporated herein
                by
                reference).10.05
            
            Sublease
                Agreement dated January 19, 1994, between Texas Commerce Bank National
                Association and Harris Webb & Garrison, Inc., as amended by that
                certain First Amendment to Sublease Agreement dated February 23,
                1994, the
                Second Amendment to Sublease Agreement dated April 26, 1994, and
                the Third
                Amendment to Sublease Agreement dated January 19, 1995 (Filed as
                Exhibit
                10.16 to the Proxy Statement/Prospectus of the Company dated December
                31,
                1998 (File No. 333-65417), and incorporated herein by
                reference).10.06
            
            On-Line
                Services Agreement dated as of June 1, 2005, between Innovest Systems,
                LLC
                and Pinnacle 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 by
                reference).10.07
            
            Office
                Lease Agreement and related amendments dated September 25, 1996,
                between
                Texas Tower Limited and Sanders Morris Mundy Inc. (Filed as Exhibit
                10.3
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
                31, 2000 (File No. 000-30066), and incorporated herein by
                reference).10.08
            
            Credit
                Agreement dated as of May 9, 2005, between Sanders Morris Harris
                Group
                Inc. and JPMorgan Chase Bank, National Association (Filed as Exhibit
                10.7
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2005 (File No. 000-30066), and incorporated herein by
                reference).10.09
            
            Reorganization
                and Purchase Agreement dated as of May 10, 2005, among Sanders Morris
                Harris Group Inc., The Edelman Financial Center, Inc., The Edelman
                Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1
                to the
                Company’s Current Report on Form 8-K dated May 10, 2005 (File No.
                000-30066), and incorporated herein by reference).10.10
            
            Agreement
                and Fourth Amendment to Credit Agreement as of May 7, 2007 between
                Sanders
                Morris Harris Group Inc. and JPMorgan Chase Bank, National Association
                (Filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for
                the quarter ended June 30, 2007 (File No. 000-30066), and incorporated
                herein by reference).*14.1
            
            Business
                Ethics Policy of the Company.




34





*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.




35




**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:  November
      9, 2007




36