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**UNITED
      STATES**


**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 MARCH 31, 2006, OR**





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





**Commission
      file No. 0-30066**





**SANDERS
      MORRIS HARRIS GROUP INC.**


(Exact
      name of registrant as specified in its charter)




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


**600
      Travis, Suite 3100**


**Houston,
      Texas 77002**


**(Address
      of principal executive office)**





Registrant’s
      telephone number, including area code: **(713) 993-4610**





Indicate
      by check mark if 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
      filed and larger accelerated filer” in Rule 12b-2 of the Exchange
      Act.




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 May
      6, 2006, the registrant had 19,108,742 outstanding shares of Common Stock,
      par
      value $0.01 per share.









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





**INDEX**





Page**PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements
            3Condensed
                Consolidated Balance Sheet as of March 31, 2006
                (unaudited) and December 31, 2005
            3Condensed
                Consolidated Statement of Income for the Three
                Months Ended March 31, 2006 and 2005 (unaudited)
            4Condensed
                Consolidated Statement of Shareholders' Equity for
                the Three Months Ended March 31, 2006 (unaudited)
            5Condensed
                Consolidated Statement of Cash Flows for the Three
                Months Ended March 31, 2006 and 2005 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements
                (unaudited)
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            19Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            25Item
                4.
            Controls
                and Procedures
            25**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            26Item
                6.
            Exhibits
            27






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**PART
                  I. FINANCIAL INFORMATION****Item
                  1.*****Financial
                  Statements*****SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED BALANCE
                  SHEET**(in
                  thousands, except share and per share
                  amounts)
  **March
                  31,**
              
              **December
                  31,****2006**
              
              **2005****ASSETS**Cash
                  and cash equivalents
              
              $
              22,112
              
              $
              14,612Receivables,
                  net of allowance of $505 and $512, respectivelyBroker-dealers
              
              
              935
              
              
              753Customers
              
              
              7,986
              
              
              8,786Related
                  parties
              
              
              5,300
              
              
              6,227Other
              
              
              1,595
              
              
              1,815Deposits
                  with clearing brokers
              
              
              1,075
              
              
              1,073Securities
                  owned
              
              
              179,289
              
              
              73,657Securities
                  available for sale
              
              
              1,836
              
              
              1,884Furniture
                  and equipment, net
              
              
              11,910
              
              
              9,673Other
                  assets and prepaid expenses
              
              
              2,098
              
              
              2,050Goodwill,
                  net
              
              
              84,465
              
              
              84,398Total
                  assets
              
              $
              318,601
              
              $
              204,928**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Liabilities:Accounts
                  payable and accrued liabilities
              
              $
              17,603
              
              $
              21,130Borrowings
              
              
              16,386
              
              
              10,706Deferred
                  tax liability, net
              
              
              3,858
              
              
              2,408Securities
                  sold, not yet purchased
              
              
              103,827
              
              
              8,168Payable
                  to clearing broker-dealers
              
              
              11,346
              
              
              17Other
                  liabilities
              
              
              33
              
              
              33Total
                  liabilities
              
              
              153,053
              
              
              42,462Commitments
                  and contingenciesMinority
                  interests
              
              
              8,138
              
              
              7,781Shareholders'
                  equity:Preferred
                  stock, $.10 par value; 10,000,000 sharesauthorized;
                  no shares issued and outstanding
              
              
              —
              
              
              —Common
                  stock, $.01 par value; 100,000,000 sharesauthorized;
                  19,778,144 and 19,634,260 shares issued, respectively
              
              
              198
              
              
              196Additional
                  paid-in capital
              
              
              135,663
              
              
              134,004Retained
                  earnings
              
              
              24,990
              
              
              23,936Accumulated
                  other comprehensive income
              
              
              40
              
              
              30Treasury
                  stock at cost, 739,402 shares
              
              
              (3,481
              )
              
              (3,481
              )Total
                  shareholders' equity
              
              
              157,410
              
              
              154,685Total
                  liabilities and shareholders' equity
              
              $
              318,601
              
              $
              204,928


The
      accompanying notes are an integral part of these consolidated financial
      statements.




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**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF
                  INCOME**(in
                  thousands, except share and per share amounts)(unaudited)
  **Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Revenues:Commissions
              
              $
              14,786
              
              $
              11,352Principal
                  transactions
              
              
              6,944
              
              
              1,850Investment
                  banking
              
              
              9,973
              
              
              6,092Investment
                  advisory and related services
              
              
              8,782
              
              
              5,012Interest
                  and dividends
              
              
              1,562
              
              
              1,183Other
                  income
              
              
              1,396
              
              
              851Total
                  revenues
              
              
              43,443
              
              
              26,340Expenses:Employee
                  compensation and benefits
              
              
              26,520
              
              
              16,491Floor
                  brokerage, exchange and clearance fees
              
              
              1,801
              
              
              1,068Communications
                  and data processing
              
              
              2,281
              
              
              1,766Occupancy
              
              
              2,637
              
              
              2,072Interest
              
              
              388
              
              
              1Other
                  general and administrative
              
              
              5,605
              
              
              2,753Total
                  expenses
              
              
              39,232
              
              
              24,151Income
                  before equity in income oflimited
                  partnerships, minority interests,and
                  income taxes
              
              
              4,211
              
              
              2,189Equity
                  in income of limited partnerships
              
              
              1,825
              
              
              1,696Income
                  before minority interests and income taxes
              
              
              6,036
              
              
              3,885Minority
                  interests in net income of consolidatedcompanies
              
              
              (1,398
              )
              
              (797
              )Income
                  before income taxes
              
              
              4,638
              
              
              3,088Provision
                  for income taxes
              
              
              (1,878
              )
              
              (1,255
              )Net
                  income
              
              $
              2,760
              
              $
              1,833Earnings
                  per share:Basic
              
              $
              0.15
              
              $
              0.10Diluted
              
              $
              0.14
              
              $
              0.10Weighted
                  average common shares outstanding:Basic
              
              
              18,988,596
              
              
              18,304,652Diluted
              
              
              19,481,512
              
              
              18,962,386


The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




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**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF SHAREHOLDERS'
                  EQUITY****For
                  the three months ended March 31, 2006**(in
                  thousands, except shares)(unaudited)
  Amounts
              
              
              
              Shares**Common
                  stock**Balance,
                  beginning of period
              
              $
              196
              
              
              
              
              
              19,634,260Stock
                  issued pursuant to employee benefit plan
              
              
              2
              
              
              
              
              
              143,884Balance,
                  end of period
              
              
              198
              
              
              
              
              
              19,778,144**Additional
                  paid-in capital**Balance,
                  beginning of period
              
              
              134,004Stock
                  issued pursuant to employee benefit plan,
              
              
              1,159including
                  tax benefitAmortization
                  of unearned compensation
              
              
              485Collection
                  of receivable for shares issued
              
              
              15Balance,
                  end of period
              
              
              135,663**Retained
                  earnings**Balance,
                  beginning of period
              
              
              23,936Dividends
                  ($0.045 per share)
              
              
              (1,706
              )Net
                  income
              
              
              2,760
              
              
              2,760Balance,
                  end of period
              
              
              24,990
              
              
              2,760**Accumulated
                  other comprehensive loss**Balance,
                  beginning of period
              
              
              30Net
                  change in unrealized appreciationon
                  securities available for sale
              
              
              17
              
              
              17Income
                  tax expense on change
              
              
              (7
              )
              
              (7
              )Balance,
                  end of period
              
              
              40
              
              
              10**Comprehensive
                  income**
              
              
              
              
              
              2,770**Treasury
                  stock**Balance,
                  beginning of period
              
              
              (3,481
              )
              
              
              
              
              (739,402
              )Balance,
                  end of period
              
              
              (3,481
              )
              
              
              
              
              (739,402
              )**Total
                  shareholders' equity and common shares
                  outstanding**
              
              **$**
              **157,410**
              
              
              
              
              
              **19,038,742**


The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
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**SANDERS
                  MORRIS HARRIS GROUP INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF CASH
                  FLOWS****For
                  the three months ended March 31, 2006 and 2005**(in
                  thousands)(unaudited)
  **2006**
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              2,760
              
              $
              1,833Adjustments
                  to reconcile net income to net cash provided by (used in)operating
                  activities:Realized
                  gain on securities available for sale
              
              
              (1
              )
              
              —Depreciation
              
              
              624
              
              
              448Provision
                  for bad debts
              
              
              66
              
              
              52Compensation
                  expense related to amortization ofunearned
                  compensation
              
              
              485
              
              
              479Deferred
                  income taxes
              
              
              1,444
              
              
              (855
              )Equity
                  in income of limited partnerships
              
              
              (1,825
              )
              
              (1,696
              )Minority
                  interests in income of consolidated companies
              
              
              1,398
              
              
              797Change
                  in receivables
              
              
              1,699
              
              
              3,872Change
                  in deposits with clearing brokers
              
              
              (2
              )
              
              (1
              )Change
                  in securities owned
              
              
              (103,807
              )
              
              (1,380
              )Change
                  in other assets
              
              
              (48
              )
              
              (266
              )Change
                  in securities sold, not yet purchased
              
              
              95,659
              
              
              3,867Change
                  in payable to clearing broker-dealers
              
              
              11,329
              
              
              (3
              )Change
                  in other liabilities
              
              
              —
              
              
              (23
              )Change
                  in accounts payable and accrued liabilities
              
              
              (4,450
              )
              
              (8,187
              )Net
                  cash provided by (used in) operating activities
              
              
              5,331
              
              
              (1,063
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (2,861
              )
              
              (794
              )Purchase
                  of securities available for sale
              
              
              —
              
              
              (298
              )Proceeds
                  from sales and maturities of securities available for sale
              
              
              65
              
              
              1Net
                  cash used in investing activities
              
              
              (2,796
              )
              
              (1,091
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from shares issued
              
              
              784
              
              
              918Tax
                  benefit of stock options exercised
              
              
              377
              
              
              290Collection
                  of receivable for shares issued
              
              
              15
              
              
              —Proceeds
                  from borrowings
              
              
              7,000
              
              
              —Repayment
                  of borrowings
              
              
              (1,320
              )
              
              —Distributions
                  to minority interests
              
              
              (1,041
              )
              
              (117
              )Payments
                  of cash dividends
              
              
              (850
              )
              
              (667
              )Net
                  cash provided by financing activities
              
              
              4,965
              
              
              424Net
                  increase (decrease) in cash and cash equivalents
              
              
              7,500
              
              
              (1,730
              )CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              14,612
              
              
              21,678CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              22,112
              
              $
              19,948Supplemental
                  cash flow information:Cash
                  (refund) paid for income taxes, net
              
              $
              (636
              )
              $
              292Cash
                  paid for interest
              
              $
              129
              
              $
              1


The
        accompanying notes are an integral part of the condensed consolidated financial
        statements.




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





*Nature
      of Operations*




Through
      its operating subsidiaries Sanders Morris Harris Inc. (“Sanders Morris Harris”
or “SMH”), Salient Capital Management (“Salient/PMT”), SMH Capital Advisors
      (“SMCA”), Charlotte Capital, The Edelman Financial Center (“Edelman”), and
      Select Sports Group (“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, and sports
      representation and management), investment and merchant banking, and
      institutional services (including institutional sales and trading, prime
      brokerage, and research). The Company serves a diverse group of institutional,
      corporate and individual clients.





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





*Consolidation*




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





In
      management's opinion, the unaudited condensed consolidated financial statements
      include all adjustments necessary for a fair presentation of our consolidated
      financial position at March 31, 2006, our results of operations for the three
      months ended March 31, 2006 and 2005, and our cash flows for the three months
      ended March 31, 2006 and 2005. 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, 2005.





*Effects
      of Recently Issued Accounting Standards*




In
      December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS
      No. 123R, *Share-Based Payment (Revised 2004).* SFAS No. 123R established
      standards for the accounting for transactions in which an entity (1) exchanges
      its equity instruments for goods or services, or (2) incurs liabilities in
      exchange for goods or services that are based on the fair value of the entity’s
      equity instruments or that may be settled by the issuance of the equity
      instruments. SFAS No. 123R eliminated the ability to account for stock-based
      compensation using APB 25 and requires that such transactions be recognized
      as
      compensation cost in the income statement based on their fair values on the
      date
      of the grant. SFAS No. 123R was effective for the Company on January 1, 2006.
      The Company transitioned to fair value based accounting for stock-based
      compensation using a modified version of prospective application (“modified
      prospective application”). Under modified prospective application the Company
      applies SFAS No. 123R to new awards and to awards modified, repurchased, or
      cancelled after January 1, 2006. Additionally, compensation cost for the portion
      of awards for which the requisite service has not been rendered (generally
      referring to non-vested awards) that were outstanding as of January 1, 2006
      must
      be recognized as the remaining requisite service is rendered during the period
      of and/or the periods after the adoption of SFAS No. 123R. The attribution
      of
      compensation cost for those earlier awards is based on the same method and
      on
      the same grant-date fair values previously determined for the pro forma
      disclosures required for companies that did not adopt the fair value accounting
      method for stock-based employee compensation. As a result of the adoption of
      SFAS No. 123R, the Company recognized additional pre-tax compensation cost
      of
      $18,000 in the first quarter of 2006 for stock-based compensation awards
      outstanding as of December 31, 2005, for which the requisite service was not
      fully rendered prior to January 1, 2006. Approximately $116,000 remains to
      be
      recognized over 1.42 weighted average years. Future levels of compensation
      cost
      recognized related to stock-based compensation awards (including the
      aforementioned expected costs during the period of adoption) may be impacted
      by
      new awards and/or modifications, repurchase and cancellations of existing awards
      before and after the adoption of this standard. (See Note 10.)




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





*Reclassifications*





Certain
      reclassifications have been made to the 2005 condensed consolidated financial
      statements to conform them with the 2006 presentation. The reclassifications
      had
      no effect on retained earnings, results of operations or cash flows as
      previously reported.





**2.**
            **ACQUISITIONS**





On
      May
      10, 2005, the Company acquired a 51% interest in The Edelman Financial Center,
      LLC, one of the leading financial planning firms in the country. The Company
      will acquire the remaining 49% of Edelman over four years. Edelman, based in
      Fairfax, Virginia, manages over $2.7 billion in assets. At the initial closing,
      SMHG bought 51% of the outstanding membership units of Edelman (“the First
      Tranche Units”). The Company paid $12.5 million, in a combination of cash and
      shares of the Company’s common stock for the First Tranche Units. The
      consideration for the First Tranche Units is subject to later adjustment (the
      “Earn-Out Consideration”) based on a multiple of the pretax income of Edelman
      for the period of October 1, 2005 through September 30, 2006. The multiple
      used
      to calculate the Earn-Out Consideration will also be based upon the level of
      pretax income for the period. The Earn-Out Consideration will be paid 50% in
      cash and 50% in the Company’s common stock.





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





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




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




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




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




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




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





Securities
      owned and securities sold, not yet purchased as of March 31, 2006 and December
      31, 2005 were as follows:


**March
                  31, 2006**
              
              **December
                  31, 2005****Sold,
                  Not Yet**
              
              
              
              **Sold,
                  Not Yet****Owned**
              
              **Purchased**
              
              **Owned**
              
              **Purchased****(in
                  thousands)**
              
              **(in
                  thousands)**Marketable:U.S.
                  government and agency
              
              $
              64,930
              
              $
              64,312
              
              $
              4,619
              
              $
              2,019Corporate
                  stocks
              
              
              25,151
              
              
              12,289
              
              
              18,096
              
              
              6,149Corporate
                  bonds
              
              
              43,874
              
              
              27,226
              
              
              7,933
              
              
              —133,955
              
              
              103,827
              
              
              30,648
              
              
              8,168Not
                  readily marketable:Partnerships
              
              
              35,574
              
              
              —
              
              
              34,108
              
              
              —Corporate
                  stocks and warrants
              
              
              9,760
              
              
              —
              
              
              8,901
              
              
              —$
              179,289
              
              $
              103,827
              
              $
              73,657
              
              $
              8,168


The
      increase in securities owned and securities sold, not yet purchased is due
      primarily to the trading portfolio of the Fixed Income National division during
      January 2006.





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




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





Securities
      available for sale at March 31, 2006 were as follows:


**Amortized**
              
              **Gross
                  Unrealized**
              
              **Estimated****Cost**
              
              **Gains**
              
              **Losses**
              
              **Fair
                  Value****(in
                  thousands)****2006:**U.S.
                  Government and agency obligations
              
              $
              968
              
              $
              4
              
              $
              (12
              )
              $
              960Corporate
                  bonds
              
              
              251
              
              
              —
              
              
              (1
              )
              
              250Marketable
                  equity securities
              
              
              550
              
              
              116
              
              
              (40
              )
              
              626Total
              
              $
              1,769
              
              $
              120
              
              $
              (53
              )
              $
              1,836





The
      contractual maturities of debt securities available for sale at March 31, 2006,
      were as follows (in thousands):




Due
                  before 5 years
              
              $
              986Due
                  after 25 years through 30 years
              
              $
              224


Gross
      realized gains on sales of securities available for sale were $1,000 for the
      three months ended March 31, 2006 and $0 for the three months ended March 31,
      2005. No realized losses on securities available for sale were recorded for
      the
      three months ended March 31, 2006 and 2005.





The
      Company has pledged securities valued at $275,000 to the bank commissioner
      of
      the state of Oklahoma to secure its performance of fiduciary duties for trust
      activities in that state.





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





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


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****(in
                  thousands)**Tax
                  computed using the statutory rate
              
              $
              1,623
              
              $
              1,081State
                  income taxes and other
              
              
              255
              
              
              174Total
              
              $
              1,878
              
              $
              1,255




**6.**
            **BORROWINGS**





During
      May 2005, the Company entered into a $15.0 million revolving credit facility
      with a bank. The line of credit expires in May 2007, unless extended. Borrowings
      under the line of credit bear interest based on LIBOR. The interest rate on
      the
      Company’s borrowings ranged from 5.85% to 6.32% during 2006. 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-EDITDA and liquidity to funded debt ratios, as well as minimum assets
      under management. At March 31, 2006, the Company was in compliance with all
      covenants. The outstanding balance on the line of credit was $15.0 million
      at
      March 31, 2006.




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During
      December 2005, Salient/PMT 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 based on LIBOR. The interest rate of Salient/PMT’s
      borrowings ranged from 6.03% to 6.47% during 2006. The credit facility is
      unsecured and not subject to financial covenants; however, payment is guaranteed
      by SMHG and the principals of Salient/PMT. The outstanding balance on the line
      of credit was $730,000 at March 31, 2006.





During
      December 2005, Edelman entered into a $1.5 million construction loan agreement
      with a bank. Proceeds from the loan are to be used to build out Edelman’s new
      office facilities. The loan is not subject to financial covenants and is secured
      by Edelman’s property and other assets and guaranteed by Mr. Edelman and SMHG.
      Beginning in January 2006 and ending in December 2006, interest will be paid
      in
      monthly installments at an interest rate, which is based on prime. The interest
      rate on Edelman’s borrowings ranged from 6.75% to 7.0% during 2006. Principal
      and interest payments will be made in equal monthly installments beginning
      in
      January 2007 and ending in December 2015. At March 31, 2006, the outstanding
      balance on the loan was $656,000.





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





In
      April
      2004, the Company acquired a 69% interest in Charlotte Capital from a previous
      investor. Employees of Charlotte Capital retained a 31% ownership interest
      in
      the firm. Employees of Charlotte Capital can earn up to an additional 9%
      ownership interest by achieving specified revenue run rates during the 36-month
      period beginning January 1, 2006 and ending December 31, 2009.





The
      Company has pledged a certificate of deposit in the amount of $50,000 to secure
      a loan made by a bank to a relative of one of the Company’s customers (the
“Debtor”). The pledge expired in April 2006; however, the Company is negotiating
      with the bank to extend the pledge. Proceeds from the bank loan were used to
      finance a business venture of the Debtor. Should the Debtor fail to repay the
      loan, the Company’s certificate of deposit will be used to satisfy any unpaid
      portion of the debt up to the face amount of the certificate of deposit. The
      Company expects the Debtor to pay the debt upon maturity. Therefore, the Company
      has recorded no reserve against this guarantee as of March 31,
      2006.





The
      Company has issued letters of credit in the amounts of $1.2 million, $199,000,
      $144,000, and $92,000 to the owners of four 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 is a party to various legal proceedings that are of an ordinary or
      routine nature incidental to our operations. The Company believes it has
      adequately reserved for such litigation matters and that they will not have
      a
      material adverse effect on consolidated financial position, results of
      operations or cash flows.





The
      Company 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 accounting 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.





The
      NASD
      conducted an inspection of our prime broker and private investment or hedge
      fund
      support operations based in our New York office in the fall of 2004. Subsequent
      to such inspection the NASD opened an investigation and has requested the
      production of additional documents and materials on six occasions in 2005 and
      2006 with respect to our prime broker and related hedge fund operations. The
      investigation is ongoing. We do not know when the NASD staff will complete
      its
      investigation or what, if any, actions the NASD may propose with respect to
      this
      matter.




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In
      the
      normal course of business, the Company enters into underwriting commitments.
      There were no firm underwriting commitments open at March 31, 2006.





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





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





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


**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands, except share**
                **and
                  per share amounts)**Computation
                  of basic earnings per common shareNet
                  income
              
              $
              2,760
              
              $
              1,833Weighted
                  average common shares outstanding
              
              
              18,988,596
              
              
              18,304,652Basic
                  income per common share
              
              $
              0.15
              
              $
              0.10
  **Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands, except share**
                **and
                  per share amounts)**Computation
                  of diluted earnings per common shareNet
                  income
              
              $
              2,760
              
              $
              1,833Weighted
                  average common shares outstanding
              
              
              18,988,596
              
              
              18,304,652Common
                  shares issuable under stock option plan
              
              
              787,071
              
              
              981,896Less
                  shares assumed repurchased with proceeds
              
              
              (294,155
              )
              
              (324,162
              )Weighted
                  average common shares outstanding
              
              
              19,481,512
              
              
              18,962,386Diluted
                  income per common share
              
              $
              0.14
              
              $
              0.10





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





SMHG
      operates through four business segments: Asset and Wealth Management, which
      can
      be further divided into Retail Brokerage and Asset Management; Institutional
      Services, which can be further divided into Institutional Brokerage and Prime
      Brokerage; Investment Banking; and Corporate and Other. The business segments
      are based upon factors such as the services provided and distribution channels
      served. Certain services are provided to customers through more than one of
      our
      business segments.





***Asset
      and Wealth Management***





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




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





***Institutional
      Services***





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





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





***Investment
      Banking***





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





***Corporate
      and Other***





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




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The
      following summarizes certain financial information of each reportable business
      segment for the three months in the period ended March 31, 2006 and 2005,
      respectively. SMHG does not analyze asset information in all business
      segments.


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****(in
                  thousands)****Revenues:**Asset
                  and Wealth ManagementRetail
                  brokerage
              
              $
              4,485
              
              $
              4,651Asset
                  management
              
              
              14,597
              
              
              7,042Asset
                  and Wealth Management Total
              
              
              19,082
              
              
              11,693Institutional
                  ServicesInstitutional
                  brokerage
              
              
              7,145
              
              
              5,832Prime
                  brokerage
              
              
              8,147
              
              
              4,111Institutional
                  Services Total
              
              
              15,292
              
              
              9,943Investment
                  banking
              
              
              7,052
              
              
              3,673Corporate
                  and other
              
              
              2,017
              
              
              1,031Total
              
              $
              43,443
              
              $
              26,340**Income
                  (loss) before equity in income of limited
                  partnerships,****minority
                  interest and income taxes:**Asset
                  and Wealth ManagementRetail
                  brokerage
              
              $
              (163
              )
              $
              617Asset
                  management
              
              
              3,650
              
              
              1,414Asset
                  and Wealth Management Total
              
              
              3,487
              
              
              2,031Institutional
                  ServicesInstitutional
                  brokerage
              
              
              (155
              )
              
              425Prime
                  brokerage
              
              
              469
              
              
              389Institutional
                  Services Total
              
              
              314
              
              
              814Investment
                  banking
              
              
              2,608
              
              
              1,033Corporate
                  and other
              
              
              (2,198
              )
              
              (1,689
              )Total
              
              $
              4,211
              
              $
              2,189**Equity
                  in income of limited partnerships:**Asset
                  and Wealth ManagementRetail
                  brokerage
              
              $
              —
              
              $
              —Asset
                  management
              
              
              1,475
              
              
              1,666Asset
                  and Wealth Management Total
              
              
              1,475
              
              
              1,666Institutional
                  ServicesInstitutional
                  brokerage
              
              
              —
              
              
              —Prime
                  brokerage
              
              
              —
              
              
              —Institutional
                  Services Total
              
              
              —
              
              
              —Investment
                  banking
              
              
              —
              
              
              —Corporate
                  and other
              
              
              350
              
              
              30Total
              
              $
              1,825
              
              $
              1,696






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**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****(in
                thousands)****Minority
                  interests in net (income) loss of consolidated
                  companies:**Asset
                  and Wealth ManagementRetail
                  brokerage
              
              $
              —
              
              $
              —Asset
                  management
              
              
              (1,398
              )
              
              (799
              )Asset
                  and Wealth Management Total
              
              
              (1,398
              )
              
              (799
              )Institutional
                  ServicesInstitutional
                  brokerage
              
              
              —
              
              
              —Prime
                  brokerage
              
              
              —
              
              
              —Institutional
                  Services Total
              
              
              —
              
              
              —Investment
                  banking
              
              
              —
              
              
              —Corporate
                  and other
              
              
              —
              
              
              2Total
              
              $
              (1,398
              )
              $
              (797
              )**Income
                  (loss) before income taxes:**Asset
                  and Wealth ManagementRetail
                  brokerage
              
              $
              (163
              )
              $
              617Asset
                  management
              
              
              3,727
              
              
              2,281Asset
                  and Wealth Management Total
              
              
              3,564
              
              
              2,898Institututional
                  ServicesInstitutional
                  brokerage
              
              
              (155
              )
              
              425Prime
                  brokerage
              
              
              469
              
              
              389Institutional
                  Services Total
              
              
              314
              
              
              814Investment
                  banking
              
              
              2,608
              
              
              1,033Corporate
                  and other
              
              
              (1,848
              )
              
              (1,657
              )Total
              
              $
              4,638
              
              $
              3,088




**10.**
            **ACCOUNTING
                FOR STOCK BASED COMPENSATION****PLANS**





Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123R, *Share-Based
      Payment (Revised 2004),* which
      requires the Company to recognize the cost of all stock-based compensation
      in
      its consolidated financial statements. The Company’s equity-classified awards
      are measured at grant-date fair value and are not subsequently remeasured.
      The
      valuation of equity instruments underlying stock-based compensation, and the
      period during which the expense is recognized is based on assumptions related
      to
      stock volatility, interest rates, vesting terms, and dividend yields. Changes
      in
      these assumptions including forfeiture rates, could have significant impacts
      on
      the expense recognized. The Company recognized additional compensation expense
      of $18,000 during the first quarter of 2006 as a result of the adoption of
      SFAS
      No. 123R.




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The
      following table illustrates the pro forma effect on net income and earnings
      per
      share as if the Company had applied the fair value recognition provisions of
      SFAS No. 123 for the three months ended in March 31, 2005.


Thousands
                  of dollars except per share dataNet
                  income as reported
              
              $
              1,833Deduct:
                  Total stock based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of related tax effects
              
              
              (58
              )Adjusted
                  income
              
              $
              1,775Earnings
                  per shareBasic-as
                  reported
              
              $
              0.10Basic-pro
                  forma
              
              $
              0.10Diluted-as
                  reported
              
              $
              0.10Diluted-pro
                  forma
              
              $
              0.09




Under
      its
      1998 Incentive Plan, as amended, (the Incentive Plan), the Company has reserved
      25% of the outstanding common stock of the Company, or 4,000,000 shares of
      common stock, whichever is greater, for the purpose of issuing incentive awards
      under the Incentive Plan. The Company had 1,358,676 shares of common stock
      available for grant under the Incentive Plan at March 31, 2006.





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





**Stock
      Options**





The
      Incentive Plan provides for the issuance to eligible employees of, among other
      things, incentive and non-qualified stock options, that may expire up to 10
      years from the date of grant. The outstanding options vest over one to five
      year
      service periods and have an exercise price equal to the closing price of the
      Company’s stock on the date of the grant. Unvested options on the date of
      termination of employment are forfeited within 90 days of termination.
      Typically, new shares are issued upon the exercise of stock
      options.





During
      the three months ended March 31, 2006, 105,700 options were exercised for which
      the Company received proceeds of $564,000. During the three months ended March
      31, 2005, 67,132 options were exercised for which the Company received proceeds
      of $333,000.





As
      a
      result of the adoption of SFAS No. 123R, the Company recognized additional
      pre-tax compensation cost of $18,000 in the first quarter of 2006 for
      stock-based compensation awards outstanding as of December 31, 2005, for which
      the requisite service was not fully rendered prior to January 1, 2006.
      Approximately $116,000 remains to be recognized over 1.42 weighted average
      years. During the three months ended March 31, 2005, 12,500 options were granted
      with a weighted average fair value of $84,000.





The
      intrinsic value of stock options exercised totaled $1.1 million during the
      three
      months ended March 31, 2006 and $829,000 for the three months ended March 31,
      2005.




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The
      following table sets forth pertinent information regarding stock option
      transactions for the three months ended March 31, 2006.


WeightedNumber
              
              Averageof
                  Shares
              
              Exercise
                  PriceOustanding
                  at January 1, 2006
              
              
              915,271
              
              $
              6.42Granted
              
              
              —
              
              
              —Exercised
              
              
              (105,700
              )
              
              5.34Outstanding
                  at March 31, 2006
              
              
              809,571
              
              $
              6.56Options
                  exercisable at December 31, 2005
              
              
              850,271
              
              $
              5.98Options
                  exercisable at March 31, 2006
              
              
              760,821
              
              $
              6.15Options
                  available for grant at December 31, 2005
              
              
              1,360,889Options
                  available for grant at March 31, 2006
              
              
              1,358,676




The
      following table summarizes information related to stock options outstanding
      and
      exercisable at March 31, 2006:


Options
                  Outstanding
              
              Options
                  ExercisableNumber
              
              Wgtd.
                  Avg.
              
              
              
              Number
              
              Wgtd.
                  Avg.Range
                  of
              
              Outstanding
              
              Remaining
              
              Wgtd.
                  Avg.
              
              Exercisable
                  at
              
              Remaining
              
              Wgtd.
                  Avg.Exercise
                  Prices
              
              at
                  3/31/2006
              
              Contr.
                  Life
              
              Exercise
                  Price
              
              at
                  3/31/2006
              
              Contr.
                  Life
              
              Exercise
                  Price$4.44-$6.04
              
              
              629,571
              
              
              3.78
              
              $
              4.82
              
              
              629,571
              
              
              3.78
              
              $
              4.82$7.91-$10.00
              
              
              25,000
              
              
              6.88
              
              
              8.16
              
              
              25,000
              
              
              6.88
              
              
              8.16$12.02-$17.20
              
              
              155,000
              
              
              8.28
              
              
              13.37
              
              
              106,250
              
              
              8.27
              
              
              13.54$4.44-$17.20
              
              
              809,571
              
              
              4.74
              
              
              6.56
              
              
              760,821
              
              
              4.51
              
              
              6.15





The
      aggregate intrinsic value of options outstanding at March 31, 2006, was $7.7
      million. The aggregate intrinsic value of options exercisable at March 31,
      2006,
      was $7.5 million.





The
      fair
      value of options at date of grant was estimated using the Black-Scholes option
      pricing model with the following weighted-average assumptions:




March
                  31,2006
              
              2005Estimated
                  life in years
              
              
              10.00
              
              
              7.38
                  - 10.00Interest
                  rate
              
              
              4.10%
                  - 4.46
              %
              
              1.74%
                  - 4.46
              %Volatility
              
              
              20.05%
                  - 38.71
              %
              
              20.05%
                  - 61.58
              %Dividend
                  yield
              
              
              1.10%
                  - 1.31
              %
              
              1.20%
                  - 1.75
              %





**Restricted
      Common Stock**





The
      Incentive Plan permits the Company to grant restricted common stock to its
      employees. Additionally, eligible employees and consultants are allowed to
      purchase in lieu of salary, commission, or bonus, shares of the Company’s
      restricted common stock at a price equal to 66.6% of the 20-day average of
      the
      closing sales prices for a share of the Company’s common stock, ending on the
      day prior to the date the shares were issued. All shares are valued at the
      closing price on the date the shares are issued. The value of restricted shares
      granted, less consideration paid, if any, is amortized to compensation expense
      over the one to five-year vesting periods assuming continued employment through
      such date.




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Employees
      deferred compensation of $221,000 during the three months ended March 31, 2006,
      and $46,000 during the three months ended March 31, 2005, that was used to
      purchase restricted common stock. In addition, the Company recognized
      compensation expense of $485,000 during the three months ended March 31, 2006,
      and $479,000 during the three months ended March 31, 2005, related to its
      restricted common stock plan.





The
      following table summarizes certain information related to restricted common
      stock grants at March 31, 2006:


WeightedNumber
                  of
              
              AverageShares
              
              Grant
                  Date Fair ValueNonvested
                  at January 1, 2006
              
              
              318,124
              
              $
              7.05Nonvested
                  at March 31, 2006
              
              
              302,632
              
              $
              7.24For
                  the three months ended March 31, 2006:Granted
              
              
              38,184
              
              $
              15.93Vested
              
              
              53,676
              
              $
              7.05Forfeited
              
              
              —
              
              $
              —




During
      the three months ended March 31, 2006, the Company granted 38,184 restricted
      common shares with a weighted average grant date fair value of $15.93. During
      the three months ended March 31, 2005, the Company granted 58,426 restricted
      common shares with a weighted average grant date fair value of $17.02. During
      the three months ended March 31, 2006, 53,676 restricted common shares vested
      with a weighted average grant date fair value of $7.05. During the three months
      ended March 31, 2005, 132,821 restricted common shares vested with a weighted
      average grant date fair value of $6.15. At March 31, 2006, total unrecognized
      compensation cost, net of estimated forfeitures related to nonvested restricted
      stock totaled $2.9 million and is expected to be recognized over the next 51
      months.





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





The
      Company had receivables from related parties totaling $5.3 million at March
      31,
      2006, primarily consisting of $4.8 million of notes receivable from employees
      and consultants.




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





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





**Overview**





Sanders
      Morris Harris Group (the “Company” or SMHG”) is a holding company that, through
      its subsidiaries and affiliates, provides asset and wealth management,
      investment banking, and institutional services to a large and diversified group
      of clients and customers, including individuals, corporations, and financial
      institutions. A summary of these services follows:





*Asset
      and Wealth Management* 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.




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





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
      administration. 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 for us, the instability in the overall stock market,
      lower trading volume, and reduced commission rates have had a negative impact
      on
      our commission revenue.




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.




The
      discussion of the Company’s results of operations below may contain
      forward-looking statements. These statements, which reflect management’s beliefs
      and expectations, are subject to risks and uncertainties that may cause actual
      results to differ materially. For a discussion of the risks and uncertainties
      that may affect the Company’s future results, please see “Competition” and
“Government Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A,
      and “Factors Affecting Forward-Looking Statements” in Part II, Item 7, and other
      items throughout the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005.




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Beginning
      in the first quarter of 2006, the Company’s retail brokerage business is
      included in Asset and Wealth Management and the Company’s prime brokerage
      business is included in institutional services.




**Components
      of Revenue and Expenses**





*Revenue* .
      Our
      revenues are comprised primarily of (1) commission revenue from retail, prime
      and institutional brokerage transactions, (2) fees from asset-based advisory
      services, asset management, financial planning, and fiduciary services (3)
      principal transactions, and (4) investment banking revenue from corporate
      finance fees, merger and acquisition fees, and merchant banking fees. We also
      earn interest on cash held and dividends received from the equity and fixed
      income securities held in our corporate capital accounts 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 and
      clearing costs, and (3) other expenses. Compensation and benefits have both
      a
      variable component based on revenue production, and a fixed component. The
      variable component includes institutional and retail sales commissions, bonuses,
      overrides, and other incentives. Retail and institutional commissions are based
      on competitive commission schedules. 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 first quarter of 2006, compensation and
      benefits represented 68% of total expenses and 61% of total revenue, compared
      to
      68% of total expenses and 63% of total revenue during the first quarter of
      2005.




Floor
      brokerage, exchange, and clearance expenses 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 member of BNY Securities Group and a subsidiary of The Bank
      of
      New York, Goldman Sachs Execution & Clearing, L.P., ADP Clearing &
Outsourcing, Inc., and First Clearing Corporation.




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





**Results
      of Operations**





*Three
      Months Ended March 31, 2006 Compared to Three Months Ended March 31,
      2005*





The
      May
      10, 2005, acquisition of a 51% interest in Edelman is reflected in our operating
      results from the date of the transaction. The Company expanded its institutional
      fixed income brokerage operations during the first quarter of 2006 when a
      30-person team formerly employed by Advest Group joined the Company. The new
      division is known as Fixed Income National.





Total
      revenues were $43.4 million in the first quarter of 2006 compared to $26.3
      million for the same quarter in 2005, an increase of $17.1 million, or 65%
      reflecting the acquisition of Edelman in May 2005, the startup of the Fixed
      Income National division, and growth in the investment and proprietary trading
      operations. Total expenses for the first quarter of 2006 increased $15.0
      million, or 62% to $39.2 million from $24.2 million in the same quarter of
      the
      previous year. Equity in income of limited partnerships increased to $1.8 during
      the first quarter of 2006 from $1.7 million during the first quarter of 2005.
      Net income for the three-month period ended March 31, 2006, increased $1.0
      million or 56% to $2.8 million from $1.8 million in the same period in 2005.
      Basic income per share was $0.15 for the three months ended March 31, 2006
      compared to $0.10 for the same period in 2005. Diluted income per share was
      $0.14 for the three months ended March 31, 2006, compared to $0.10 for the
      same
      period in 2005.




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Commissions
      revenue increased to $14.8 million in the first quarter of 2006 from $11.4
      million for the same period in 2005, primarily as a result of the Edelman
      acquisition. Principal transactions revenue totaled $6.9 million for the first
      quarter of 2006 versus $1.9 million in the first quarter of 2005 reflecting
      growth in our proprietary trading operations and the addition of the Fixed
      Income National division. Investment banking revenue increased to $10.0 million
      during the first quarter of 2006 from $6.1 million in the same period of 2005,
      principally due to an increase in private placement and advisory fees. Revenues
      from investment advisory and related services fees increased to $8.8 million
      in
      the first quarter of 2006 from $5.0 million in the same quarter of 2005
      primarily due to the acquisition of Edelman during the second quarter of 2005.
      Interest and dividend income increased to $1.6 million in the first quarter
      of
      2006 from $1.2 million in the same period last year, due to higher margin
      interest reflecting an increase in margin balances. Other income increased
      from
      $851,000 during the first quarter of 2005 to $1.4 million during the same period
      in 2006 due to an increase in fees earned on the Company’s cash balance and
      customer credit balances at its clearing firms resulting from higher deposit
      balances.




During
      the three months ended March 31, 2006, employee compensation and benefits
      increased to $26.5 million from $16.5 million in the same period last year
      due
      to more employees and higher revenues during 2006. Floor brokerage, exchange
      and
      clearance fees increased to $1.8 million in the first quarter of 2006 from
      $1.1
      million in the same quarter of 2005 reflecting higher clearing and execution
      costs resulting from the increased trading volume. Communication and data
      processing costs increased to $2.3 million in 2006 from $1.8 million in the
      same
      period last year resulting primarily from increased personnel and additional
      offices. Occupancy costs totaled $2.6 million during the first quarter of 2006,
      compared to $2.1 million in the prior year quarter due to expansion of our
      New
      York City offices, and the addition of Edelman. Other general and administrative
      expenses increased to $5.6 million during the first three months of 2006 from
      $2.8 million in the first quarter of last year mainly due to our
      growth.




Our
      effective tax rate was 40.5% for the three months ended March 31, 2006 compared
      to 40.6% for the three months ended March 31, 2005.





Results
      by Segment





**Asset
      and Wealth Management**





*Retail
      Brokerage*


**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands)**Revenues
              
              $
              4,485
              
              $
              4,651(Loss)
                  income before income taxes
              
              $
              (163
              )
              $
              617





Revenues
      from retail brokerage declined to $4.5 million from $4.7 million, and income
      before income taxes declined to a loss of $163,000 from $617,000. Sales credits
      from investment banking transactions declined to $683,000 from $1.0 million
      due
      to a decline in fees earned from the Company’s participation in syndicate
      transactions. The decline in revenues from investment banking transactions
      was
      partially offset by revenues from two new offices. Total expenses increased
      to
      $4.6 million from $4.0 million in 2005 primarily due to costs associated with
      the opening of two new retail offices, and to an increase in legal expenses
      related to arbitration claims against the Company.




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*Asset
      Management*


**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands)**Revenues
              
              $
              14,597
              
              $
              7,042Income
                  before income taxes
              
              $
              3,727
              
              $
              2,281


Revenues
      from asset management increased to $14.6 million from $7.0 million, and income
      before taxes increased to $3.7 million from $2.3 million. Commission revenues
      increased to $3.7 million from $1.4 million, while investment management and
      related service fees increased to $8.5 million from $4.8 million. The revenue
      growth is primarily due to the acquisition of Edelman in May 2005. Total
      expenses rose to $10.9 million from $5.6 million due to the higher revenues.
      Minority interests in net income of consolidated companies reflect the portion
      of net income attributable to minority interest ownership of entities included
      in this segment’s consolidated financial statements. Income attributable to
      minority interests, which reduces SMHG’s pretax income, increased to $1.4
      million in 2006 from $799,000 in 2005, principally due to increased income
      from
      the Company’s ownership of 51% of Edelman. While revenues increased by $7.0
      million, or 107%, income before income taxes increased by $1.4 million, or
      63%,
      mainly due to an increase in the percentage of revenues derived from entities
      that are not wholly owned by SMHG and for which minority interest charges are
      recorded.





**Institutional
      Services**





*Institutional
      Brokerage*


**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands)**Revenues
              
              $
              7,145
              
              $
              5,832(Loss)
                  income before income taxes
              
              $
              (155
              )
              $
              425


Revenues
      from institutional brokerage increased to $7.1 million from $5.8 million, and
      income before taxes declined to a loss of $155,000 from $425,000. Commission
      revenue increased to $4.5 million from $4.2 million, while revenues from
      principal transactions increased to $1.5 million from $451,000. Both the
      increase in commissions and principal transactions are due to the startup of
      the
      Fixed Income National division during the first quarter of 2006. Total expenses
      increased to $8.3 million from $5.4 million in 2005 primarily due to the startup
      of the Fixed Income National division.




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*Prime
      Brokerage*


**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands)**Revenues
              
              $
              8,147
              
              $
              4,111Income
                  before income taxes
              
              $
              469
              
              $
              389


Revenues
      from prime brokerage increased to $8.1 million from $4.1 million, and income
      before taxes increased to $469,000 from $389,000. Commission revenue increased
      to $3.8 million from $3.2 million, while principal transaction revenue increased
      to $3.8 million from $591,000, reflecting growth in proprietary trading
      activities. Total expenses increased to $7.7 million during the first three
      months of 2006 from $3.7 million during the first three months of 2005
      reflecting increased compensation and other costs related to proprietary trading
      activities. Compensation and other costs when measured as a percentage of
      proprietary trading revenues are higher than similar costs associated with
      other
      revenue sources.





**Investment** **** **Banking**




**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands)**Revenues
              
              $
              7,052
              
              $
              3,673Income
                  before income taxes
              
              $
              2,608
              
              $
              1,033
 Revenues
      from investment banking increased to $7.1 million from $3.7 million, and income
      before taxes increased to $2.6 million, or 37% of revenues, from $1.0 million,
      or 28% of revenues. The revenue increase is primarily due to increased revenues
      from private placement transactions and advisory fees during the first quarter
      of 2006. Total expenses increased to $4.4 million from $2.6 million in 2005
      due
      to higher compensation costs related to the higher revenues and to higher
      occupancy costs caused by the division’s relocation to larger offices in the New
      York area. The margin increase from 2005 to 2006 is due primarily to a smaller
      increase in costs of the business that are not directly related to revenue
      variances.





**Corporate
      and Other**


**Three
                  Months Ended**
                **March
                  31,****2006**
              
              **2005****(in
                  thousands)**Revenues
              
              $
              2,017
              
              $
              1,031Loss
                  before income taxes
              
              $
              (1,848
              )
              $
              (1,657
              )


Revenues
      from corporate and other increased to $2.0 million from $1.0 million, and the
      loss before taxes increased to $1.8 million from $1.7 million. Revenues from
      principal transactions, which consist principally of changes in the values
      of
      our investment portfolios, increased to $1.1 million in 2006, from $201,000
      in
      2005. Portfolio value increases have no related impact on expenses; therefore,
      the loss before income taxes measured as a percentage of revenues is higher
      in
      2006 than in the prior year.




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**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.





At
      March
      31, 2006, we had approximately $22.1 million in cash and cash equivalents,
      which
      together with receivables from broker-dealers, deposits with clearing brokers,
      marketable securities owned, and securities available for sale represented
      approximately 50% of our total assets at the end of the first quarter.





For
      the
      three months ended March 31, 2006, net cash provided by operations totaled
      $5.3
      million versus net cash used in operations of $1.1 million during the first
      three months of 2005. Accounts payable and accrued liabilities decreased by
      $4.5
      million during the three months ended March 31, 2006, principally due to the
      payment of accrued compensation during the first quarter of 2006.





Securities
      owned increased by $103.8 million during the first three months of 2006, while
      securities sold, not yet purchased increased by $95.7 million and payables
      to
      clearing brokers increased by $11.3 million. The increases in securities owned,
      securities sold, not yet purchased and payables to clearing brokers is primarily
      due to the trading portfolios of the Fixed Income National division, which
      began
      operations during January 2006 and our proprietary trading operations. The
      Company’s Fixed Income National division and its 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.





Capital
      expenditures for the first quarter of 2006 were $2.9 million, mainly for the
      purchase of furniture, computer equipment and software, as well as for leasehold
      improvements, necessary for our growth.





At
      March
      31, 2006, 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 requirement and had capital in excess of the required minimum.





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





**Factors
      Affecting Forward-Looking Statements**





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




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





**Market
      Risks**





During
      the three months ended March 31, 2006, there has 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, 2005.





At
      March
      31, 2006, securities owned by the Company were recorded at a fair value of
      $179.3 million, including $133.9 million in marketable securities, $35.6 million
      representing the Company’s investments in limited partnerships and $9.8 million
      representing other not readily marketable securities.





At
      March
      31, 2006, Salient/PMT had securities available for sale with a fair value of
      $1.8 million. These securities have an original cost of $1.8 million, and are
      subject to equity price risk. At March 31, 2006, the unrealized increase in
      market value totaling $67,000 less tax of $27,000 has been included as a
      separate component of shareholders’ equity.




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




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




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**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 operation in any
      future period and a significant judgment could have a material adverse impact
      on
      our consolidated financial position, results of operations, and cash flows.
      In
      addition to claims for damages and monetary sanctions that may be made against
      us, we incur substantial costs in investigating and defending claims and
      regulatory matters.




The
      NASD
      conducted an inspection of our prime broker and private investment or hedge
      fund
      support operations based in our New York office in November 2004.
      Subsequently,  the NASD opened an investigation and has requested the
      production of additional documents and materials on ten occasions in 2005 and
      2006 with respect to our prime broker and related hedge fund operations and
      has
      conducted formal interviews of a number of our employees involved in these
      operations. The investigation is ongoing. We do not know when the NASD staff
      will complete its investigation or what, if any, actions the NASD may propose
      with respect to this matter.




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 resuits in the period
        in
        which it is resolved.
 
 In
        September 2004, two former customers of Sanders Morris Harris, a mother and
        her
        daughter, filed an arbitration claim with the NASD against their broker,
        Sanders
        Morris Harris and Lehman Brothers, Inc. alleging that (a) their accounts
        were
        improperly invested in unsuitable, speculative securities, (b) their broker
        churned their accounts, and (c) the branch manager at Sanders Morris Harris
        failed to properly supervise the accounts. In addition, the daughter alleged
        that her account was traded without proper authorization. The customers claim
        aggregate compensatory damages against Sanders Morris Harris in an amount
        in
        excess of $1.2 million,
        as well as damages for emotional distress, punitive damages in the amount
        of
        three times compensatory damages, interest, attorney's fees, and costs. Lehman
        Brothers, Inc., the broker's previous employer, has settled its claims as
        has
        the broker, who voluntarily resigned from Sanders Morris Harris and currently
        works at another firm. An arbitration hearing on the claim commenced on February
        6, 2006, and continued through February 17,2006, at which time it was adjourned.
        The hearing is scheduled to resume on May 30,2006. At the close of the
        customers' presentation of their case, the hearing panel dismissed their
        claims
        for damages for emotional distress
        and attorney's fees. We have denied liability in this matter and believe
        that we
        have meritorious defenses to the customers' claims and intend to vigorously
        defend such claims.


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**Item
      6**.***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 (Filed as Exhibit 3.2 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
                (File
                No. 000-30066), and incorporated herein by
                reference).


†10.01
            Sanders
                Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as
                Appendix
                A to the Definitive Proxy Statement on Schedule 14A of the Company
                dated
                May 3, 2002 (File No. 000-30066), and incorporated herein by
                reference).


†10.02
            Sanders
                Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit
                10.1
                to the Company’s 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).


*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.






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**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.
              MORRISName:  
                Ben T. Morris
              Title:    
                Chief Executive Officer




Date: May
              9,
              2006
            By:
            /s/ RICK
              BERRYName:  
                Rick Berry
              Title:    
                Chief Financial Officer






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