10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(mark one)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended December 31, 2007
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30066

Sanders Morris Harris Group Inc.

(Exact name of registrant as specified in its charter)

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

(713) 993-4610

(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

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

The aggregate market value of the shares of Common Stock held by nonaffiliates of the registrant at June 30, 2007 was $194.6 million. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant were deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors, and beneficial owners are, in fact, affiliates of the registrant.

As of March 7, 2008, the registrant had 25,228,347 outstanding shares of Common Stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive Proxy Statement pertaining to the 2008 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference into Part III of this Report.

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

INDEX 

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	24
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	38
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68
Item 9A.	Controls and Procedures	68
Item 9B.	Other Information	70
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	71
Item 11.	Executive Compensation	71
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13.	Certain Relationships and Related Transactions, and Director Independence	71
Item 14.	Principal Accountant Fees and Services	71
PART IV
Item 15.	Exhibits, Financial Statement Schedules	72

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PART I

Item 1. Business

General

Sanders Morris Harris Group Inc. (“SMHG” or “the Company”) is a holding company that, through our subsidiaries and affiliates, provides asset/wealth management, and capital markets services. Our company, as it exists today, results largely from the merger in January 2000 of Sanders Morris Mundy Inc., a Houston-based full-service regional investment bank, and Harris, Webb & Garrison, Inc., a Houston-based investment management firm. Since the merger, we have grown significantly, both organically and through strategic acquisitions. From January 2000 through December 31, 2007, we have:

· grown our assets under management or advisement from approximately $3.2 billion to $16.9 billion;

· increased our asset and wealth management business from 56 to 401 employees and our investment banking business from 17 to 54 employees;

· expanded our client base by increasing the number of our client accounts from 21,000 to 74,000;

· expanded our geographic presence by growing from 11 offices in six states to 65 offices in 21 states; and

· broadened our product offerings and distribution networks.

We were founded on the belief that a financial services company should be not only a counselor to its clients but also a partner. We and members of our executive management, where suitable and permissible, often invest in our products on the same basis as our clients, which we refer to as an “investment in common.” We believe that becoming wealth partners with our clients demonstrates our confidence in the investment opportunities that we recommend and differentiates us from our competitors. Consistent with this belief, we analyze every potential product that we offer to our clients as if we are investing in it ourselves, which we believe results in higher quality investments.

As a result of our focus on creating wealth partnerships with our clients, our executive officers are directly and extensively involved in building client relationships and marketing our products and services. We focus on creating lasting relationships with our private, corporate, and institutional clients by providing a range of services throughout their financial life cycle, combining the personalized service and senior level attention of a smaller firm with the capabilities of a larger firm.

We feel that we have achieved strong brand recognition and a sound reputation in the southwestern United States. Our presence in Houston has helped us benefit from robust energy prices and a resulting increase in energy transactions. Additionally, our acquisitions have enabled us to add well-regarded asset managers and wealth advisors to our platform in other regions of the country. In all, we have 65 offices in 21 states. These factors have strengthened our brand recognition and reputation and have enabled us to attract new clients, not only in the Southwest but, increasingly, in other regions of the country.

We believe that our strategies have been successful. Our assets under management or advisement have grown from approximately $3.2 billion at January 1, 2000 to $16.9 billion at December 31, 2007, representing a compound annual growth rate of 21.0%. Our revenue has grown from $43.9 million in 2000 to $185.8 million in 2007, representing a compound annual growth rate of 20.8%. Our income from continuing operations has improved from $2.1 million in 2000 to $5.1 million in 2007.

We think that these operating results validate our operating strategies. Further, we believe we now have in place the people, infrastructure, and brand recognition at each of our businesses, which, combined with sufficient working capital, will enable us to leverage our operating platform to further increase our profitability and market share.

Our Products and Services

Asset/Wealth Management

Our asset/wealth management business provides investment advisory, wealth and investment management, financial planning, and trust services to high net worth and mass affluent individuals and institutions.

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Through our various asset and wealth management subsidiaries and divisions, we serve two distinct client bases:

· High Net Worth and Mass Affluent Individuals:  We define high net worth individuals as individuals who have over $1 million in investable assets and mass affluent individuals as individuals who have $100,000 to $1 million in investable assets. Throughout their financial life cycle, we provide these clients with comprehensive investment advisory and asset and wealth management services, as either a fiduciary or an agent, including asset allocation, investment strategies and alternatives, tax efficient estate and financial planning, trusts, and private client services.

· Corporations and Institutions:  We provide asset management services in specific investment styles to corporations and institutions. We distribute our asset management products both internally through our marketing efforts and externally through formal sub-advisory relationships and other distribution arrangements with third parties.

Each of our business units generally focuses on a different portion of the asset and wealth management business in terms of client type and location, asset and product type, and distribution channel. These business units are generally operated as individual businesses that market their products under their own brand name, with certain products offered through multiple external and internal distribution channels and with certain administrative or back office functions being provided by the parent company. In addition, one or more of our executive officers serve on the board of directors or management committee of each of these businesses.

Our asset/wealth management business primarily earns revenue by charging fees for managing the investment assets of clients. Fees are typically calculated as a percentage of the value of assets under management or advisement and vary with the type of account managed, the asset manager, and the account size. Accordingly, the fee income of each of our asset and wealth management businesses typically increases or decreases as its average assets under management increases or decreases. Increases in assets under management result from appreciation in the value of client assets and from net inflows of additional assets from new and existing clients. Conversely, decreases in assets under management result from asset value depreciation and from net client redemptions and withdrawals. We believe an asset-based fee structure helps align our interests with the interests of our clients, particularly as compared to a commission-based fee structure, which is based on the number and value of securities trades executed. Our asset management business may also earn performance fees from certain assets if the investment performance of the assets in the account meets or exceeds a specified benchmark during a measurement period.

At December 31, 2007, our asset and wealth management subsidiaries had approximately $16.9 billion in assets under management or advisement. Our asset and wealth management revenue in 2007 was $107.3 million and pre-tax income from continuing operations was $24.8 million, accounting for 57.7% of our total revenue and 75.1% of our pre-tax income from continuing operations excluding corporate overhead.

Our eight asset and wealth management businesses are described below.

SMH Capital Inc.  SMH Capital Inc. (formerly Sanders Morris Harris Inc.) (“SMH”), member FINRA/SIPC, headquartered in Houston, Texas, provides asset and wealth management services directly through its private client business and through its affiliation with SMH Partners. Its financial advisors (both internal and affiliated through SMH Partners) serve high net worth and mass affluent clients, many of whom have long-standing relationships with us. As a full service firm, SMH offers its clients asset and wealth management services and financial advice relating to corporate debt and equity securities, including the securities of companies followed by our research analysts, underwritings that we co-manage or in which we participate, and private placements of securities in which we serve as placement agent, as well as mutual funds, defined contribution plans, wrap-fee programs, money market funds, insurance products, and tax, trust, and estate advice. At December 31, 2007, SMH had $4.9 billion in assets under management or advisement, exclusive of our proprietary funds.

SMH Partners is a select group of independent registered representatives affiliated with SMH that provides specialized asset and wealth management services and products to high net worth and mass affluent individuals and institutions. The services provided by SMH Partners include investment management, estate planning, and retirement planning. The financial planners who affiliate with us are able to offer their clients a broad range of new investment opportunities through several exclusive investment programs offered by SMH, Salient Capital Management, LLC and SMH Capital Advisors, Inc., as well as by third parties.

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Additionally, SMH has organized 17 proprietary funds for the purpose of investing primarily in equity or equity-linked securities, interest-bearing debt securities, and debt securities convertible into common stock. These funds invest primarily in small to mid-capitalization companies, both public and private, that we believe are either significantly undervalued relative to their growth potential or that have substantial prospects for capital appreciation. Companies in which the funds invest represent a number of industries, including life sciences, energy, technology, and industrial services. We account for our interests in all of these funds using the equity method, which approximates fair value. At December 31, 2007, these proprietary funds had $292 million in assets under management and committed capital.

The Edelman Financial Center, LLC.  The Edelman Financial Center, LLC (“Edelman”), located in Fairfax, Virginia, provides financial advisory services primarily to mass affluent individuals. Edelman has won more than 60 financial, business, community, and philanthropic awards and has been named three times by Inc. magazine as the fastest-growing privately-held financial planning firm in the country. Edelman founder and chairman Ric Edelman is one of the nation’s leading advocates of financial literacy. In addition, Edelman offers its clients mortgage brokerage services and a variety of life, disability, and long-term care insurance solutions to fit their needs. At December 31, 2007, Edelman had more than 8,200 clients and $3.7 billion in assets under management or advisement. We own 51% of Edelman and have agreed to purchase the balance in 2008 and 2009.

Salient Capital Management, LLC.  Salient Capital Management, LLC (“Salient”), located in Houston, Texas, provides asset and wealth management services to high net worth and mass affluent individuals and smaller institutions, including financial and estate planning, trusts, and custody services. Salient has also organized several funds for the use of its clients, which are also available to clients of our other businesses and are marketed externally. At December 31, 2007, Salient had assets under management or advisement of approximately $6.3 billion. We own 50% of Salient. We also own approximately 28% of Endowment Advisers, L.P., the advisor to The Endowment Master Fund, which is one of the principal investment programs affiliated with Salient.

SMH Capital Advisors, Inc.  SMH Capital Advisors, Inc. (“Capital Advisors”), located in Fort Worth, Texas, provides investment management services related to high-yield fixed income securities. This business is also known by its previous name of Cummer/Moyers. Nelson’s World’s Best Money Managers ranked Capital Advisors as the No. 1 ranked firm in its U.S. High Yield Income rankings for the one-year, five-year, and ten-year periods ended March 31, 2006 and the No. 2 ranked firm in its U.S. Intermediate Duration Fixed Income rankings for the five-year period ended March 31, 2006. At December 31, 2007, Capital Advisors had $1.9 billion in assets under management.

Kissinger Financial Services.  Kissinger Financial Services (“Kissinger”), a division of SMH based in Hunt Valley, Maryland, provides financial planning and investment management services to high net worth and mass affluent individuals. Kissinger derives revenue from fees charged to clients for the preparation of financial plans and for monitoring services and earns commissions and fees from investment and insurance products sold to clients. At December 31, 2007, Kissinger had $387 million in assets under management or advisement.

The Rikoon Group, LLC. The Rikoon Group, LLC (“Rikoon”), based in Santa Fe, New Mexico, provides asset and wealth management services to high net worth individuals including financial and estate planning, investment management services, wealth education, and family retreats. Rikoon operates nationally with fee only investment counsel and also offers comprehensive family office services. At December 31, 2007, Rikoon had $419 million in assets under management.

The Dickenson Group, LLC. The Dickenson Group, LLC (“Dickenson”), based in Solon, Ohio, offers extensive expertise on insurance planning for individuals, families, and businesses as well as employee benefits communications and estate planning.

Select Sports Group Holdings, LLC.  Select Sports Group Holdings, LLC, (“SSG”), based in Houston, Texas, provides sports representation and management services to professional athletes, principally professional football and baseball players, in contract negotiation, marketing and endorsements, public relations, legal counseling, and related areas. SSG receives fees from its athlete clients for the representation and management services provided. Our SSG clients have access to our investment programs in the areas of stocks, bonds, private equity, and specialized investment vehicles. Additionally, we provide a deal-screening program that reviews the numerous investment opportunities offered to professional athletes. We own 50% of SSG.

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Capital Markets

Our capital markets business provides investment banking, institutional equity and fixed income brokerage, prime brokerage services, and proprietary trading services to institutional customers.

Investment Banking

We conduct our investment banking services through SMH. Our full-service investment banking business focuses primarily on middle market companies in the natural resources, environmental, converging technologies, business services, and health care industries. We have a well-established investment banking practice that combines our industry knowledge, the significant experience of our senior bankers, and our extensive corporate and professional relationships to serve the broad needs of emerging growth companies within our targeted industries. Our investment banking services include public offerings and private placements of equity and debt securities, financial advisory services, and merchant banking services. Our financial advisory services include advising on mergers, acquisitions, and divestitures, fairness opinions, and financial strategies. Our merchant banking activities focus on providing private equity capital for our own account to these companies. We also provide valuation and litigation support services.

Our goal is to provide our investment banking clients the personalized service and senior level attention of a boutique with the capabilities of a full-service firm. We focus on building lasting relationships with our clients by providing a range of services throughout their financial life cycle. Our execution capabilities and full range of services provide us with the opportunity to expand our business relationships with our clients as they evolve.

Our strategy is to build a balanced mix of corporate securities underwriting, private financing, financial advisory and merchant banking services. We believe the number and dollar amount of underwritings, private placements, financial advisory engagements, and merchant banking investments in which we participate will contribute significantly to increased public and industry awareness of SMH and will result in increased demand for our investment banking services.

During 2007, we co-managed 14 public offerings and managed or co-managed 11 private placements, PIPE, or registered direct offerings with a total transaction value of approximately $3.1 billion. We believe that we were the twelfth most active investment bank in the U.S. in 2007 in the distribution of master limited partnerships, or MLPs, participating as co-manager in seven transactions totaling approximately $2.3 billion in transaction value. In addition, we completed 16 financial advisory engagements totaling approximately $1.3 billion in transaction value in 2007. At December 31, 2007, we had investment banking offices in New York, Houston, and Los Angeles with 54 employees.

Institutional Brokerage

Our institutional brokerage business, which we also conduct through SMH, includes institutional equity and fixed income brokerage and institutional research.

Institutional Equity.  Our institutional clients include a broad array of institutions throughout North America, Europe, and Asia, including banks, retirement funds, mutual funds, endowments, investment advisors, and insurance companies. Our institutional equity strategy is to provide equity research coverage and trading services focused on companies with a presence in the U.S. Areas of concentration include financial services, life sciences, oil and gas exploration and production, oilfield services, pipelines, entertainment and media, retailing, and technology. We provide our institutional clients with research and execution trading services in both exchange-listed equity securities and equity securities quoted on Nasdaq. We also distribute to institutional clients equity securities from offerings that we co-manage or underwrite. Commissions are charged on all institutional securities transactions based on rates formulated by us. These services are available to institutional clients of our financial advisors. A substantial portion of our institutional equity trading professionals, who joined us in January 2002, comprised the institutional equity group of Sutro & Co. As of December 31, 2007, we had institutional equity operations in Los Angeles, New York, Dallas/Fort Worth and Houston with 21 professionals.

Institutional Fixed Income.  Through our fixed income division, we provide bond brokerage and principal trading services to our institutional clients, adding to the range of investment products we offer. We offer U.S. government and agency securities, municipal securities, mortgage-related securities, and corporate investment-grade and high-yield bonds, as well as preferred stock and structured products. We are also active as a secondary market broker for residential, consumer, and commercial loans and derives revenue from the placement and servicing of mortgage loans. The high-yield bond group within our fixed income division complements our middle-market investment banking operations by providing a distribution channel for investment banking clients. As of December 31, 2007, our institutional fixed income operations included 12 professionals and are based in Houston and New York.

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Institutional Research.  We use our proprietary equity research analysis to drive our institutional equity business and, where regulatorily permitted, to assist our other businesses, such as our investment banking operations and proprietary funds. This research analysis is based on economic fundamentals, using tools such as price-to-earnings multiples, price-to-book value comparisons, both absolute and relative to historic norms, and our research department’s own earnings forecasts. We intend to rely primarily on our own research rather than on research products purchased from outside research organizations. As of December 31, 2007, we had 16 research professionals who provide coverage on 77 companies from offices in Houston, Los Angeles, New York and Dallas.

Prime Brokerage Services  

The brokerage industry has developed a service known as prime brokerage in which a professional investor, usually a private investor or hedge fund, maintains a cash or margin account with a prime broker that provides trade execution, clearing, bookkeeping, reporting, custodial, securities borrowing, financing, research, and fund raising services. The Concept Capital division of SMH, based in New York, with 40 professionals as of December 31, 2007, provides prime brokerage services to 21 hedge fund managers. We earn commission income on the securities transactions that we process through the prime brokerage transaction and interest income from arranging financing for these hedge funds. The profitability of this division is directly related to the volume of transactions that we process and the borrowings of the funds.

SMH also maintains several proprietary trading accounts on behalf of individual securities traders through this division. SMH shares in the profits or losses of these accounts and receives the commissions generated in them. The accounts are designed to diversify the aggregate risks, thus limiting potential losses or gains. Most of the accounts have “first loss” deposits to insulate SMH from trading losses. We have procedures in place to monitor trading to ensure that in the event that any “first loss” deposits are depleted by a trader, trading is suspended.

In 2007, revenue from our capital markets business was $75.7 million and pre-tax income from continuing operations was $8.3 million, accounting for 40.7% of our total revenue and 24.9% of our pre-tax income excluding corporate overhead.

Industry Trends

We believe that we are well positioned to capitalize on a number of trends in the financial services industry, including:

· consolidation among firms offering financial products and services;

· continued and substantial growth in the high net worth and mass affluent markets;

· increasing acceptance of alternative investments by many high net worth, mass affluent, and institutional investors;

· increased demand by investors for unbiased advice; and

· growth in investment banking activity in our target sectors.

Our Strengths

The ongoing consolidation trend in the financial services industry has provided us access to many highly skilled professionals who have chosen to be part of a smaller yet sophisticated firm that has flexibility and preserves an entrepreneurial environment when providing financial services to clients. We attribute our success and distinctiveness not only to our highly skilled professionals but also to the following strengths:

· Focus on Growing High Net Worth and Mass Affluent Markets.  We offer financial products and services designed to benefit high net worth and mass affluent individuals. We believe that there is a particularly significant opportunity in providing products and services to the large and growing mass affluent market, which, according to Forrester Research, controlled $12 trillion, or 39%, of U.S. retail assets as of June 2005 and is expected to grow by $2.3 trillion by 2020.

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· Highly Regarded Distribution Network and Investment Managers.  Our asset and wealth management business includes Edelman, Salient, Capital Advisors (formerly known as Cummers/Moyers Capital Advisors, Inc.), Kissinger, and Rikoon, each of which benefits from a sound regional reputation. Moreover, our wealth advisors and asset managers include Ric Edelman, the founder of Edelman, named to Barron’s 100 Top Financial Advisors in 2004, 2005, 2006, and 2007, Capital Advisors, a No. 1 ranked firm in 2005 and 2006 by Nelson’s World’s Best Money Managers, and Don Sanders, our largest shareholder, who has more than 45 years of investment experience and is well-known and regarded in the Southwest.

· Regional and Industry Focus.  We are a full-service regional financial services company based in Texas with 65 offices in 21 states and have achieved a strong brand recognition and sound reputation in the Southwest. Our presence in Texas allows us to focus our investment and financial advisory efforts on industries that have established markets in Texas and the Southwest, including energy, health care, environmental, technology, financial and business services, retail and consumer products, and media and communications. We believe that our focus on these industries has allowed us to develop a level of industry expertise that distinguishes us from many of our competitors.

· Ability to Cross-Sell Products.  We have a business platform that permits many of the products and services developed by one area of our business to be sold to or accessed by one or more other areas of our business. For example, our high net worth, mass affluent, and institutional clients have access to securities offerings developed by our investment bankers. Similarly, our equity research designed for institutional clients can be accessed to benefit our individual and investment banking clients, and we also provide our asset and wealth management products and services to executives of our investment banking clients.

· Alignment of Interests.  Where suitable and permissible, we and members of our executive management frequently invest in the same investment opportunities as our clients, which creates a financial identity of interest and trust among our senior management, our clients, and us. We believe that by creating these wealth partnerships with our clients, we and our executives solidify our client relationships by validating the quality of the products and services that we offer. We also believe that our unbiased offering of a broad range of both proprietary and external investment products and our increasing use of an asset-based fee structure further align our interests with those of our asset and wealth management clients.

· Proven Management Team.  Our executive management averages more than 30 years of experience in the financial services industry and provides senior level management to every aspect of our business. Our executive management is supported by a core team of professionals who also have significant experience in the financial services industry. Their collective experience has resulted in a large network of both leaders of corporations and institutions and affluent investors with whom our executive management has developed extensive relationships. We strengthen these relationships further by providing our clients personalized service, senior level attention, and access to other areas of our business.

Our Strategy

We believe there is an uncommon opportunity for a high quality asset and wealth management and capital markets services firm that can tailor its product and service offerings to fit the needs of its individual, corporate, and institutional clients. Further, we believe we have put in place the people, infrastructure, and brand recognition at each of our businesses, which, combined with sufficient working capital, will enable us to leverage our operating platform to further increase our profitability and market share. Specifically, we intend to:

· Capitalize on Growth of Our Target Markets by Expanding Our Asset and Wealth Management Business.  We intend to take advantage of favorable demographic trends to continue to expand our asset and wealth management business by:

· continuing to gather assets under management or advisement through internal growth, expansion of external distribution channels, and acquisitions;

· continuing to add additional experienced and productive asset managers and wealth advisors;

· marketing the skills of our asset and wealth management professionals to our other business areas; and

· continuing to develop, market, and invest in our proprietary funds.

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We have increased our assets under management or advisement through the acquisitions of Edelman in 2005 and Rikoon in 2007. At December 31, 2007, Edelman’s assets under management was $3.7 billion and Rikoon’s assets under management was $419 million.

· Supplement Internal Growth with Strategic Acquisitions.  We plan to actively pursue opportunities to acquire all or a significant portion of other complementary asset and wealth management businesses to gain access to additional proprietary products to offer our high net worth, mass affluent, and institutional clients, to gain access to new clients, to increase our assets under management or advisement, and to expand our geographic base. We believe that attractive acquisition opportunities exist, particularly among smaller, specialized regional financial services firms that want to affiliate with a larger company while still retaining their identity and entrepreneurial culture. Since 2000, we have acquired or gained control of ten significant firms with products and services that we believe complement or expand our client base and the services and products that we provide. In addition, we believe that the ongoing consolidation trend in the financial services industry will allow us to continue to hire proven financial professionals who prefer the culture and opportunities inherent in an innovative regional firm such as ours.

Marketing

While we believe cross-selling opportunities exist among our various businesses based on the relationships developed by the individual companies, each major subsidiary has its own branding identity subject to an overall Sanders Morris Harris Group umbrella.

SMH markets through its 41 offices and through 24 offices of independent registered representatives who are affiliated with SMH through SMH Partners. SMH targets its client groups through financial advisor relationships, mailings, telephone calls, in-person presentations, and firm-sponsored workshops. Due to the nature of its business, its regional name recognition, and the reputation of its management, business is obtained through referrals from existing clients, corporate relationships, other investment bankers, or initiated directly by the client, as well as through senior level calling programs.

Edelman conducts its marketing efforts through media channels designed to educate individuals on the subject of personal finance. Ric Edelman hosts a nationally syndicated weekly radio program in the Washington, D.C. area and in sixteen other markets. Ric Edelman is a nationally syndicated newspaper columnist, publishes a monthly newsletter, and is the author of a variety of books and video and audio educational systems that help people achieve their financial goals.

Salient conducts its marketing and business development efforts on a company-wide calling basis. All Salient professionals are encouraged to be actively involved in business development efforts through maintenance of professional and personal relationships and active involvement in community events. Salient markets to specific client groups through telephone calls, multi-media client presentations, and company-sponsored or co-sponsored workshops and seminars. Salient has arrangements with several financial services entities through which those companies offer a variety of Salient’s investment programs to their clients.

Capital Advisors focuses its marketing and business development efforts on specific client groups through consultants, mailings, telephone calls, and multi-media client presentations. Kissinger conducts its marketing and business development primarily through referrals from existing clients and other professional (i.e., accountants and attorneys) and sponsored or co-sponsored workshops and seminars. The seminars are sponsored by Kissinger, local employers, government agencies, and local colleges and universities.

Existing and potential clients can also gain a variety of information about our firm and the services we provide through the Internet websites for our various businesses. The information on those websites is not a part of this Annual Report on Form 10-K.

Competition

The asset and wealth management and capital markets services businesses are highly competitive. The principal competitive factors influencing our businesses are:

· expertise and quality of the professional staff;

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· reputation in the marketplace;

· existing client relationships;

· ability to commit capital to client transactions; and

· mix of market capabilities.

We compete directly with many other national and regional full service financial services firms and, to a lesser extent, with discount brokers, investment banking firms, investment advisers, broker-dealer subsidiaries of major commercial bank holding companies, and other companies offering financial services in the U.S., globally, and through the Internet. We also compete for asset management and fiduciary services with commercial banks, private trust companies, sponsors of mutual funds, insurance companies, financial planning firms, venture capital, private equity and hedge funds, and other asset managers. We believe that our principal competitive advantages include our regional and industry focus, focus on the growing high net worth and mass affluent markets, highly regarded distribution network and investment managers, ability to cross-sell our products, creating wealth partnerships with our clients, and proven management team.

The financial services industry has become considerably more concentrated as many securities firms have either ceased operations or been acquired by or merged into other firms. Many of these larger firms have significantly greater financial and other resources than we do and can offer their customers more product offerings, lower pricing, broader research capabilities, access to international markets, and other products and services we do not offer, which may give these firms a competitive advantage over us.

Government Regulation

The securities industry is one of the nation's most extensively regulated industries. The U.S. Securities and Exchange Commission, or SEC, is responsible for the administration of the federal securities laws and serves as a supervisory body over all national securities exchanges and associations. The regulation of broker-dealers has to a large extent been delegated by the federal securities laws to Self Regulatory Organizations (“SROs”). These SROs include, among others, all the national securities and commodities exchanges and the Financial Industry Regulatory Authority (formerly the NASD) (“FINRA”). Subject to approval by the SEC and certain other regulatory authorities, SROs adopt rules that govern the industry and conduct periodic examinations of the operations of our broker-dealer subsidiary. Our broker-dealer subsidiary is registered in all 50 states, Puerto Rico, and the province of Ontario, Canada and is also subject to regulation under the laws of these jurisdictions.

As a registered broker-dealer, SMH, our brokerage subsidiary, is subject to certain net capital requirements of Rule 15c3-1 under the Exchange Act. The net capital rules, which specify minimum net capital requirements for registered broker-dealers, are designed to measure the financial soundness and liquidity of broker-dealers. Failure to maintain the required net capital may subject a firm to suspension or revocation of registration by the SEC and suspension or expulsion by other regulatory bodies, and ultimately may require its liquidation. Further, a decline in a broker-dealer's net capital below certain “early warning levels”, even though above minimum capital requirements, could cause material adverse consequences to the broker-dealer.

As registered investment advisors under the Investment Advisers Act of 1940, SMH, Capital Advisors, Edelman, Salient, Rikoon, and certain other subsidiaries are subject to the requirements of regulations under both the Investment Advisers Act and certain state securities laws and regulations. Such requirements relate to, among other things, (1) limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, (2) record-keeping and reporting requirements, (3) disclosure requirements, (4) limitations on principal transactions between an advisor or its affiliates and advisory clients, and (5) general anti-fraud prohibitions.

Our trust subsidiary, Salient Trust Co., LTA (“Salient Trust”), is subject to supervision and examination by the Texas Department of Banking. As a Texas chartered trust company, Salient Trust is subject to the Texas Trust Company Act, the rules and regulations promulgated under the act and supervision by the Texas Banking Commissioner. These laws are intended primarily for the protection of Salient Trust’s clients, rather than for the benefit of investors.

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Employees

At December 31, 2007, we had 617 employees. Of these, 115 were engaged in retail brokerage, 21 in institutional sales and trading, 12 in fixed income sales, 54 in investment banking, 16 in securities analysis and research, 40 in prime brokerage services, 60 in financial advisory and trust services, 18 in financial planning, 200 in investment management, 13 in systems development, 8 in sports representation and management, and 60 in accounting, administration, legal, compliance, and support operations. None of our employees are subject to collective bargaining agreements. We believe our relations with our employees generally are good.

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on our internet website, www.smhgroup.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Item 1A. Risk Factors

We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal, and regulatory risks. You should carefully consider the following risks and all of the other information in this Report, including the Consolidated Financial Statements and Notes thereto. The following are some of the more important factors that could affect our businesses.

Risks Relating to the Nature of Our Business

The asset and wealth management, investment banking, and institutional services industries are highly competitive. If we are not able to compete successfully against current and future competitors, our business, financial condition, and results of operations will be adversely affected.

The financial services business is highly competitive, and we expect it to remain so. The principal competitive factors influencing our asset and wealth management, investment banking and institutional services businesses are:

· the experience and quality of the professional staff;

· reputation in the marketplace;

· existing client relationships;

· ability to commit capital to client transactions; and

· mix of market capabilities.

Our ability to compete effectively in our asset and wealth management and investment banking activities is also influenced by the adequacy of our capital levels and by our ability to raise additional capital.

We compete directly with many other national and regional full service financial services firms and, to a lesser extent, with discount brokers, investment banking firms, investment advisors, broker-dealer subsidiaries of major commercial bank holding companies, and other companies offering financial services in the U.S., globally, and through the Internet. We also compete for asset management and fiduciary services with commercial banks, private trust companies, sponsors of mutual funds, insurance companies, financial planning firms, venture capital, private equity, and hedge funds, and other asset managers.

We are a relatively small firm with 617 employees as of December 31, 2007, and total revenue of $185.8 million in 2007. Many of our competitors have greater personnel and financial resources than we do. Larger competitors are able to advertise their products and services on a national or regional basis and may have a greater number and variety of products and distribution outlets for their products, larger customer bases, and greater name recognition. These larger and better capitalized competitors may be better able to respond to changes in the asset and wealth management and investment banking industries, to finance acquisitions, to fund internal growth, and to compete for market share generally. Also, many of our competitors have more extensive investment banking activities than we do and, therefore, may possess a relative advantage in accessing deal flow and capital. In addition to competition from firms currently in the securities business, there has been increasing competition from other firms offering financial services, including automated trading and other services based on technological innovations.

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Increased pressure created by current or future competitors, individually or collectively, could materially and adversely affect our business and results of operations. Increased competition may result in reduced revenue and loss of market share. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, or marketing decisions or acquisitions that also could materially and adversely affect our business and results of operations. In addition, new technologies and the expansion of existing technologies may increase competitive pressures on us. We cannot assure you that we will be able to compete successfully against current and future competitors.

Competition also extends to the hiring and retention of highly skilled employees. A competitor may be successful in hiring away an employee or group of employees, which may result in our losing business formerly serviced by them. Such competition can also raise our costs of hiring and retaining the key employees we need to effectively execute our business plan.

If we are unable to compete effectively, our business, financial condition, and results of operations will be adversely affected.

We may experience reduced revenue due to downturns or disruptions in the securities markets that reduce market volumes, securities prices, and liquidity, which can also cause counterparties to fail to perform.

The securities business is, by its nature, subject to significant risks, particularly in volatile or illiquid markets, including:

· the risk of trading losses;

· losses resulting from the ownership or underwriting of securities;

· counterparty failure to meet commitments;

· customer fraud;

· employee fraud;

· issuer fraud;

· errors and misconduct;

· failure in connection with the processing of securities transactions; and

· customer litigation.

As an asset and wealth management and capital markets services firm, changes in the financial markets or economic conditions in the U.S. and elsewhere in the world could adversely affect our business in many ways. The securities business is directly affected by many factors, including market, economic, and political conditions; broad trends in business and finance; investor sentiment and confidence in the financial markets; legislation and regulation affecting the national and international business and financial communities; currency values; inflation; the availability and cost of short-term and long-term funding and capital; the credit capacity or perceived creditworthiness of the securities industry in the marketplace; the level and volatility of equity prices and interest rates; and technological changes. These and other factors can contribute to lower price levels for securities and illiquid markets.

A market downturn could result in lower prices for securities, which may result in reduced management fees calculated as a percentage of assets managed. A market downturn could also lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in the revenue we receive from commissions and spreads. Fluctuations in market activity could impact the flow of investment capital into or from assets under management or advisement and the way customers allocate capital among money market, equity, fixed income, or other investment alternatives, which could negatively impact our asset and wealth management business. Unfavorable financial or economic conditions would likely reduce the number and size of transactions in which we provide underwriting, financial advisory, and other services. Our corporate finance revenue, in the form of financial advisory and underwriting fees, is directly related to the number and size of the transactions in which we participate and would therefore be adversely affected by a sustained market downturn. In periods of low volume or price levels, profitability is further adversely affected because certain of our expenses remain relatively fixed.

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Sudden sharp declines in market values of securities can result in illiquid markets and the failure of counterparties to perform their obligations, which could make it difficult for us to sell securities, hedge securities positions, and invest funds under management. Market declines could also increase claims and litigation, including arbitration claims from customers. In such markets, we may incur reduced revenue or losses in our principal trading, market making, investment banking, merchant banking, and financial advisory activities.

We are also subject to risks inherent in extending credit to the extent our clearing brokers permit our customers to purchase securities on margin. The margin risk increases during rapidly declining markets when collateral values may fall below the amount our customer owes us. Any resulting losses could adversely affect our business, financial condition, and results of operations.

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

We conduct principal trading, market making, merchant banking, and arbitrage activities for our own account, which subjects our capital to significant risks. These activities often involve the purchase, sale, or short sale of securities as principal in markets that are characterized as relatively illiquid or that may be susceptible to rapid fluctuations in liquidity and price. These market conditions could limit our resale of purchased securities or the repurchase of securities sold short. These risks involve market, credit and counterparty, and liquidity risks, which could result in losses for us. Market risk relates to the risk of fluctuating values and the ability of third parties to whom we have extended credit to repay us. Credit and counterparty risks represent the potential loss due to a client or counterparty failing to perform its contractual obligations, such as delivery of securities or payment of funds. Liquidity risk relates to our inability to liquidate assets or redirect illiquid investments. In any period we may experience losses as a result of price declines, lack of trading volume, or lack of liquidity.

In our underwriting and merchant banking, asset and wealth management, and other activities, we may have large concentrations in securities of, or commitments to, a single issuer or issuers engaged in a specific industry. As an underwriter, we may incur losses if we are unable to resell the securities we commit to purchase or if we are forced to liquidate our commitment at less than the agreed purchase price. Also, the trend, for competitive and other reasons, toward larger commitments on the part of lead underwriters means that, from time to time, as an underwriter (including a co-manager), we may retain significant concentrations in individual securities. These concentrations increase our exposure to market risks.

Our business depends on the services of our executive officers, senior management, and many other skilled professionals and may suffer if we lose the services of our executive officers, senior management, or other skilled professionals.

We depend on the continuing efforts of our executive officers and senior management. That dependence may be intensified by our decentralized operating strategy. If executive officers or members of senior management leave us, our business or prospects could be adversely affected until we attract and retain qualified replacements.

We derive a substantial portion of our revenue from the efforts of our financial services professionals. Therefore, our future success depends, in large part, on our ability to attract, recruit, and retain qualified financial services professionals. Demand for these professionals is high and their qualifications make them particularly mobile. These circumstances have led to escalating compensation packages in the industry. Up front payments, increased payouts, and guaranteed contracts have made recruiting these professionals more difficult and can lead to departures by current professionals. From time to time we have experienced, and we may in the future experience, losses of asset and wealth management, sales and trading, research, and investment banking professionals. Departures can also cause client defections due to close relationships between clients and the professionals. If we are unable to retain our key employees or attract, recruit, integrate, or retain other skilled professionals in the future, our business could suffer. We have a number of investment advisor affiliates, including Edelman, Kissinger, Rikoon, and Dickenson, that were founded by and are identified with one individual. The departure, death, or disability of that individual could result in the loss of clients and assets under management.

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We generally do not have employment agreements with our senior executive officers or other professionals. We attempt to retain our employees with incentives such as the issuance of our stock subject to continued employment. These incentives, however, may be insufficient in light of increasing competition for experienced professionals in the securities industry, particularly if our stock price declines or fails to appreciate sufficiently to be a competitive source of a portion of a professional’s compensation.

Because our asset and wealth management and capital markets services businesses focus on investors and capital markets clients based in the southwestern U.S., an economic downturn in that region generally, or in any of our target sectors, could adversely affect our revenue.

We depend upon asset and wealth management and capital markets services for clients based in the southwestern U.S. account for a significant portion of our revenue. An economic downturn in the Southwest generally or in the energy sector or another of our target sectors could adversely affect our existing and potential asset and wealth management clients and the emerging and middle-market companies and industries within the region we predominantly serve, which could in turn reduce our asset and wealth management and capital markets services businesses and adversely affect our business, financial condition, and results of operation.

Litigation and potential securities laws liabilities may adversely affect our business.

Many aspects of our business involve substantial risks of liability, litigation, and arbitration, which could adversely affect us. As a normal part of our business, we are from time to time named as defendants or co-defendants in civil litigation and arbitration proceedings and as a subject of regulatory investigations arising from our business activities as a financial services firm. Some of these proceedings involve claims for substantial amounts of damages, based on allegations such as misconduct by or our failure to properly supervise our asset and wealth management advisors, bad investment advice, unsuitable investment recommendations or excessive trading in a client’s account by our asset and wealth management advisors, materially false or misleading statements made in connection with securities offerings and other transactions, bad advice provided to participants in corporate transactions, and disputes over the terms and conditions of complex trading arrangements. The risks of liability, litigation, and arbitration often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time. In view of the inherent difficulty of predicting the outcome of legal and regulatory proceedings, particularly where the plaintiffs or regulatory authorities seek substantial or indeterminate damages or fines 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 or what the timing of the ultimate resolution of these matters will be. Depending on our results for a particular period, an adverse determination could have a material effect on quarterly or annual operating results in the period in which it is resolved. See “Item 3. - Legal Proceedings”.

In recent years, there has been a substantial amount of litigation involving the investment banking industry, including class action lawsuits seeking substantial damages and other suits seeking punitive damages. Companies engaged in the underwriting of securities, as we are, are subject to substantial potential liability, including for material misstatements or omissions in prospectuses and other communications in underwritten offerings of securities or statements made by securities analysts. These liabilities can arise under federal securities laws, similar state statutes, and common law doctrines. The risk of liability may be higher for an underwriter that, like us, is active in the underwriting of securities offerings for emerging and middle-market companies because of the higher degree of risk and volatility associated with the securities of these companies. The defense of these or any other lawsuits or arbitration proceedings may divert the efforts and attention of our management and staff, and we may incur significant legal expense in defending litigation or arbitration proceedings.

Poor investment performance, in either relative or absolute terms, may reduce the profitability of our asset and wealth management business.

In 2007, our asset and wealth management revenue was $107.3 million, accounting for 57.7% of our total revenue. We derive our revenue from this business primarily from management fees that are based on committed capital, assets under management or advisement, and incentive fees, which are earned if the return of our proprietary funds exceeds certain threshold returns. Our ability to maintain or increase assets under management or advisement is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market or economic conditions, and competition from other fund managers.

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Investment performance is one of the most important factors in retaining existing clients and competing for new asset and wealth management business. Poor investment performance could reduce our revenue and impair our growth in a number of ways:

· existing clients may withdraw funds from our asset and wealth management business in favor of better performing products;

· our incentive fees could decline or be eliminated entirely;

· asset-based advisory fees could decline from a decrease in assets under management or advisement;

· our ability to attract funds from existing and new clients might diminish;

· firms with which we have business relationships may terminate their relationships with us; and

· our wealth managers and investment advisors may depart, whether to join a competitor or otherwise.

Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our asset and wealth management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenue and profitability of our asset and wealth management business will likely be reduced and our ability to attract new clients and funds will likely be impaired.

Our asset and wealth management clients can terminate their relationships with us, reduce the aggregate assets under management or advisement, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, changes in management or control of clients or third party distributors with whom we have relationships, loss of key investment management personnel or wealth advisors, and financial market performance.

We may experience substantial fluctuations in our operating results from period to period due to the nature of our business and therefore fail to meet profitability expectations.

Our operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors. These factors include:

· levels of assets under our management or advisement;

· the number of underwriting and merger and acquisition transactions completed by our clients and the level and timing of fees we receive from those transactions;

· the number of institutional and retail brokerage transactions and the commissions we receive from those transactions;

· changes in the market valuations of investments held by proprietary investment funds that we organize and manage and of companies in which we have invested as a principal;

· the timing of recording of asset management fees and special allocations of income, if any;

· the realization of profits and losses on principal investments;

· variations in expenditures for personnel, consulting, accounting, and legal expenses;

· expenses of establishing any new business units, including marketing and technology expenses; and

· changes in accounting principles.

Our revenue from an underwriting transaction is recorded only when the underwriting is completed. Revenue from merger or acquisition transactions is recorded only when non-refundable retainer fees are received or the transaction closes. Accordingly, the timing of recognition of revenue from a significant transaction can materially affect our quarterly and annual operating results. Additionally, we have a certain level of fixed costs in our investment banking operations. As a result, we could experience losses in these operations if revenue from our services is lower than our fixed costs.

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We depend on proprietary and third party systems, so systems failures could significantly disrupt our business. These and other operational risks may disrupt our business, result in regulatory action against us, or limit our growth.

Our business depends highly on our and our clearing firms’ ability to process, on a daily basis, a large number of transactions across numerous and diverse markets and the transactions we process have become increasingly complex. Consequently, we rely heavily on our communications and financial, accounting, and other data processing systems, including systems provided by our clearing brokers and service providers. We face operational risk arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly recorded, evaluated, or accounted.

If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to clients, regulatory intervention, or reputational damage. Any failure or interruption of our systems, the systems of our clearing brokers, or third party trading systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results. In addition, our clearing brokers provide our principal disaster recovery system. We cannot assure you that we or our clearing brokers will not suffer any systems failures or interruption, including ones caused by earthquake, fire, other natural disasters, power or telecommunications failure, act of God, act of war, terrorism, or otherwise, or that our or our clearing brokers’ back-up procedures and capabilities in the event of any such failure or interruption will be adequate. The inability of our or our clearing brokers’ systems to accommodate an increasing volume of transactions could also constrain our ability to expand our business.

Strategic investments or acquisitions may result in additional risks and uncertainties in our business.

We intend to grow our core businesses through both internal expansion and through strategic investments and acquisitions. To the extent we make strategic investments or acquisitions, we face numerous risks and uncertainties combining or integrating the relevant businesses and systems, including the need to combine accounting and data processing systems and management controls, and to integrate relationships with clients, vendors, and business partners. Acquisitions pose the risk that any business we acquire may lose clients or employees or could under-perform relative to expectations.

Risks Related to the Regulation of Our Business

Our securities broker-dealer, investment adviser, and trust company subsidiaries are subject to substantial regulation. If we fail to comply with applicable requirements, our business will be adversely affected.

Our businesses are subject to extensive regulation under both federal and state laws. SMH is registered as a broker-dealer with the SEC and FINRA; SMH, Capital Advisors, Salient, Edelman, and Rikoon are registered with the SEC as investment advisers; and Salient Trust is licensed as a trust company by the Texas Banking Commissioner. All of the professional agents employed by SSG are registered as certified contract advisors with either the National Football League Players Association or the Major League Baseball Players Association.

The SEC is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally FINRA and the securities exchanges, are actively involved in the regulation of broker-dealers. We are also subject to regulation by state securities commissions in those states in which we do business. The principal purpose of regulation and discipline of broker-dealers is the protection of clients and the securities markets rather than protection of creditors and shareholders of broker-dealers. Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, record-keeping, and the conduct of directors, officers, and employees.

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The SEC, FINRA, other self-regulatory organizations, and state securities commissions may conduct administrative proceedings that can result in:

· censure, fines, or civil penalties;

· issuance of cease-and-desist orders;

· deregistration, suspension, or expulsion of a broker-dealer or investment advisor;

· suspension or disqualification of the broker-dealer’s officers or employees;

· prohibition against engaging in certain lines of business; and

· other adverse consequences.

The imposition of any penalties or orders on us could have a material adverse effect on our business, financial condition, and results of operations. The investment banking and brokerage industries have recently come under scrutiny at both the state and federal levels, and the cost of compliance and the potential liability for non-compliance has increased as a result.

Our trust subsidiary, Salient Trust, is subject to the Texas Trust Company Act, the rules and regulations under that act, and supervision by the Texas Banking Commissioner. These laws are intended primarily for the protection of Salient Trust’s clients rather than its equity owners.

The regulatory environment in which we operate is also subject to change. Our business may be adversely affected as a result of new or revised legislation, or changes in rules promulgated by the SEC, FINRA, and other self-regulatory organizations. We may also be adversely affected by changes in the interpretation or enforcement of existing laws and rules by the SEC and FINRA.

Our financial services businesses may be materially affected not only by regulations applicable to our subsidiaries as financial market intermediaries but also by regulations of general application. For example, the volume of our underwriting, merger and acquisition, merchant banking, and principal investment business in a given period could be affected by existing and proposed tax legislation, antitrust policy, and other governmental regulations and policies, including the monetary policies of the Federal Reserve Board, as well as changes in interpretation or enforcement of existing laws and rules that affect the business and financial communities.

Our ability to comply with laws and regulations relating to our financial services businesses depends in large part upon maintaining a system to monitor compliance and our ability to attract and retain qualified compliance personnel. Although we believe we are in material compliance with all applicable laws and regulations, we may not be able to comply in the future. Any noncompliance could have a material adverse effect on our business, financial condition, and results of operations.

The business operations of SMH and Salient Trust may face limitations due to net capital requirements.

As a registered broker-dealer, SMH is subject to the net capital rules administered by the SEC and FINRA. These rules, which specify minimum net capital requirements for registered broker-dealers and FINRA members, are designed to assure that broker-dealers maintain adequate net capital in relation to their liabilities and the size of their customers’ business. These requirements have the effect of requiring that a substantial portion of a broker-dealer’s assets be kept in cash or highly liquid investments. Failure to maintain the required net capital may subject a firm to suspension or revocation of its registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies. Compliance with these net capital rules could limit operations that require extensive capital, such as underwriting or trading activities. Additionally, our trust subsidiary, Salient Trust, is subject to minimum net capital requirements under the Texas Trust Company Act. A failure to comply with the net capital requirements could impair SMH’s ability to conduct business as a broker-dealer and Salient Trust’s ability to conduct business as a trust company.

These net capital rules could also restrict our ability to withdraw capital in situations where our broker-dealer and trust company subsidiaries have more than the minimum required capital. We may be limited in our ability to pay dividends, implement our strategies, pay interest or repay principal on our debt, and redeem or repurchase our outstanding shares. In addition, a change in these net capital rules or new rules affecting the scope, coverage, calculation, or amount of the net capital requirements, or a significant operating loss or significant charge against net capital, could have similar effects.

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As a holding company, we depend on dividends, distributions, and other payments from our subsidiaries to fund any dividend payments and to fund all payments on our obligations. As a result, any regulatory action that restricts SMH’s or Salient Trust’s ability to make payments to us could impede access to funds we need to make dividend payments or payments on our obligations.

Risks Relating to Owning Our Common Stock

Our common stock price may be volatile, which could adversely affect the value of your shares. Our common stock may trade at prices below your purchase price.

The market price of our common stock may be subject to significant fluctuations in response to many factors, including:

· our perceived prospects;

· the perceived prospects of the securities and financial services industries in general;

· differences between our actual financial results and those expected by investors and analysts;

· changes in securities analysts’ recommendations or projections;

· our announcements of significant contracts, milestones, or acquisitions;

· sales of substantial amounts of our common stock;

· changes in general economic or market conditions, including conditions in the securities brokerage and investment banking markets or in the southwestern U.S.;

· changing conditions in the industry of one of our major client groups; and

· fluctuations in stock market price and volume unrelated to us or our operating performance.

Many of these factors are beyond our control. Any one of the factors noted herein could have an adverse effect on the value of our common stock. Our common stock may trade at prices below your purchase price.

Because our board of directors can issue common stock without shareholder approval, you could experience substantial dilution.

Our board of directors has the authority to issue up to 100,000,000 shares of common stock and to issue options and warrants to purchase shares of our common stock without shareholder approval in certain circumstances. Future issuances of additional shares of our common stock could be at values substantially below the price at which you may purchase our stock and, therefore, could represent substantial dilution. In addition, our board of directors could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without shareholder approval.

Our ability to issue “blank check” preferred stock without approval by the holders of our common stock could adversely affect your rights as a common shareholder and could be used as an anti-takeover device.

Our charter allows our board of directors to issue preferred stock and to determine its rights, powers, and preferences without shareholder approval (“blank check” preferred stock). Future preferred stock issued under the board of directors’ authority could contain preferences over our common stock as to dividends, distributions, and voting power. Holders of preferred stock could, for example, be given the right to separately elect some number of our directors in all or specified events or an independent veto right over certain transactions, and redemption rights and liquidation preferences assigned to preferred shareholders could affect the residual value of your common stock. We could also use the preferred stock to deter or delay a change in control that may be opposed by management even if the transaction might be favorable to you as a common shareholder.

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Anti-takeover provisions of the Texas Business Corporation Act and our charter could discourage a merger or other type of corporate reorganization or a change in control even if it could be favorable to the interests of our shareholders.

Provisions of our corporate documents and Texas law may delay or prevent an attempt to obtain control of our company, whether by means of a tender offer, business combination, proxy contest, or otherwise. These provisions include:

· the authorization of “blank check” preferred stock;

· the ability to remove directors only for cause, and then only on approval of the holders of two-thirds of the outstanding voting stock;

· a restriction on the ability of shareholders to take actions by less than unanimous written consent; and

· a restriction on business combinations with interested parties.

Our officers and directors own a substantial amount of our common stock and, therefore, exercise significant control over our corporate governance and affairs, which may result in their taking actions with which you do not agree.

Our executive officers and directors, and entities affiliated with them, control approximately 25% of our outstanding common stock (including exercisable stock options held by them). These shareholders, if they act together, will be able to exercise substantial influence over the outcome of all corporate actions requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions, which may result in corporate action with which you do not agree. This concentration of ownership may also have the effect of delaying or preventing a change in control and might affect the market price of our common stock.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

Our principal executive office together with certain brokerage and investment banking operations of SMH are located at 600 Travis, Houston, Texas and comprise approximately 67,000 square feet of leased office space pursuant to lease arrangements expiring in 2018. We lease 24 other office locations including Alexandria, Virginia; Asheville, North Carolina; Bethesda, Maryland; Boca Raton; Chicago; Cleveland (two locations); Colorado Springs; Dallas/Fort Worth (three locations); Fairfax, Virginia; Garden City, New York; Greenwich, Connecticut; Houston; Hunt Valley, Maryland; Jackson, Mississippi; Las Vegas; Los Angeles; New York City (two locations); Santa Fe; Tranquility, New Jersey; and Tulsa. We lease all of our office space which management believes, at the present time, is adequate for our business. We also lease communication and other office equipment.

Item 3. 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.

FINRA initially conducted an inspection of our Concept Capital prime brokerage and private investment or hedge fund support operations based in our New York office in November 2004.  Subsequent to such inspection, FINRA opened an investigation with respect to our prime brokerage and related hedge fund operations. In August 2006, SMH received a “Wells letter” notification from FINRA, which stated that the staff of FINRA had made a preliminary determination to recommend that disciplinary action be brought against SMH and four of its employees based on alleged violations of certain conduct rules of FINRA.  On October 17, 2007, SMH executed an Acceptance, Waiver and Consent (“AWC”) to resolve all matters with respect to the disciplinary action, which was accepted by FINRA on January 9, 2008.  Pursuant to the AWC, SMH agreed to pay a fine of $450,000.

In May 2005, SMH acted as placement agent for a private placement of $50.0 million in convertible preferred stock of Ronco Corporation, a leading company in direct response marketing. Subsequent to the offering, Ronco experienced financial difficulties and ultimately filed a voluntary petition under Chapter 11 of the Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale of substantially all of Ronco’s assets in August 2007, and the case has been converted to liquidation under Chapter 7. It is unlikely that there will be any distribution to its unsecured creditors or equity security holders.  SMH has written off a $3.0 million subordinated working capital loan that it made to Ronco in 2006.  SMH is a defendant in two proceedings related to Ronco, one of which is material and dicussed below.

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

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

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

There were no matters submitted to a vote of our security holders during the fourth quarter of 2007.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on the Global Market Security tier of The Nasdaq Stock Market under the symbol “SMHG”. The following table sets forth the quarterly high and low sales prices for our common stock during 2007 and 2006 for the calendar quarters indicated, each as reported on the Nasdaq National Market, and cash dividends declared per share of common stock:

Calendar Period	High		Low		Cash Dividend
2007:
First Quarter	$	12.89	$	10.19	$	0.045
Second Quarter	$	13.97	$	10.67	$	0.045
Third Quarter	$	12.15	$	8.99	$	0.045
Fourth Quarter	$	10.82	$	8.15	$	0.045
2006:
First Quarter	$	16.88	$	14.89	$	0.045
Second Quarter	$	16.53	$	14.32	$	0.045
Third Quarter	$	15.59	$	12.40	$	0.045
Fourth Quarter	$	13.49	$	10.75	$	0.045

At March 7, 2008, there were 313 holders of record of our common stock.

Dividend Policy

In 2002, our board of directors instituted a policy of paying regular quarterly dividends on our common stock. During 2005, we increased the declared quarterly dividend payment to $0.045 per share (an annual amount of $0.18 per share). In February 2008, the board of directors declared a cash dividend for the first quarter of 2008 in the amount of $0.045 per share. Our declaration and payment of future dividends is subject to the discretion of our board of directors. In exercising this discretion, the board of directors will take into account various factors, including general economic and business conditions, our strategic plans, our financial results and condition, our expansion plans, any contractual, legal and regulatory restrictions on the payment of dividends, and such other factors the board considers relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

For our equity compensation plans, the following table shows, at the end of fiscal year 2007, (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights, (b) the weighted-average exercise price of such options, warrants and rights, and (c) the number of securities remaining available for future issuance under the plans, excluding those issuable upon exercise of outstanding options, warrants and rights.

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Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of oustanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		856,385	$	8.30		2,206,383	(1)
Equity compensation plans not approved by security holders		-		-		-
Total		856,385	$	8.30		2,206,383

(1) The number of shares of our common stock available for incentive awards under our 1998 Incentive Plan is the greater of 4.0 million shares or 25% of the total number of shares of our common stock from time to time outstanding.

Recent Sales of Unregistered Securities

On September 14, 2007, the Company issued an aggregate of 242,927 shares of common stock to the owners of an insurance agency operated under the name of Dickenson and Associates as partial consideration for the purchase of the assets and goodwill of such business. The shares were valued at $2.4 million or $9.88 per share. In addition to the shares, the owners of Dickenson and Associates received a cash payment of $3.6 million. The shares were issued by the Company without registration under the Securities Act of 1933 pursuant to and in reliance on Section 4(2) of such Act, relating to transactions not involving a public offering, and Regulation D thereunder.

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Corporate Performance

The following chart shows a comparison of the cumulative total shareholder return on our common stock for the five-year period ended December 31, 2007, as compared to the cumulative total return of the Nasdaq Stock Market Index and the Nasdaq Financial Stocks Index, a peer group, assuming $100 was invested at market close on December 31, 2002 in our common stock and the two indices and dividends were reinvested.

	Dec-02		Dec-03		Dec-04		Dec-05		Dec-06		Dec-07
Sanders Morris Harris Group Inc	$	100.00	$	143.60	$	208.00	$	193.90	$	153.10	$	124.90
Nasdaq Stock Market Index (U.S. & Foreign)		100.00		150.80		164.10		167.90		185.20		204.70
Nasdaq Financial Stocks Index (1)		100.00		135.30		157.80		161.60		185.80		167.00

(1) The Nasdaq Financial Stocks Index is composed of all Nasdaq companies with Standard Industrial Classification codes ranging from 6000 through 6799.

The foregoing performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference.

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Issuer Purchase of Equity Securities

The following table represents information with respect to shares of SMHG common stock repurchased by the Company during the quarter ended December 31, 2007.

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (1)		Maximum number of shares that may yet be purchased under the plans or programs
October 1 to October 31, 2007		-	$	-		-		-
November 1 to November 30, 2007		101,384		9.10		101,384		898,616
December 1 to December 31, 2007		88,490		9.67		88,490		810,126
Total		189,874	$	9.37		189,874		810,126

(1) The Company announced a share repurchase programon November 7, 2007 to purchase up to 1.0 million shares of the Company's shares of common stock. All purchases were made in open-market transactions.

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Item 6.Selected Financial Data

The following data should be read together with the Consolidated Financial Statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included later in this report.

	Year Ended December 31,
	2007		2006			2005		2004		2003
	(in thousands except per share amounts)
Statement of Income:
Total revenue	$	185,812	$	166,748		$	124,475	$	119,060	$	103,934
Income from continuing operations	$	5,093	$	10,308		$	10,295	$	12,043	$	10,416
Income (loss) from discontinued operations, net of tax		-		(6,902	)		379		371		-
Net income	$	5,093	$	3,406		$	10,674	$	12,414	$	10,416
Diluted earnings (loss) per common share:
Continuing operations	$	0.20	$	0.49		$	0.53	$	0.66	$	0.59
Discontinued operations		-		(0.33	)		0.02		0.02		-
Net earnings	$	0.20	$	0.16		$	0.55	$	0.68	$	0.59
Weighted average common shares outstanding and committed - diluted		25,086		20,915			19,253		18,302		17,622

	As of December 31,
	2007		2006		2005		2004		2003
	(in thousands except per share amounts)
Balance Sheet Data:
Cash and cash equivalents	$	46,503	$	68,861	$	17,867	$	22,262	$	33,406
Securities		85,657		83,929		75,541		59,929		35,478
Total assets		291,548		282,042		208,689		172,433		139,469
Total liabilities		48,265		49,982		46,223		28,419		20,110
Minority interests		20,105		12,124		7,781		5,230		4,506
Shareholders' equity		223,178		219,936		154,685		138,784		114,853
Cash dividends declared per common share	$	0.18	$	0.18	$	0.18	$	0.15	$	0.12

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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward-Looking Statements

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and their related notes and other detailed information appearing elsewhere in this Annual Report.

Overview

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

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

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

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

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

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

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

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Our financial services business is affected by general economic conditions. Our revenue relating to asset-based advisory services and managed accounts is typically from fees based on the market value of assets under management or advisement. The growth in assets under our management resulted in higher management fees for us. While growth in assets under management has resulted in higher management fees, the instability in the overall stock market, lower trading volume, and reduced commission rates have had a negative impact on our commission revenue.

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

Components of Revenue and Expenses

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

Expenses. Our expenses consist of (1) compensation and benefits, (2) floor brokerage, exchange, and clearance fees, and (3) other expenses. Compensation and benefits have both a variable component, based on revenue production, and a fixed component. The variable component includes institutional and retail sales commissions, bonuses, overrides, and other incentives. Wealth advisory and institutional commissions are based on competitive commission schedules. 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 2007, compensation and benefits represented 64.8% of total expenses and 57.8% of total revenue, compared to 66.0% of total expenses and 57.7% of total revenue during 2006.

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

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

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Total revenue increased $19.1 million to $185.8 million in 2007 from $166.7 million in 2006, while total expenses increased $19.9 million to $165.7 million in 2007 from $145.8 million in 2006. Equity in income of limited partnerships increased to $3.8 million in 2007 from $2.2 million in 2006, principally due to larger increases in the values of securities held in the investment portfolios of the limited partnerships managed by the Company. Income from continuing operations was $5.1 million, or $0.20 per diluted common share, in 2007 compared to $10.3 million, or $0.49 per diluted common share, in 2006. The loss from discontinued operations was $6.9 million, or $0.33 per diluted common share, in 2006. There was no such loss in 2007.

Commission revenue declined to $54.8 million in 2007 from $57.2 million during 2006 primarily due to the conversion of assets under management at Edelman from a commission-based to a fee-based compensation structure. Investment banking revenue declined to $35.0 million in 2007 from $36.6 million in 2006 due to reduced revenue from investment banking advisory engagements. Investment advisory and related services increased from $41.7 million during 2006 to $71.3 million in 2007. The conversion of almost three-quarters of Edelman’s assets under management from a commission-based to a fee-based compensation structure has contributed in the rise in investment advisory fee revenue. Additionally, an increase in assets under management at Edelman and Salient and the acquisition of Rikoon also contributed to the growth in investment advisory fee revenue. Principal transactions revenue declined from $18.7 million in 2006 to $10.2 million in 2007 as the result of declines in the value of our investment portfolios. Interest and dividends increased to $6.7 million in 2007 from $6.6 million in 2006. Other income increased to $7.7 million in 2007 from $5.9 million in 2006 due to an increase in fees earned on the Company’s cash balances and customer credit balances at its clearing firms resulting from higher deposit balances.

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Employee compensation and benefits increased to $107.4 million in 2007 from $96.3 million in 2006 due to the higher revenue. Floor brokerage, exchange, and clearance fees declined to $6.4 million in 2007 from $7.4 million in 2006 as the result of lower trading volume in the proprietary trading operations of our Concept Capital division. Communications and data processing increased to $10.0 million in 2007 from $7.7 million in 2006 primarily due to higher clearing firm service fees at Edelman caused by the conversion of accounts from a commission-based to a fee-based fee structure. Occupancy costs increased to $11.9 million in 2007 from $11.0 million in 2006 due to the increase in the amount of rental space and related furniture and equipment necessary for the expansion of our asset and wealth management business. Interest expense declined to $35,000 in 2007 from $804,000 in 2006 due to the payoff of most of the Company’s debt during 2006. Amortization of intangible assets was $349,000 in 2007. There was no such amortization recorded in 2006. Other general and administrative expenses increased to $29.6 million in 2007 from $22.7 million in 2006 primarily due to the write-off of two notes receivable, representing bridge loans to investment banking clients, totaling $5.0 million.

Our effective tax rates from continuing operations were 37.2% in 2007 and 2006. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of state income taxes, which was partially affected by certain interest and dividend income not subject to tax.

During 2006, the Company hired a 30-person fixed income team and established an expanded fixed income division headquartered in New York. Over the course of the year, the division was unable to achieve sufficient revenue to offset its costs, many of which were in the form of guaranteed salaries and bonuses. During the third and fourth quarters of 2006, we decided to close and closed the division. As a result, we recorded a loss from discontinued operations in 2006 of $3.8 million, net of tax, primarily consisting of operating losses.

Additionally, during 2006, Charlotte Capital, an investment advisor subsidiary of the Company, made the decision to terminate its existing advisory agreements and wind up its business. This decision was made due to the continuing decline of assets under management and to the fact that Charlotte Capital was not profitable. As a result, we recorded a loss from discontinued operations in 2006 of $3.1 million, net of tax, consisting of a write down of goodwill, operating losses, and abandoned leases.

No losses from discontinued operations were recorded in 2007.

RESULTS BY SEGMENT

Asset/Wealth Management

	Year Ended December 31,
	2007		2006
	(in thousands)
Revenue	$	107,252	$	80,452
Income from continuing operations before income taxes	$	24,833	$	12,838

Revenue from asset/wealth management increased to $107.3 million in 2007 from $80.5 million in 2006 and income from continuing operations before income taxes increased to $24.8 million in 2007 from $12.8 million in 2006. Commission revenue declined to $19.5 million in 2007 from $23.5 million in 2006 due to the conversion of assets under management at Edelman from a commission-based to a fee-based compensation structure. Investment advisory and related services increased to $71.1 million in 2007 from $41.6 million in 2006 as a result of this conversion. Growth in assets under management at Edelman and Salient, as well as the acquisition of Rikoon, has contributed to the increase in revenue from investment advisory fees. Compensation expense increased to $55.2 million in 2007 from $45.8 million in 2006 due to the higher revenue. The change in value of our investments in limited partnerships resulted in a gain of $8.5 million in 2007 compared to $1.5 million in 2006. Minority interests in net income of consolidated companies reflect the portion of net income attributable to minority interest ownership of entities included in our consolidated financial statements. Income attributable to minority interests, which reduces our pretax income, increased to $15.8 million in 2007 from $6.7 million in 2006, due to the increase in Edelman’s income, of which minority interests own 49%, and to the increased income from one of the limited partnerships, of which minority interests own 75%.

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Capital Markets

Investment Banking

	Year Ended December 31,
	2007		2006
	(in thousands)
Revenue	$	23,609	$	25,239
Income from continuing operations before income taxes	$	4,273	$	7,728

Revenue from investment banking declined to $23.6 million in 2007 from $25.2 million in 2006 and income from continuing operations before income taxes declined to $4.3 million in 2007 from $7.7 million in 2006. The revenue decrease is primarily due to lower revenue from advisory fees during 2007. Total expense increased to $19.3 million in 2007 from $17.5 million in 2006, principally due to additional compensation and other costs incurred in an effort to increase revenue.

Institutional Brokerage

	Year Ended December 31,
	2007		2006
	(in thousands)
Revenue	$	15,519	$	21,349
Income from continuing operations before income taxes	$	1,232	$	2,819

Revenue from institutional brokerage declined to $15.5 million in 2007 from $21.3 million in 2006 and income from continuing operations before income taxes declined to $1.2 million in 2007 from $2.8 million in 2006. Commission revenue declined to $9.9 million in 2007 from $13.9 million in 2006 reflecting a decline in both the number of shares traded in our institutional equity division and the commission revenue per share traded. These declines are largely the result of the growth in electronic trading strategy execution software that replaces, in some cases, the role of traditional traders. Additionally, sales credits from syndicate and investment banking activities declined to $3.4 million in 2007 from $4.3 million in 2006 reflecting a lower volume of offerings sold by the institutional division. Total expenses declined to $14.3 million in 2007 from $18.5 million in 2006 primarily due to the decline in revenue.

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Prime Brokerage Services

	Year Ended December 31,
	2007		2006
	(in thousands)
Revenue	$	36,583	$	34,788
Income from continuing operations before income taxes	$	2,750	$	2,595

Revenue from prime brokerage services increased to $36.6 million in 2007 from $34.8 million in 2006 and income from continuing operations before income taxes rose to $2.8 million in 2007 from $2.6 million in 2006. Commission revenue increased to $25.3 million in 2007 from $19.7 million in 2006, while principal transaction revenue decreased to $7.8 million in 2007 from $12.6 million in 2006, reflecting growth in hedge fund servicing revenue and lower revenue from proprietary trading activities. Total expenses increased to $33.8 million during 2007 from $32.2 million during 2006 reflecting increased compensation and other costs related to increased revenue.

Corporate Support

	Year Ended December 31,
	2007			2006
	(in thousands)
Revenue	$	2,849		$	4,920
Loss from continuing operations before income taxes	$	(24,972	)	$	(9,562	)

Revenue from corporate support declined to $2.8 million in 2007 from $4.9 million in 2006 and the loss from continuing operations before income taxes increased to $25.0 million in 2007 from $9.6 million in 2006. Total expenses increased to $23.2 million in 2007 from $15.2 million in 2006 primarily due to the write-off of two notes receivable that totaled $5.0 million. In addition, compensation expense increased to $13.7 million from $10.5 million primarily due to additional compensation expense related to the acquisition of Rikoon. Equity in income (loss) of limited partnerships decreased to a loss of $4.6 million from a gain of $728,000, principally due to a decrease in value of our investment in one limited partnership.

Year Ended December 31, 2006 Compared to Year Ended December 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.

Total revenue increased $42.2 million to $166.7 million in 2006 from $124.5 million in 2005, while total expenses increased $34.8 million to $145.8 million in 2006 from $111.0 million in 2005. Equity in income of limited partnerships declined to $2.2 million in 2006 from $8.5 million in 2005, principally due to lower increases in the values of securities held in the investment portfolios of the limited partnerships managed by the Company. Income from continuing operations was $10.3 million, or $0.49 per diluted common share, in 2006 compared to $10.3 million, or $0.53 per diluted common share, in 2005. The loss from discontinued operations was $6.9 million, or $0.33 per diluted common share, in 2006 compared to income from discontinued operations of $379,000, or $0.02 per diluted common share, during 2005.

Commission revenue increased to $57.2 million in 2006 from $44.5 million during 2005 due to the addition of two new wealth advisory offices in 2006 and the inclusion of Edelman for a full year in 2006 versus only seven months in 2005. Investment banking revenue increased to $36.6 million in 2006 from $32.8 million in 2005 due to higher revenue from advisory services. Investment advisory and related services increased from $29.2 million during 2005 to $41.7 million in 2006. The inclusion of Edelman for a full year in 2006 as well as the conversion of almost half of Edelman’s assets under management from a commission-based to a fee-based fee structure are the principal factors that resulted in the higher investment advisory fee revenue. Additionally, an increase in assets under management at Salient and Capital Advisors contributed to the growth in investment advisory fee revenue. Principal transactions revenue increased from $9.8 million in 2005 to $18.7 million in 2006 as the result of higher proprietary trading activity at our Concept Capital prime brokerage services division. Interest and dividends increased to $6.6 million in 2006 from $4.6 million in 2005 due to an increase in both interest rates and the amount of money in the firm’s accounts that are earning interest income. Other income increased to $5.9 million in 2006 from $3.5 million in 2005 due to an increase in fees earned on the Company’s cash balances and customer credit balances at its clearing firms resulting from higher deposit balances.

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Employee compensation and benefits increased to $96.3 million in 2006 from $74.5 million in 2005 due to the higher revenue. Floor brokerage, exchange, and clearance fees increased to $7.4 million in 2006 from $4.7 million in 2005 as the result of higher trading volume in the proprietary trading operations of our Concept Capital division. Occupancy costs increased to $11.0 million in 2006 from $8.5 million in 2005 due to the inclusion of Edelman for the full 2006 year, and to the increase in the amount of rental space and related furniture and equipment necessary for the expansion of our proprietary trading operations. Interest expense doubled to $804,000 in 2006 from $402,000 in the prior year due to an increase in the Company’s debt during 2006. Most of the debt was repaid before the end of 2006. Other general and administrative expenses increased to $22.7 million in 2006 from $15.3 million in 2005. Higher legal costs associated with the settlement of two related customer arbitration claims during 2006, higher accounting costs associated with audit fees and the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the inclusion of Edelman for the full year of 2006 were the primary reasons for the increase in other general and administrative expense.

Our effective tax rates from continuing operations were 37.2% in 2006 and 40.7% in 2005. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of state income taxes, which was partially affected by certain interest and dividend income not subject to tax.

During 2006, the Company hired a 30-person fixed income team and established an expanded fixed income division headquartered in New York. Over the course of the year, the division was unable to achieve sufficient revenue to offset its costs, many of which were in the form of guaranteed salaries and bonuses. During the third and fourth quarters of 2006, we decided to close and closed the division. As a result, we recorded a loss from discontinued operations in 2006 of $3.8 million, net of tax, primarily consisting of operating losses.

Additionally, during 2006, Charlotte Capital, an investment advisor subsidiary of the Company, made the decision to terminate its existing advisory agreements and wind up its business. This decision was made due to the continuing decline of assets under management and to the fact that Charlotte Capital was not profitable. As a result, we recorded a loss from discontinued operations in 2006 of $3.1 million, net of tax, consisting of a write down of goodwill, operating losses, and abandoned leases.

RESULTS BY SEGMENT

Asset/Wealth Management

	Year Ended December 31,
	2006		2005
	(in thousands)
Revenue	$	80,452	$	55,307
Income from continuing operations before income taxes	$	12,838	$	13,122

Revenue from asset/wealth management increased to $80.5 million in 2006 from $55.3 million in 2005 and income from continuing operations before income taxes declined to $12.8 million in 2006 from $13.1 million in 2005. Commission revenue increased to $23.5 million in 2006 from $14.2 million in 2005 due to the acquisition of Edelman in 2005 and the addition of two new wealth advisory offices in 2006. Investment advisory and related services increased to $41.6 million in 2006 from $29.2 million in 2005. Growth in assets under management at Salient and Capital Advisors, as well as the acquisition of Edelman, has contributed to the increase in revenue from investment advisory fees. Compensation expense rose to $45.8 million in 2006 from $32.0 million in 2005 due to the higher revenue. The change in value of our investments in limited partnerships resulted in a gain of $1.5 million in 2006 compared to $7.2 million in 2005. Minority interests in net income of consolidated companies reflect the portion of net income attributable to minority interest ownership of entities included in our consolidated financial statements. Income attributable to minority interests, which reduces our pretax income, increased to $6.7 million in 2006 from $4.6 million in 2005, principally due to increased income from one of the limited partnerships, of which minority interests own 50%.

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Capital Markets

Investment Banking

	Year Ended December 31,
	2006		2005
	(in thousands)
Revenue	$	25,239	$	18,509
Income from continuing operations before income taxes	$	7,728	$	6,502

Revenue from investment banking increased to $25.2 million in 2006 from $18.5 million in 2005 and income from continuing operations before income taxes increased to $7.7 million in 2006 from $6.5 million in 2005. The revenue increase is primarily due to increased revenue from private placement transactions and advisory fees during 2006. Total expense increased to $17.5 million in 2006 from $12.0 million in 2005, principally due to additional compensation and other costs associated with the revenue increase.

Institutional Brokerage

	Year Ended December 31,
	2006		2005
	(in thousands)
Revenue	$	21,349	$	26,501
Income from continuing operations before income taxes	$	2,819	$	3,552

Revenue from institutional brokerage declined to $21.3 million in 2006 from $26.5 million in 2005 and income from continuing operations before income taxes declined to $2.8 million in 2006 from $3.6 million in 2005. Commission revenue declined to $13.9 million in 2006 from $15.8 million in 2005 reflecting a decline in both the number of shares traded in our institutional equity division and the commission revenue per share traded. These declines are largely the result of the growth in electronic trading strategy execution software that replaces, in some cases, the role of traditional traders. Additionally, sales credits from syndicate and investment banking activities declined by $2.7 million to $4.3 million in 2006 reflecting a lower volume of offerings sold by the institutional division. Total expenses declined to $18.5 million in 2006 from $22.9 million in 2005 primarily due to the decline in revenue.

Prime Brokerage Services

	Year Ended December 31,
	2006		2005
	(in thousands)
Revenue	$	34,788	$	19,613
Income from continuing operations before income taxes	$	2,595	$	1,955

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Revenue from prime brokerage services increased to $34.8 million in 2006 from $19.6 million in 2005 and income from continuing operations before income taxes rose to $2.6 million in 2006 from $2.0 million in 2005. Commission revenue increased to $19.7 million in 2006 from $14.3 million in 2005, while principal transaction revenue increased to $12.6 million in 2006 from $4.2 million in 2005, reflecting growth in proprietary trading activities. Total expenses increased to $32.2 million during 2006 from $17.7 million during 2005 reflecting increased compensation and other costs related to proprietary trading activities. Compensation and other costs, when measured as a percentage of proprietary trading revenue, are higher than similar costs associated with other revenue sources.

Corporate Support

	Year Ended December 31,
	2006			2005
	(in thousands)
Revenue	$	4,920		$	4,545
Loss from continuing operations before income taxes	$	(9,562	)	$	(7,778	)

Revenue from corporate support increased to $4.9 million in 2006 from $4.5 million in 2005 and the loss from continuing operations before income taxes increased to $9.6 million in 2006 from $7.8 million in 2005. Interest and dividend income increased to $3.8 million in 2006 from $3.0 million in 2005 due to an increase in the amount of money earning interest, reflecting proceeds from the Company’s stock offering during 2006, and due to higher interest rates during 2006. Total expenses increased to $15.2 million in 2006 from $13.6 million in 2005. Accounting expenses increased by $742,000 due to higher audit and Sarbanes-Oxley related costs. Unallocated research costs totaled $783,000 during 2006.

Liquidity and Capital Resources

Cash Requirements

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

The Company had two credit facilities in effect at December 31, 2007. In May 2005, the Company entered into a $15.0 million revolving credit facility with a bank. In May 2006, this credit agreement was amended to increase the revolving credit facility to $18.0 million. The line of credit expires in May 2008. There was no outstanding balance on the line of credit at December 31, 2007. The amount of available borrowings under the line of credit, which is reduced by letters of credit issued by the Company, was $16.3 million at December 31, 2007. In December 2005, Salient entered into a $2.5 million revolving credit facility that will expire in April 2008. The outstanding balance on the Salient line of credit was $200,000 at December 31, 2007.

32

The Company and its subsidiaries have contractual obligations under operating leases that expire by 2018 with initial noncancelable terms in excess of one year. The aggregate annual rentals for these operating leases, consisting of leases for office space and computer and office equipment, debt repayment based on contractual maturities, along with the base amount of additional consideration for the acquisition of Edelman, are as described in the following table:

	Payment due by period
	Total		Within 1 year		After 1 but within 3 years		After 3 but within 5 years		After 5 years
	(in thousands)
Operating lease obligations	$	51,584	$	7,946	$	16,450	$	15,350	$	11,838
Debt repayment		200		200		-		-		-
Estimated amount of additional consideration for Edelman acquisition		91,867		44,367		47,500		-		-
Total	$	143,651	$	52,513	$	63,950	$	15,350	$	11,838

Operating expenses consist of compensation and benefits, floor brokerage, exchange, and clearing costs, and other expenses. These expenses are primarily dependent on revenue and, with the exception of obligations for office rentals, should require a limited amount of capital in addition to that provided by revenue during 2008. Currently, obligations for non-cancelable office leases total $7.9 million during 2008. Funds required for other working capital items such as receivables, securities owned, and accounts payable, along with expenditures to repurchase stock, are expected to total between $5.0 million and $10.0 million during 2008. Capital expenditure requirements are expected to total between $4.0 million and $6.0 million during 2008, mainly consisting of leasehold improvements, furniture, and computer equipment and software. Funds needed for acquisitions will depend on the completion of transactions that may not be identifiable until such time as the acquisition is completed.

We intend to satisfy a large portion of our funding needs with our own capital resources, consisting largely of internally generated earnings and liquid assets. At December 31, 2007, we had approximately $46.5 million in cash and cash equivalents, which together with liquid assets, consisting of receivables from broker-dealers, deposits with clearing organizations, marketable securities owned, and securities available for sale totaled $72.4 million.

Receivables turnover, calculated as total revenue divided by average receivables, was five for each of the years ended December 31, 2007 and 2006. The allowance for doubtful accounts as a percentage of receivables was 5.2% at December 31, 2007 compared to 0.8% at December 31, 2006. The increase in the allowance for doubtful accounts as a percentage of receivables was the result of a $2.0 million provision for bad debts recorded on a note receivable from an investment banking client in the fourth quarter of 2007.

Sources and Uses of Cash

On October 4, 2006, we completed a sale of 5.0 million shares of common stock in an underwritten public offering, at a price to the public of $12.50 per share. Jefferies & Company, Inc. led the underwriting team, with Sandler O’Neill & Partners, L.P. as co-manager for the offering. We received net proceeds (before expenses) of $58.8 million, which were used to repay the outstanding balance of our revolving credit facility and to provide funds for general corporate purposes, including expansion of our business and working capital.

For the year ended December 31, 2007, net cash provided by operations totaled $24.4 million compared to $13.4 million during 2006. Receivables increased by $20.3 million during the year ended December 31, 2007, principally due to increased revenue and the $8.0 million loan to Edelman Financial Advisors, LLC.

Marketable securities owned decreased by $16.9 million during the year ended December 31, 2007, while securities sold, not yet purchased decreased by $4.7 million and payables to broker-dealers and clearing organizations increased by $2.2 million. The change in marketable securities owned, securities sold, not yet purchased, and payables to broker-dealers and clearing organizations is primarily due to the trading portfolios of our proprietary trading operations. The Company’s proprietary trading operations carry both long and short fixed income and equity securities. These trading operations generally seek to generate profits based on trading spreads, rather than through speculation on the direction of the market. We employ hedging strategies designed to insulate the net value of our trading inventories from fluctuations in the general level of interest rates and equity price variances. We finance a portion of our trading positions through our clearing broker-dealers.

33

Not readily marketable securities owned, primarily investments in limited partnerships, were $61.1 million at December 31, 2007 compared to $45.4 million at December 31, 2006. This increase is primarily the result of a $20.0 million initial investment in a new limited partnership managed by Capital Advisors. Management believes its investment in limited partnerships is a critical part of its capital market investing activities that has historically generated favorable returns for the Company. These limited partnerships typically have a ten-year life.

Capital expenditures for the year ended December 31, 2007 were $7.7 million mainly for the purchase of leasehold improvements, furniture, and computer equipment and software necessary for our growth.

At December 31, 2007, SMH, our registered broker-dealer subsidiary, was in compliance with the net capital requirements of the SEC's Uniform Net Capital Rules and had capital in excess of the required minimum. Salient Trust was in compliance with the Texas Department of Banking’s net capital requirement and had capital in excess of the required minimum.

Critical Accounting Policies/Estimates

Valuation of Not Readily Marketable Securities. Securities not readily marketable include investment securities (1) for which there is no market on a securities exchange or no independent publicly quoted market, (2) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (3) that cannot be offered or sold because of other arrangements, restrictions, or conditions applicable to the securities or to the company. Securities not readily marketable consist primarily of investments in private companies, limited partnerships, equities, options, and warrants.

Generally, investments in shares of public companies are valued at a discount of up to 30% to the closing market price on the balance sheet date if the shares are not readily marketable. Investments in unregistered shares of public companies are valued at up to a 30% discount from the most recent sales price of registered shares, except in cases where the securities may be sold pursuant to a currently effective registration statement or an exemption from registration and there exists sufficient trading volume in the securities, in which case the market price is used. The discounts reflect liquidity risk and contractual or statutory restrictions on transfer. Preferred stock of a public company is carried at its liquidation preference. Investments in private companies are valued at the purchase price, the best estimate of fair value, until there is a basis for revaluation. Revaluation may result from a subsequent public offering or private placement, an event that has occurred indicating valuation increase or impairment, or other pertinent factors and events. Investments in limited partnerships are accounted for using the equity method, which approximates fair value.

Investments in not readily marketable securities, marketable securities with insufficient trading volumes, and restricted securities have been valued at their estimated fair value by the Company in the absence of readily ascertainable market values. These estimated values may differ significantly from the values that would have been used had a readily available market existed for these investments. Such differences could be material to the financial statements. At December 31, 2007 and 2006, the Company’s investment portfolios included investments totaling $61.1 million and $45.4 million, respectively, whose values had been estimated by the Company in the absence of readily ascertainable market values.

Goodwill. Goodwill is recorded for the excess of the purchase price over the fair value of identifiable net assets acquired through a merger transaction. Goodwill is not amortized, but instead is tested for impairment at least annually using a fair value approach.

The Company uses several methods to value its reporting units, including discounted cash flows, comparisons with valuations of public companies in the same industry, multiples of assets under management, and industry guidelines for the valuation of private companies in a similar business. The Company determined that the fair values of the reporting units exceeded their carrying values; therefore, goodwill does not appear to be impaired. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

Stock-Based Compensation. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“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.

34

Effects of Inflation

Historically, inflation has not had a material effect on our consolidated financial position, results of operations or cash flows; however, the rate of inflation can be expected to affect our expenses, such as employee compensation, occupancy, and equipment. Increases in these expenses may not be readily recoverable in the prices that we charge for our services. Inflation can have significant effects on interest rates that in turn can affect prices and activities in the financial services market. These fluctuations could have an adverse impact on our financial services operations.

Recent Accounting Pronouncements

See “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” in the accompanying notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details of recent accounting pronouncements and their expected impact on the Company’s financial statements.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Market Risk

The following discussion relates to our market risk sensitive instruments as of December 31, 2007.

Our trading equity and debt securities are marked to market on a daily basis. At December 31, 2007, our trading equity and debt securities were recorded at a fair value of $23.8 million. These trading equity and debt securities are subject to equity price risk. This risk would amount to approximately $2.4 million based on a potential loss in fair value from a hypothetical 10% decrease in the market value of such equity securities. The actual equity price risk related to the trading equity securities may differ substantially.

Our market making, investing, and underwriting activities often involve the purchase, sale, or short sale of securities and expose our capital to significant risks, including market risk, equity price risk, and credit risk. Market risk represents the potential loss we may incur as a result of absolute and relative price movements, price volatility, and changes in liquidity in financial instruments due to many factors over which we have no control. Our primary market risk arises from the fact that we own a variety of investments that are subject to changes in value and could result in material gains or losses. We also engage in proprietary trading and make dealer markets in equity securities. In doing this, we are required to maintain certain amounts of inventories in order to facilitate customer order flow. We are exposed to equity price risk due to changes in the level and volatility of equity prices primarily in Nasdaq and over-the-counter markets. Changes in market conditions could limit our ability to resell securities purchased or to purchase securities sold short. Direct market risk exposure to changes in foreign exchange rates is not material. We do not use derivatives for speculative purposes.

We seek to cover our exposure to market and equity price risk by limiting our net long and short positions and by selling or buying similar instruments. In addition, trading and inventory accounts are monitored on an ongoing basis, and we have established position limits. Position and exposure reports are prepared at the end of each trading day and are reviewed by traders, trading managers, and management personnel. These reports show the amount of capital committed to various issuers and industry segments. Securities held in our investment portfolio are guided by an investment policy and are reviewed on a regular basis.

Credit risk represents the potential loss due to a client or counterparty failing to perform its contractual obligations, such as delivery of securities or payment of funds, or the value of collateral held to secure obligations proving to be inadequate as related to our margin lending activities. This risk depends primarily on the creditworthiness of the counterparty. We seek to control credit risk by following an established credit approval process, monitoring credit limits, and requiring collateral where appropriate.

We monitor our market and counterparty risk on a daily basis through a number of control procedures designed to identify and evaluate the various risks to which we are exposed. We have established various committees to assess and to manage risk associated with our investment banking and other activities. The committees review, among other things, business and transactional risks associated with potential clients and engagements. We seek to control the risks associated with our investment banking activities by review and approval of transactions by the relevant committee prior to accepting an engagement or pursuing a material investment transaction.

35

Our financial services business is affected by general economic conditions. Our revenues relating to asset-based advisory services and managed accounts are typically from fees based on the market value of assets under management or advisement. The growth in assets under our management resulted in higher management fees for us. While growth in assets under management has resulted in higher management fees, the instability in the overall stock market, lower trading volume, and reduced commission rates have had a negative impact on our commission revenue. In addition, the instability in the credit markets, which sharply widened the spreads over treasuries of certain less than investment grade bonds held primarily in our newly established high yield hedge fund, created losses in our investment portfolio during the second half of 2007.

At December 31, 2007, securities owned by the Company were recorded at a fair value of $84.9 million, including $23.8 million in marketable securities, $53.0 million representing our investments in limited partnerships, and $8.1 million representing other not readily marketable securities.

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

At December 31, 2007, Salient Trust had securities available for sale with a fair value of $759,000. These securities have an amortized cost of $492,000, and are subject to equity price risk. At December 31, 2007, the unrealized increase in market value totaling $267,000, less tax of $106,000, has been included as a separate component of shareholders’ equity.

Operational Risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions, and inadequacies or breaches in our internal control processes. Our businesses are highly dependent on our and our third party providers’ ability to process, on a daily basis, a large number of transactions across numerous and diverse markets. In addition, the transactions we process have become increasingly complex. If any of our or our third party providers’ financial, accounting, or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people, or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.

We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.

In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation, or other services used by us or third parties with which we conduct business.

Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software, and networks may be vulnerable to unauthorized access, computer viruses, or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured or not fully covered through any insurance maintained by us.

36

Legal and Compliance Risk

Legal and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti-money laundering, and record keeping.

New Business Risk

New business risk refers to the risk of entering into a new line of business or offering a new product. By entering a new line of business or offering a new product, we may face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we currently face. We review proposals for new businesses and new products to determine if we are prepared to handle the additional or increased risks associated with entering into such activities.

Other Risk

Other risks encountered by us include political, regulatory, and tax risks. These risks reflect the potential impact that changes in national, state, and local laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups.

37

Item 8.Financial Statements and Supplementary Data

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		39
Consolidated Balance Sheets as of December 31, 2007 and 2006		40
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2007		41
Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2007		42
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2007		43
Notes to Consolidated Financial Statements		44

38

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Sanders Morris Harris Group Inc.:

We have audited the accompanying consolidated balance sheets of Sanders Morris Harris Group Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sanders Morris Harris Group Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As described in note 2, the Company has restated the consolidated statement of cash flows for the year ended December 31, 2005.

As described in note 1, the Company changed its method for accounting for stock-based compensation in 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sanders Morris Harris Group Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2008, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP 

KPMG LLP

Houston, Texas

March 13, 2008

39

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	December 31,
	2007			2006
ASSETS
Cash and cash equivalents	$	46,503		$	68,861
Receivables, net of allowance of $2,330 and $227, respectively
Broker-dealers and clearing organizations		232			505
Customers		25,147			16,720
Related parties		14,676			6,212
Other		4,408			5,587
Deposits with clearing organizations		1,095			1,084
Securities owned		84,898			82,462
Securities available for sale		759			1,467
Furniture, equipment, and leasehold improvements, net		16,613			12,323
Other assets and prepaid expenses		2,329			2,048
Goodwill, net		88,461			83,810
Other intangible assets, net		6,427			963
Total assets	$	291,548		$	282,042
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	29,523		$	25,550
Borrowings		200			555
Deferred tax liability, net		137			3,037
Securities sold, not yet purchased		15,432			20,107
Payable to broker-dealers and clearing organizations		2,973			733
Total liabilities		48,265			49,982
Commitments and contingencies
Minority interests		20,105			12,124
Shareholders' equity:
Preferred stock, $0.10 par value; 10,000,000 shares
authorized; no shares issued and outstanding		-			-
Common stock, $0.01 par value; 100,000,000 shares
authorized; 25,765,806 and 25,273,437 shares issued,
respectively		258			253
Additional paid-in capital		204,596			199,176
Retained earnings		23,422			23,902
Accumulated other comprehensive income		161			86
Treasury stock, at cost, 929,285 shares and 739,411 shares,
respectively		(5,259	)		(3,481	)
Total shareholders' equity		223,178			219,936
Total liabilities and shareholders' equity	$	291,548		$	282,042

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

40

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	Year Ended December 31,
	2007			2006			2005
Revenue:
Commissions	$	54,804		$	57,229		$	44,497
Investment banking		35,014			36,569			32,800
Investment advisory and related services		71,322			41,723			29,228
Principal transactions		10,238			18,708			9,821
Interest and dividends		6,746			6,637			4,608
Other income		7,688			5,882			3,521
Total revenue		185,812			166,748			124,475
Expenses:
Employee compensation and benefits		107,371			96,258			74,465
Floor brokerage, exchange, and clearance fees		6,440			7,363			4,726
Communications and data processing		10,013			7,721			7,581
Occupancy		11,870			11,011			8,528
Interest		35			804			402
Amortization of intangible assets		349			-			-
Other general and administrative		29,621			22,687			15,327
Total expenses		165,699			145,844			111,029
Income from continuing operations before equity in income of
limited partnerships, minority interests, and income taxes		20,113			20,904			13,446
Equity in income of limited partnerships		3,840			2,222			8,482
Income from continuing operations before minority interests
and income taxes		23,953			23,126			21,928
Minority interests in net income of consolidated companies		(15,837	)		(6,708	)		(4,575	)
Income from continuing operations before income taxes		8,116			16,418			17,353
Provision for income taxes		3,023			6,110			7,058
Income from continuing operations		5,093			10,308			10,295
Income (loss) from discontinued operations, net of tax of
$0, $(3,965), and $252, respectively		-			(6,902	)		379
Net income	$	5,093		$	3,406		$	10,674
Basic earnings (loss) per common share:
Continuing operations	$	0.21		$	0.50		$	0.55
Discontinued operations		-			(0.33	)		0.02
Net earnings	$	0.21		$	0.17		$	0.57
Diluted earnings (loss) per common share:
Continuing operations	$	0.20		$	0.49		$	0.53
Discontinued operations		-			(0.33	)		0.02
Net earnings	$	0.20		$	0.16		$	0.55
Weighted average common shares outstanding and committed:
Basic		24,777			20,475			18,660
Diluted		25,086			20,915			19,253

 

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

41

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands, except shares and per share amounts)

	Year Ended December 31,															Year Ended December 31,
	Amounts															Shares
	2007					2006					2005					2007			2006			2005
Common stock
Balance, beginning of year	$	253				$	196				$	185					25,273,437			19,634,260			18,547,978
Sale of stock		-					50					-					-			5,000,000			-
Stock issued for acquisition		2					2					4					242,927			189,812			362,105
Stock issued pursuant to commitment		-					-					4					-			-			440,000
Stock issued pursuant to employee benefit plan		3					5					3					249,442			449,365			284,177
Balance, end of year		258					253					196					25,765,806			25,273,437			19,634,260
Common stock committed
Balance, beginning of year		-					-					7,819					-			-			440,000
Stock committed for acquistion		-					-					-					-			190,431			-
Stock issued pursuant to commitment		-					-					(7,819	)				-			(190,431	)		(440,000	)
Balance, end of year		-					-					-					-			-			-
Additional paid-in capital
Balance, beginning of year		199,176					134,004					117,859
Sale of stock		-					58,391					-
Stock issued for acquisition		2,398					2,380					6,246
Stock issued pursuant to commitment		-					-					7,815
Stock issued pursuant to employee benefit plan; including tax benefit		599					2,001					103
Amortization of restricted stock grants		2,423					2,385					1,981
Collection of receivable for shares issued		-					15					-
Balance, end of year		204,596					199,176					134,004
Retained earnings
Balance, beginning of year		23,902					23,936					16,452
Cash dividends ($0.18 per share in 2007; 2006; and 2005)		(5,573	)				(3,440	)				(3,190	)
Net income		5,093		5,093			3,406		3,406			10,674		10,674
Balance, end of year		23,422		5,093			23,902		3,406			23,936		10,674
Accumulated other comprehensive income (loss)
Balance, beginning of year		86					30					(50	)
Net change in unrealized appreciation on securities available for sale		125		125			89		89			133		133
Income tax expense on change in unrealized appreciation on securities available for sale		(50	)	(50	)		(33	)	(33	)		(53	)	(53	)
Balance, end of year		161		75			86		56			30		80
Comprehensive income				5,168					3,462					10,754
Treasury stock
Balance, beginning of year		(3,481	)				(3,481	)				(3,481	)				(739,411	)		(739,402	)		(739,402	)
Acquisition of treasury stock		(1,778	)				-					-					(189,874	)		(9	)		-
Balance, end of year		(5,259	)				(3,481	)				(3,481	)				(929,285	)		(739,411	)		(739,402	)
Total shareholders' equity and common shares outstanding and committed	$	223,178				$	219,936				$	154,685					24,836,521			24,534,026			18,894,858

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

42

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2007			2006			2005
							(restated)
CASH FLOWS FROM OPERATINGACTIVITIES:
Net income	$	5,093		$	3,406		$	10,674
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized (gain) loss on securities available for sale		(1	)		(12	)		311
(Gain) loss on sales of assets		74			(9	)		-
Depreciation and amortization		3,333			2,873			2,107
Provision for bad debts		5,308			836			248
Stock-based compensation expense		2,423			2,385			1,981
Goodwill impairment charge		-			4,456			-
Amortization of intangible assets		349			-			-
Deferred income taxes		(2,950	)		596			828
Equity in income of limited partnerships		(3,840	)		(2,222	)		(8,482	)
Minority interests in net income of consolidated companies		15,837			6,708			4,859
Unrealized and realized losses on not readily marketable
securities owned, net		3,358			2,740			974
Not readily marketable securities owned received for payment
of investment banking fees		(1,182	)		(5,189	)		(1,260	)
Net change in:
Receivables		(20,348	)		(11,775	)		(441	)
Deposits with clearing organizations		(11	)		(11	)		(5	)
Marketable securities owned		16,888			(4,614	)		(7,534	)
Other assets and prepaid expenses		(293	)		2			115
Accounts payable and accrued liabilities		2,794			3,814			910
Securities sold, not yet purchased		(4,675	)		11,939			1,819
Payable to broker-dealers and clearing organizations		2,240			(2,539	)		2,676
Net cash provided by operating activities		24,397			13,384			9,780
CASH FLOWS FROM INVESTINGACTIVITIES:
Capital expenditures		(7,737	)		(5,669	)		(3,799	)
Acquisitions, net of cash acquired of $0, $0, and $421, respectively		(8,292	)		(2,382	)		(16,106	)
Purchases of securities available for sale		-			-			(1,151	)
Proceeds from sales and maturities of securities available for sale		834			520			1,022
Purchases of not readily marketable securities owned		(24,201	)		(1,152	)		(4,814	)
Proceeds from sales of not readily marketable securities owned		6,541			1,632			5,456
Proceeds from sales of assets		40			155			-
Net cash used in investing activities		(32,815	)		(6,896	)		(19,392	)
CASH FLOWS FROM FINANCINGACTIVITIES:
Purchases of treasury stock		(1,778	)		-			-
Proceeds from sale of stock		-			58,441			-
Proceeds from shares issued pursuant to employee benefit plan		483			1,490			106
Tax benefit of stock options exercised		119			516			-
Collection of receivables for shares issued		-			15			-
Proceeds from borrowings		145			8,119			13,206
Repayment of borrowings		(500	)		(18,270	)		(2,500	)
Investments by minority interests		80			47			41
Distributions to minority interests		(8,037	)		(2,412	)		(2,446	)
Payments of cash dividends		(4,452	)		(3,440	)		(3,190	)
Net cash provided by (used in) financing activities		(13,940	)		44,506			5,217
Net increase (decrease) in cash and cash equivalents		(22,358	)		50,994			(4,395	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		68,861			17,867			22,262
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	46,503		$	68,861		$	17,867

 

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

43

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

The Company merged with and acquired its operating subsidiaries from 1999 through 2007. The acquisitions were accounted for using the purchase method and, accordingly, results of an acquired entity are included in the Company’s consolidated financial statements from the date of acquisition. As a result, the current period results are not comparable to the prior periods.

During the third and fourth quarters of 2006, the Company closed (a) the activities of the division known as Fixed Income National, which began operations during the first quarter of 2006 and (b) Charlotte Capital, LLC (“Charlotte Capital”). Fixed Income National provided fixed income brokerage services to institutional clients. The operating results of the Fixed Income National division and Charlotte Capital are included in income (loss) from discontinued operations, net of tax, and are excluded from the segment disclosures for all periods presented.

Principles of Consolidation

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

Management's Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of consolidated assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Cash Equivalents

Highly liquid debt instruments with original maturities of three months or less when purchased are considered to be cash equivalents.SMH, the Company’s broker-dealer subsidiary, is subject to the regulations of the Securities and Exchange Commission that, among other things, may restrict the withdrawal of cash held at SMH’s clearing firms that is used to collateralize SMH’s trading accounts.

Securities Owned

Marketable securities are carried at fair value based on quoted market prices. Not readily marketable securities are valued at fair value based on either internal valuation models or management’s estimate of amounts that could be realized under current market conditions assuming an orderly liquidation over a reasonable period of time. Unrealized gains or losses from marking securities owned to market value are included in revenue under the caption “Principal transactions” and in “Equity in income of limited partnerships”. Securities not readily marketable include securities (1) for which there is no market on a securities exchange or no independent publicly quoted market, (2) that cannot be publicly offered or sold unless registration is effected under the Securities Act of 1933 or other applicable securities acts, or (3) that cannot be offered or sold because of other arrangements, restrictions, or conditions applicable to the securities or to the company. Proprietary transactions and the related income/expense are recorded on the trade date. Realized gains and losses from sales of securities owned are computed using the average cost method and are also included in revenue under the caption “Principal transactions”.

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Investments in not readily marketable securities, marketable securities with insufficient trading volumes, and restricted securities have been valued at their estimated fair value by the Company in the absence of readily ascertainable market values. These estimated values may differ significantly from the values that would have been used had a readily available market existed for these investments. Such differences could be material to the financial statements. At December 31, 2007 and 2006, the Company’s investment portfolios included investments totaling $61.1 million and $45.4 million, respectively, whose values had been estimated by the Company in the absence of readily ascertainable market values.

Securities Available for Sale

Securities available for sale include marketable equity securities and debt instruments owned by Salient Trust Co., LTA (“Salient Trust”), a subsidiary of the Company, with maturities greater than three months when purchased. These securities are recorded at cost and are adjusted for unrealized holding gains and losses due to market fluctuations. These unrealized gains or losses, net of taxes, are recorded as other comprehensive income (loss) and are shown as a separate component of shareholders’ equity. Realized gains and losses from sales of securities available for sale are recorded using the specific identification method.

Furniture, Equipment, and Leasehold Improvements

Furniture, equipment, and leasehold improvements are carried at cost. Depreciation of furniture and equipment is computed on a straight-line basis over a three to seven year period. Amortization of leasehold improvements is computed on a straight-line basis over the term of the lease. When assets are retiredor otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

During the year ended December 31, 2006, the Company recognized goodwill impairment charges totaling $4.5 million related to its ownership of Charlotte Capital. During the fourth quarter of 2006, the Company made the decision to close and closed Charlotte Capital. The operating results of Charlotte Capital, including the goodwill impairment charges, are included in income (loss) from discontinued operations, net of tax, in the accompanying consolidated statements of income.

Other intangible assets consist primarily of customer relationships and trade names acquired in purchase business combinations. Other intangible assets acquired that have indefinite lives (trade names) are not amortized but are tested for impairment annually or if certain circumstances indicate a possible impairment may exist. Certain other intangible assets acquired (customer relationships and covenants not to compete) are amortized over their estimated useful lives and tested for impairment if certain circumstances indicate an impairment may exist.

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Resale and Repurchase Agreements

Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings. It is the policy of the Company to obtain the possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“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 Accounting Principles Board Opinion No. 25 (“APB No. 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 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. Future levels of compensation cost recognized related to stock-based compensation awards may be impacted by new awards and/or modifications, repurchase and cancellations of existing awards before and after the adoption of this standard.

Income Taxes

The Company utilizes the asset and liability method for deferred income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events recognized in the Company's financial statements or tax returns. All expected future events other than changes in the law or tax rates are considered in estimating future tax consequences.

The provision for income taxes includes federal, state, and local income taxes currently payable and those deferred because of temporary differences between the financial statements and tax bases of assets and liabilities. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense. Penalties, if any, are recognized in other general and administrative expense.

Commissions

Commissions and related clearing expenses are recorded on the trade date as securities transactions occur.

Investment Banking

Investment banking revenue includes gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as an underwriter or agent. Investment banking revenue also includes fees earned from providing merger and acquisition and financial restructuring advisory services. Investment banking management fees are recorded on offering date, sales concessions on settlement date, and underwriting fees at the time the underwriting is completed and the income is realized or realizable and earned. Other investment banking fees are recognized when the services have been performed.

Investment Advisory and Related Services

Revenue from investment advisory and related services consists primarily of portfolio and partnership management fees. Portfolio management fees are received quarterly and are recognized as earned when payments are due. Partnership management fees are received quarterly and are recognized as earned on a monthly basis.

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Investments in Limited Partnerships

Investments in limited partnerships are accounted for at fair value, and principally consist of Environmental Opportunities Fund, L.P., Environmental Opportunities Fund II, L.P., Environmental Opportunities Fund II (Institutional), L.P., Corporate Opportunities Fund, L.P., Corporate Opportunities Fund (Institutional), L.P., Sanders Opportunity Fund, L.P., Sanders Opportunity Fund (Institutional), L.P., SMH Credit Opportunity Fund, L.P. (formerly Tactical Opportunities High Yield Fund, L.P.), Life Sciences Opportunity Fund, L.P., Life Sciences Opportunity Fund (Institutional), L.P., Life Sciences Opportunity Fund II, L.P., Life Sciences Opportunity Fund (Institutional) II, L.P., 2003 Houston Energy Partners, L.P., 2005 Houston Energy Partners, L.P., Concept Capital, LLC, Select Sports Group, Ltd., Endowment Advisors, L.P., SMH Private Equity Group I, L.P., SMH Private Equity Group II, L.P., Salient Enhanced Credit Fund, L.P., Salient Total Return Fund, L.P., Global Hedged Equity Fund, L.P., and SMH NuPhysicia, LLC.

Fair Values of Financial Instruments

The fair values of cash and cash equivalents, receivables, accounts payable and accrued liabilities, borrowings, and payables to broker-dealers approximate cost due to the short period of time to maturity. Securities owned, securities available for sale, and securities sold, not yet purchased are carried at their fair values.

Sale of Stock

On October 4, 2006, we completed a sale of 5,000,000 shares of common stock in an underwritten public offering, at a price to the public of $12.50 per share. Jefferies & Company, Inc. led the underwriting team, with Sandler O’Neill & Partners, L.P. as co-manager for the offering. We received net proceeds (before expenses) of $58.75 million, which were used to repay the outstanding balance of our revolving credit facility and to provide funds for general corporate purposes, including expansion of our business and working capital.

Reclassifications

Certain reclassifications have been made to the 2006 and 2005 consolidated financial statements to conform them to the 2007 presentation. Cash flow information has been revised to reclassify the acquisitions and dispositions of not readily marketable securities owned from net cash provided by operating activities to net cash used in investing activities. The total amount thus reclassified was $480,000 and $642,000 for 2006 and 2005, respectively. Management believes that the changes in the consolidated statement of cash flows are immaterial relative to the financial statements taken as a whole. The result of this reclassification on net cash provided by 2005 operating activities is reflected in Note 2. The result of this reclassification on net cash provided by 2006 operating activities was a decrease of $480,000. The result of this reclassification on net cash used in investing activities in the 2006 and 2005 consolidated statements of cash flows is as follows:

	2006			2005
	(in thousands)
Net cash used in investing activities (as reported)	$	(7,376	)	$	(20,034	)
Impact of reclassification of acquisitions and dispositions of
not readily marketable securities		480			642
Net cash used in investing activities (as reclassified)	$	(6,896	)	$	(19,392	)

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141, Business Combinations (Revised 2007). SFAS No. 141R replaces SFAS No. 141, Business Combinations, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS No. 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS No. 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS No. 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS No. 141. Under SFAS No. 141R, the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS No. 5, Accounting for Contingencies. SFAS No. 141R is expected to have a significant impact on the Company’s accounting for business combinations closing on or after January 1, 2009.

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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company on January 1, 2008. As a result of the adoption of SFAS No. 157, the Company expects to record an increase in additional paid-in capital of approximately $1.0 million on the adoption date.

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

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51. SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS No.  160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS No. 160 is effective for the Company on January 1, 2009. At December 31, 2007, the Company had $20.1 million in minority interests that would be reported as a component of equity under the requirements of SFAS No. 160.

2.RESTATEMENT

During 2006, the Company restated its 2005 consolidated statement of cash flows to correct an understatement of the Company’s previously reported cash balances resulting from errors in which cash in the Company’s clearing firm accounts was improperly offset against margin balances related to unsettled trades; and certain payables to broker-dealers for unsettled trades that were netted against its cash and margin balances in some of the Company’s clearing firm accounts.

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The result of this restatement on the 2005 consolidated statement of cash flows is as follows:

	2005
	As Reported			As Restated
	(in thousands)
Change in receivables	$	65		$	(441	)
Change in accounts payable and accrued liabilities		437			910
Change in payable to broker-dealers and
clearing organizations		-			2,676
Net cash provided by operating activities		7,751			9,780
Net decrease in cash and cash equivalents		(7,066	)		(4,395	)
Cash and cash equivalents at beginning of year		21,678			22,262
Cash and cash equivalents at end of year		14,612			17,867

The change in 2005 net cash provided by operating activities includes a reclassification of $642,000 discussed in Note 1 - Reclassifications.

3. ACQUISITIONS

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

On May 24, 2007, the Company acquired a 75% interest in Rikoon for cash consideration of $6.0 million of which $1.3 million was recorded as compensation expense. The Company agreed to purchase an additional 5% interest in February 2011 for cash consideration ranging from a minimum of $3.0 million to a maximum of $5.0 million based on the amount by which Rikoon’s average earnings before interest, taxes, depreciation, and amortization (“EBITDA”) varies from the threshold EBITDA specified in the purchase agreement. At acquisition, Rikoon, based in Santa Fe, New Mexico, managed approximately $400 million in assets. The acquisition was accounted for as a purchase and, accordingly, the financial information of Rikoon has been included in the Company’s consolidated financial statements from May 24, 2007. The consideration exceeded the fair market value of identifiable net tangible assets by $4.4 million which has been recorded as goodwill and other intangible assets.

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

In May 2008, the Company will purchase an additional 25% membership interest in Edelman. The Company will pay an amount to be determined based upon Edelman’s 2007 pretax income (the “Second Tranche Consideration”). The Second Tranche Consideration of $44.4 million 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 to be determined based upon Edelman’s 2008 pretax income (the “Third Tranche Consideration”). The Third Tranche Consideration will also be paid in a combination of cash and the Company’s common stock.

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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 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 and other intangible assets.

4.ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following table sets forth pertinent information regarding the allowance for doubtful accounts (in thousands):

Balance at December 31, 2004	$	476
Additions charged to cost and expenses		248
Charge off of receivables		(212	)
Balance at December 31, 2005		512
Additions charged to cost and expenses		836
Charge off of receivables		(1,121	)
Balance at December 31, 2006		227
Additions charged to cost and expenses		5,308
Charge off of receivables		(3,205	)
Balance at December 31, 2007	$	2,330

5.SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

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

	December 31,
	2007				2006
	Owned		Sold, Not Yet Purchased		Owned		Sold, Not Yet Purchased
	(in thousands)
Marketable:
U.S. government and agency	$	-	$	-	$	260	$	15
Corporate stocks and options		23,799		15,432		36,843		20,051
Corporate bonds		-		-		-		41
		23,799		15,432		37,103		20,107
Not readily marketable:
Limited partnerships		53,012		-		36,095		-
Warrants		5,649		-		8,795		-
Equities and options		2,438		-		469		-
		61,099		-		45,359		-
	$	84,898	$	15,432	$	82,462	$	20,107

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

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A summary of the results of operations and partners’ capital of the limited partnerships is as follows for the years ended December 31, 2007, 2006, and 2005:

	Year Ended December 31,
	2007			2006			2005
	(in thousands)
Net investment income	$	30,751		$	9,853		$	6,534
Unrealized gain (loss) on investments		(6,803	)		(6,156	)		19,900
Realized gain on investments		28,308			17,784			25,285
Increase in partners' capital resulting from operations	$	52,256		$	21,481		$	51,719
Total assets	$	612,868		$	369,834		$	316,465
Total liabilities		(60,764	)		(26,856	)		(23,499	)
Partners' capital	$	552,104		$	342,978		$	292,966

6.SECURITIES AVAILABLE FOR SALE

Securities available for sale at December 31, 2007 and 2006 were as follows:

	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair Value
	(in thousands)
At December 31, 2007:
U.S. government and agency obligations	$	133	$	3	$	-		$	136
Marketable equity securities		359		264		-			623
Total	$	492	$	267	$	-		$	759
At December 31, 2006:
U.S. government and agency obligations	$	717	$	4	$	(5	)	$	716
Corporate bond		250		-		(1	)		249
Marketable equity securities		359		143		-			502
Total	$	1,326	$	147	$	(6	)	$	1,467

The contractual maturities of debt securities available for sale at December 31, 2007 were as follows:

	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Over 25 years	$	133	$	136

The Company’s available for sale portfolio is comprised of U.S. government agency obligations and large cap equity securities. No securities available for sale had unrealized losses as of December 31, 2007. Two U.S. government agency obligations and one corporate bond had unrealized losses as of December 31, 2006. All had been in continuous unrealized loss positions for more than 12 months.

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Securities available for sale in an unrealized loss position at December 31, 2006 were as follows:

	Less than 12 months				12 months or longer					Total
	Estimated		Unrealized		Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses			Fair Value		Losses
	(in thousands)
At December 31, 2006:
U.S. government and agency
obligations	$	-	$	-	$	495	$	(5	)	$	495	$	(5	)
Corporate bond		-		-		249		(1	)		249		(1	)
Total temporarily impaired securities	$	-	$	-	$	744	$	(6	)	$	744	$	(6	)

Management evaluates securities available for sale to determine if a decline in value is other than temporary. Such evaluation considers the length of time and the extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. No securities available for sale had unrealized losses as of December 31, 2007. However, a write-down accounted for as a realized loss may be necessary in the future.

Gross realized gains on sales of securities available for sale were $1,000, $15,000, and $21,000 for the years ended December 31, 2007, 2006, and 2005, respectively. No realized losses on securities available for sale were recorded for the year ended December 31, 2007. Gross realized losses on sales of securities available for sale were $3,000 and $332,000 for the years ended December 31, 2006, and 2005, respectively. Such gains and losses are included in revenue under the caption “Principal transactions”.

7.RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS

Receivables from broker-dealers and clearing organizations at December 31, 2007 and 2006 were as follows:

	December 31,
	2007		2006
	(in thousands)
Receivables from broker-dealers and clearing organizations	$	232	$	505

8.DEPOSITS WITH CLEARING ORGANIZATIONS

Under its clearing agreements, SMH is required to maintain a certain level of cash or securities on deposit with clearing organizations. Should the clearing organizations suffer a loss due to the failure of a customer of the Company to complete a transaction, the Company is required to indemnify the clearing organizations. The Company had $1.1 million on deposit as of December 31, 2007 and 2006 with clearing organizations to meet this requirement.

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9.FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

Furniture, equipment, and leasehold improvements at December 31, 2007 and 2006 were as follows:

	December 31,
	2007			2006
	(in thousands)
Furniture and fixtures	$	4,875		$	3,904
Equipment		8,911			8,200
Leasehold improvements		14,508			10,072
Accumulated depreciation and amortization		(11,681	)		(9,853	)
Furniture, equipment, and leasehold improvements, net	$	16,613		$	12,323

10.BORROWINGS

During May 2005, the Company entered into a $15.0 million revolving credit facility with a bank. In May 2006, this credit agreement was amended to increase the revolving credit facility to $18.0 million. The line of credit expires in May 2008, unless extended. Borrowings under the line of credit bear interest at LIBOR plus 150 basis points. Interest is payable quarterly on this line of credit. The credit facility is secured by a pledge of ownership interests in two of the Company’s subsidiaries. Debt covenants require the Company to maintain certain debt-to-EBITDA and liquidity to funded debt ratios, as well as minimum assets under management. At December 31, 2007, the Company was in compliance with all covenants. The line of credit has a commitment fee of 1/8% per annum. There was no outstanding balance on the line of credit at December 31, 2007. The amount of available borrowings under the line of credit, which is reduced by letters of credit issued by the Company, was $16.3 million at December 31, 2007.

During December 2005, Salient entered into a $2.5 million revolving credit facility with a bank. The line of credit expires in April 2008. Borrowings under the line of credit bear interest at LIBOR plus 165 basis points. The interest rate of Salient’s borrowings ranged from 6.45% to 7.15% during 2007 and was 6.51% at December 31, 2007. Interest is payable quarterly on this line of credit. The credit facility is unsecured and not subject to financial covenants; however, payment is guaranteed by SMHG and the principals of Salient. The outstanding balance on the line of credit was $200,000 at December 31, 2007.

11.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 2007 and 2006 were as follows:

	December 31,
	2007		2006
	(in thousands)
Accounts payable	$	5,591	$	5,320
Compensation		18,000		17,971
Other		5,932		2,259
Total accounts payable and accrued liabilities	$	29,523	$	25,550

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12. INCOME TAXES

The components of the income tax provision (benefit) for the years ended December 31, 2007, 2006, and 2005 were as follows:

	Year Ended December 31,
	2007			2006			2005
	(in thousands)
From continuing operations:
Current	$	5,973		$	5,275		$	6,230
Deferred		(2,950	)		835			828
Income tax provision from continuing operations		3,023			6,110			7,058
From discontinued operations		-			(3,965	)		252
Income tax provision	$	3,023		$	2,145		$	7,310

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

	Year Ended December 31,
	2007		2006		2005
	(in thousands)
Expected federal tax at statutory rate of 34% for 2007,
34% for 2006, and 35% for 2005	$	2,759	$	5,582	$	6,074
State and other income taxes		264		528		984
Total	$	3,023	$	6,110	$	7,058

The effective tax rates from continuing operations for the years ended December 31, 2007, 2006, and 2005 were 37.2%, 37.2%, and 40.7%, respectively.

The components of the deferred income tax assets and liabilities were as follows:

	December 31,
	2007			2006
	(in thousands)
Deferred income tax assets:
Accumulated depreciation	$	1,321		$	830
Accrued liabilities		-			133
Allowance for doubtful accounts		869			85
Partnership income		233			-
Deferred compensation		830			1,288
Restricted stock compensation		196			96
SFAS No. 123R expense		95			97
Total deferred tax assets		3,544			2,529
Deferred income tax liabilities:
Accrued liabilities		(142	)		-
Partnership loss		-			(183	)
Unrealized gains on securities available for sale		(100	)		(53	)
Prepaid expenses		(229	)		(370	)
Imputed interest expense		(183	)		(183	)
Stock option expense		-			(553	)
Goodwill and other intangible amortization		(734	)		(819	)
Unrealized gain on securities owned		(2,293	)		(3,403	)
Other		-			(2	)
Total deferred tax liabilities		(3,681	)		(5,566	)
Net deferred tax liability	$	(137	)	$	(3,037	)

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

The current tax receivable at December 31, 2007 and 2006 was $1.6 million and $2.0 million, respectively.

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

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

The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process whereby the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The provisions of FIN No. 48 were effective for the Company on January 1, 2007. The adoption of FIN No. 48 did not have a significant impact on the Company’s consolidated financial statements.

13.ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS

Substantially all employees are eligible to participate in the Sanders Morris Harris Group Inc. 401(k) defined contribution plan. The Company made no contributions to this plan in 2007, 2006, and 2005.

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

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.

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Through December 31, 2005, the Company accounted for stock-based compensation using the intrinsic value method in accordance with APB No. 25. The following table illustrates the effect on net income for the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123 as amended by SFAS No. 148 (in thousands, except per share amounts):

	2005
Net income	$	10,674
Deduct total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax effects		(139	)
Pro forma net income	$	10,535
Earnings per share:
Basic-as reported	$	0.57
Basic-pro forma	$	0.56
Diluted-as reported	$	0.55
Diluted-pro forma	$	0.55

The Company’s 1998 Incentive Plan specifies that the number of shares of its common stock available for incentive awards or incentive stock options may not exceed the greater of 4,000,000 shares or 25% of the total number of shares of common stock outstanding.

Stock Options

The 1998 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 years ended December 31, 2007, 2006, and 2005, 55,200, 153,686, and 143,757 options were exercised for which the Company received proceeds of $257,000, $792,000, and $752,000, respectively, and the tax benefit realized from stock option exercises was $119,000, $516,000, and $0, respectively. The Company recognized pretax compensation cost of $144,000, or $88,000 net of tax, for the year ended December 31, 2007 and $261,000, or $159,000 net of tax, for the year ended December 31, 2006. The portion of stock-based compensation expense related to stock options that was unrecognized at December 31, 2007 was $195,000 and is expected to be recognized over a weighted average period of 1.41 years.

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The following table sets forth information regarding the Company’s stock options for each of the three years in the period ended December 31, 2007:

				Weighted		Weighted
				Average		Average		Aggregate
	Number			Exercise		Remaining		Intrinsic
	of Shares			Price		Life		Value
						(in years)		(in thousands)
Outstanding at December 31, 2004		1,036,528		$	6.03
Granted		22,500			17.03
Exercised		(143,757	)		5.23			$	1,648
Oustanding at December 31, 2005		915,271			6.42
Granted		150,000			15.19
Exercised		(153,686	)		5.15				1,483
Oustanding at December 31, 2006		911,585			8.08
Granted		-			-
Exercised		(55,200	)		4.66				340
Oustanding at December 31, 2007		856,385			8.30		4.22		1,670
Options exercisable at December 31, 2007		778,885			7.61		3.81		2,057
Options available for grant at December 31, 2007		2,206,383

The following table summarizes information related to stock options outstanding and exercisable at December 31, 2007:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/2007		Wgtd. Avg. Remaining Contr. Life		Wgtd. Avg. Exercise  Price		Number Exercisable at 12/31/2007		Wgtd. Avg. Exercise Price
$4.44-$6.04		526,385		2.30	$	4.85		526,385	$	4.86
$7.91-$9.15		25,000		5.12		8.16		25,000		8.16
$12.02-$17.20		305,000		7.46		14.27		227,500		13.93
$4.44-$17.20		856,385		4.22		8.30		778,885		7.61

The fair value of options at date of grant was estimated using the Black-Scholes option pricing model. There were no stock options granted during 2007. During 2006 and 2005, stock options were granted with the following weighted-average assumptions:

	2006			2005
Expected life in years		5.00			10.00
Interest rate		5.02	%		4.14	%
Volatility		19.33	%		24.64	%
Dividend yield		1.24	%		1.10	%
Weighted average fair value of options
Granted during the period	$	3.65		$	5.98

Restricted Stock

The 1998 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 66.66% of the 20-day average of the closing sales price of the Company’s common stock, ending on the day prior to the date the shares are 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 a one to five-year vesting period.

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Employees deferred compensation of $225,000, $698,000, and $495,000 during the years ended December 31, 2007, 2006, and 2005, respectively, that was used to purchase restricted common stock. The Company recognized pretax compensation expense of $2.3 million, $2.4 million, and $2.0 million, or $1.4 million, $1.5 million, and $1.2 million net of tax, during the years ended December 31, 2007, 2006, and 2005, respectively, related to its restricted common stock plan.

The following table summarizes certain information related to restricted common stock grants at December 31, 2007:

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
Nonvested at January 1, 2007		523,302	$	14.46
Nonvested at December 31, 2007		526,741	$	13.39
For the year ended December 31, 2007:
Granted		211,885	$	10.85
Vested		190,903	$	13.55
Forfeited		17,543	$	12.87

At December 31, 2007, total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock totaled $4.4 million and is expected to be recognized over the next 4.92 years. The fair value of restricted stock vested during the years ended December 31, 2007, 2006, and 2005 was $2.2 million, $2.2 million, and $3.7 million, respectively.

14.PREFERRED STOCK

The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.10 per share. Shares of preferred stock may be issued from time to time by the board of directors, without action by the shareholders, in one or more series with such designations, preferences, special rights, qualifications, limitations, and restrictions as may be designated by the board of directors prior to the issuance of such series. No shares of preferred stock have been issued as of December 31, 2007.

15.TREASURY STOCK

On November 6, 2007, the Company’s board of directors approved a program to repurchase up to 1,000,000 shares of the Company’s common stock. Under the program, shares are repurchased in the open market or privately negotiated transactions from time to time at prevailing market prices. Such repurchases are accounted for using the cost method. The Company repurchased 189,874 shares of its common stock during the year ended December 31, 2007 related to this program. No shares of common stock were reacquired during the year ended December 31, 2006.

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16.EARNINGS (LOSS) PER COMMON SHARE

Basic and diluted earnings (loss) per common share computations were as follows:

	Year Ended December 31,
	2007		2006			2005
	(in thousands, except per share amounts)
Income from continuing operations	$	5,093	$	10,308		$	10,295
Income (loss) from discontinued operations, net of tax		-		(6,902	)		379
Net income	$	5,093	$	3,406		$	10,674
Basic earning (loss) per common share:
Continuing operations	$	0.21	$	0.50		$	0.55
Discontinued operations		-		(0.33	)		0.02
Net earnings	$	0.21	$	0.17		$	0.57
Diluted earnings (loss) per common share:
Continuing operations	$	0.20	$	0.49		$	0.53
Discontinued operations		-		(0.33	)		0.02
Net earnings	$	0.20	$	0.16		$	0.55
Weighted average number of common shares outstanding:
Basic		24,777		20,475			18,660
Incremental common shares issuable under stock
option plan, net		309		440			593
Diluted		25,086		20,915			19,253

Outstanding stock options of 305,000, 172,500, and 22,500 at December 31, 2007, 2006, and 2005, respectively, have not been included in diluted earnings per common share because to do so would have been antidilutive for the years presented.

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17.GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of the Company’s goodwill and other intangible assets for the years ended December 31, 2007 and 2006 were as follows:

	Year Ended December 31, 2007
					Amortizable Intangible Assets:									Total
	Goodwill		Trade Names		Covenants Not To Compete			Customer Relationships			Subtotal			Other Intangible Assets
	(in thousands)
Balance, beginning of year	$	83,810	$	-	$	-		$	963		$	963		$	963
Acquisition of Rikoon		-		1,759		295			2,384			2,679			4,438
Acquisition of Dickenson		4,651		487		289			599			888			1,375
Amortization		-		-		(57	)		(292	)		(349	)		(349	)
Balance, end of year	$	88,461	$	2,246	$	527		$	3,654		$	4,181		$	6,427

	Year Ended December 31, 2006
						Amortizable Intangible Assets:						Total
	Goodwill			Trade Names		Covenants Not To Compete		Customer Relationships		Subtotal		Other Intangible Assets
	(in thousands)
Balance, beginning of year	$	83,435		$	-	$	-	$	963	$	963	$	963
Edelman Earn-Out Consideration		4,831			-		-		-		-		-
Charlotte impairment charges		(4,456	)		-		-		-		-		-
Balance, end of year	$	83,810		$	-	$	-	$	963	$	963	$	963

As of December 31, 2007, the remaining weighted-average amortization period is 4.69 years for covenants not to compete and 12.13 years for customer relationships included in the table above.

The following table shows estimated future amortization expense related to these intangible assets (in thousands):

2008	$	484
2009		447
2010		339
2011		339
2012		339
Thereafter		2,233

18.COMMITMENTS AND CONTINGENCIES

The Company has issued letters of credit in the amounts of $630,000, $250,000, $235,000, $230,000, $199,000, $144,000, and $92,000 to the owners of seven 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.

As discussed in Note 3 – Acquisitions, in May 2008 the Company will purchase an additional 25% membership interest in Edelman for $44.4 million payable in a combination of cash and the Company’s common stock.

In December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors, LLC (“EFA”) to expand the Edelman financial platform into additional markets outside the Washington, D.C. metropolitan area. The Company owns a 10% membership interest in EFA. We committed to initially loan EFA up to $10 million to cover its start-up expenses for 2007 and an additional $10 million, if necessary, commencing December 1, 2007. The loans to EFA are payable on May 12, 2009. Mr. Edelman has guaranteed repayment of the EFA obligation to the extent of funds that will be owed to him by the Company in connection with the purchase of Edelman. The outstanding balance of the Company’s loan to EFA was $8.0 million at December 31, 2007. There was no balance outstanding on this loan at December 31, 2006. EFA has entered into an agreement with Radio Networks, LLC, an affiliate of ABC, Inc. and The Walt Disney Company, to nationally syndicate Mr. Edelman’s weekly radio program. The program is being syndicated into sixteen additional markets, including Atlanta, Baltimore, Chicago, Columbus, Dallas, Detroit, Houston, Indianapolis, Los Angeles, Miami, New York City, Orlando, Phoenix, Portland, Oregon, San Diego, and San Francisco.

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Pursuant to the terms of (a) the Contribution Agreement dated as of April 28, 2003, among the Company and the other owners of Salient (the “Salient Partners”), pursuant to which Salient was formed, and (b) the Contribution and Option Agreement dated as of April 28, 2003, among the Company, the Salient Partners, and MWY Consulting, LLC, pursuant to which the Company acquired an interest in Endowment Advisers GP, L.P. (“EA GP”) and Endowment Advisers, L.P. (“EA LP”), subsequent to May 1, 2008, the Company and the Salient Partners have the right, at any time, exercisable by written notice to the other party to buy each other’s ownership interests in Salient, EA GP, and EA LP. Under the procedure established by the agreements, following the giving of notice of an offer, the parties have 30 days to arrive at a mutually agreeable price. If the parties cannot agree on a price within such 30-day period, the price based on the fair market value of Salient, EA GP, and EA LP, will be determined by independent appraisers selected by the parties. Following determination of the price, the Salient Partners have the first right exercisable within ten days following the price determination to exercise their right to buy the Company’s interest in Salient, EA GP, and EA LP from the Company. The purchase price is payable 50% in cash and the balance in the form of a promissory note maturing three years following its date of issuance and bearing interest at the prime rate. If the Salient Partners do not exercise their right to purchase the Company’s interest in Salient, EA GP, and EA LP, the Company has the right to purchase the Salient Partners’ interests in such entities. If the Company exercises its right to purchase Salient Partner’s interest, certain principals of Salient are obligated to enter into employment agreements with the Company with a minimum term of two-years (which shall contain a coterminous non-compete provision) with compensation and upon terms mutually acceptable to the parties (but in no event with compensation less than that which is being received by a principal at such time). If following commencement of the process neither party exercises its right to purchase the other parties’ interest, the ownership would remain the same with the purchase right exercisable again at a future date by either party.

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

In the normal course of business, the Company enters into underwriting commitments. There were no firm underwriting commitments open at December 31, 2007.

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 Financial Industry Regulatory Authority (formerly the NASD) (“FINRA”) initially conducted an inspection of our Concept Capital prime brokerage and private investment or hedge fund support operations based in our New York office in November 2004.  Subsequent to such inspection, FINRA opened an investigation with respect to our prime brokerage and related hedge fund operations. In August 2006, SMH received a “Wells letter” notification from FINRA, which stated that the staff of FINRA had made a preliminary determination to recommend that disciplinary action be brought against SMH and four of its employees based on alleged violations of certain conduct rules of FINRA.  On October 17, 2007, SMH executed an Acceptance, Waiver and Consent (“AWC”) to resolve all matters with respect to the disciplinary action, which was accepted by FINRA on January 9, 2008.  Pursuant to the AWC, SMH agreed to pay a fine of $450,000 which was included in accounts payable and accrued liabilities at December 31, 2007.

In May 2005, SMH acted as placement agent for a private placement of $50.0 million in convertible preferred stock of Ronco Corporation, a leading company in direct response marketing. Subsequent to the offering, Ronco experienced financial difficulties and ultimately filed a voluntary petition under Chapter 11 of the Bankruptcy Code on June 14, 2007.  The bankruptcy court approved the sale of substantially all of Ronco’s assets in August 2007, and the case has been converted to liquidation under Chapter 7. It is unlikely that there will be any distribution to its unsecured creditors or equity security holders.  SMH has written off a $3.0 million subordinated working capital loan that it made to Ronco in 2006.  SMH is a defendant in two proceedings related to Ronco, one of which is material and discussed below.

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

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

Total rental expense for operating leases was $6.5 million, $6.4 million, and $5.2 million for the years ended December 31, 2007, 2006, and 2005, respectively. Rent expense on operating leases is recognized on a straight line basis over the life of the respective leases. The Company and its subsidiaries have obligations under operating leases that expire by 2018 with initial noncancelable terms in excess of one year. Aggregate annual rentals for office space and computer and office equipment are as follows (in thousands):

2008	$	7,946
2009		8,211
2010		8,239
2011		8,113
2012		7,237
Thereafter		11,838
Total minimum rental payments	$	51,584

19.CONCENTRATIONS OF RISK

Financial investments that potentially subject the Company to concentrations of credit risk primarily consist of securities available for sale, securities owned, and all receivables. The Company’s securities portfolio has a concentration in companies in the energy and life sciences sectors. Risks and uncertainties associated with financial investments include credit exposure, interest rate volatility, regulatory changes, and changes in market values of equity securities. Future changes in market trends and conditions may occur that could cause actual results to differ materially from the estimates used in preparing the accompanying consolidated financial statements.

The Company executes, as agent, securities transactions on behalf of its customers. If either the customer or a counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the market value of the security is different from the contract value of the transaction. The Company’s customer security transactions are transacted on either a cash or margin basis. In margin transactions, the customer is extended credit by the clearing broker, subject to various regulatory margin requirements, collateralized by cash and securities in the customer’s account. In connection with these activities, the Company executes customer transactions with the clearing broker involving the sale of securities not yet purchased (short sales). In the event the customer fails to satisfy its obligation, the Company may be required to purchase financial instruments at prevailing market prices in order to fulfill the customer’s obligations.

The Company and its subsidiaries are engaged in various trading and brokerage activities with counterparties that primarily include broker-dealers, banks, and other financial institutions. If counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Company's policy to review, as necessary, the credit standing of each counterparty.

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20.NET CAPITAL REQUIREMENTS OF SUBSIDIARIES

SMH is subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 (and the rule of the “applicable” exchange also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1). At December 31, 2007, SMH had net capital, as defined, of $19.7 million, which was $18.7 million in excess of its required net capital of $948,000. At December 31, 2007, Salient Trust’s net capital was in excess of the minimum capital of $1.5 million required by the Texas Department of Banking.

21.BUSINESS SEGMENT INFORMATION

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

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

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

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

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

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

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

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The following summarizes certain financial information of each reportable business segment for the years ended December 31, 2007, 2006, and 2005. SMHG does not analyze asset information in all business segments.

	Year Ended December 31,
	2007			2006			2005
	(in thousands)
Revenue:
Asset/Wealth Management	$	107,252		$	80,452		$	55,307
Capital Markets:
Investment banking		23,609			25,239			18,509
Institutional brokerage		15,519			21,349			26,501
Prime brokerage services		36,583			34,788			19,613
Capital Markets Total		75,711			81,376			64,623
Corporate Support		2,849			4,920			4,545
Total	$	185,812		$	166,748		$	124,475
Income (loss) from continuing operations before equity in income (loss) of limited partnerships, minority interests, and income taxes:
Asset/Wealth Management	$	32,191		$	18,052		$	10,505
Capital Markets:
Investment banking		4,273			7,728			6,502
Institutional brokerage		1,232			2,819			3,552
Prime brokerage services		2,750			2,595			1,955
Capital Markets Total		8,255			13,142			12,009
Corporate Support		(20,333	)		(10,290	)		(9,068	)
Total	$	20,113		$	20,904		$	13,446
Equity in income (loss) of limited partnerships:
Asset/Wealth Management	$	8,479		$	1,494		$	7,192
Capital Markets:
Investment banking		-			-			-
Institutional brokerage		-			-			-
Prime brokerage services		-			-			-
Capital Markets Total		-			-			-
Corporate Support		(4,639	)		728			1,290
Total	$	3,840		$	2,222		$	8,482
Minority interests in net income of consolidated companies:
Asset/Wealth Management	$	(15,837	)	$	(6,708	)	$	(4,575	)
Capital Markets:
Investment banking		-			-			-
Institutional brokerage		-			-			-
Prime brokerage services		-			-			-
Capital Markets Total		-			-			-
Corporate Support		-			-			-
Total	$	(15,837	)	$	(6,708	)	$	(4,575	)
Income (loss) from continuing operations before income taxes:
Asset/Wealth Management	$	24,833		$	12,838		$	13,122
Capital Markets:
Investment banking		4,273			7,728			6,502
Institutional brokerage		1,232			2,819			3,552
Prime brokerage services		2,750			2,595			1,955
Capital Markets Total		8,255			13,142			12,009
Corporate Support		(24,972	)		(9,562	)		(7,778	)
Total	$	8,116		$	16,418		$	17,353

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22.SUPPLEMENTAL CASH FLOW INFORMATION

	Year Ended December 31,
	2007			2006			2005
	(in thousands)
Cash paid for income taxes, net	$	5,742		$	1,072		$	5,603
Cash paid for interest		23			842			280
Non-cash investing activities:
Acquisitions:
Fixed assets, net		-			-			338
Other assets		-			-			250
Goodwill		46,767			2,449			22,676
Accounts payable and accrued liabilities		-			(67	)		(811	)
Minority interests		-			-			(97	)
Common stock		(2,400	)		(2,382	)		(6,250	)
Non-cash financing activities:
Dividends declared not yet paid		1,121			-			-

23.RELATED PARTY TRANSACTIONS

The Company had receivables from related parties totaling $14.7 million and $6.2 million at December 31, 2007 and 2006, respectively, primarily consisting of $8.0 million notes receivable from EFA at December 31, 2007 and $2.7 million and $3.5 million at December 31, 2007 and 2006, respectively, of notes receivable from employees and consultants representing loans made to induce the employees and consultants to affiliate with the Company. The notes receivable from employees and consultants typically are forgiven over a one to five-year period and have tiered maturities from 2008 through 2012.

SMH earned fees of $3.4 million, $2.4 million, and $1.6 million in 2007, 2006, and 2005, respectively, through the sale of annuity products from HWG Insurance Agency, Inc. (“HWG”). The sole shareholder of HWG is an employee of SMH.

In December 2006, Ric Edelman organized a new entity, EFA, to expand the Edelman financial platform into additional markets outside the Washington, D.C. metropolitan area. The Company owns a 10% membership interest in EFA. We committed to initially loan EFA up to $10 million to cover its start-up expenses for 2007 and an additional $10 million, if necessary, commencing December 1, 2007. The loans to EFA are payable on May 12, 2009. Mr. Edelman has guaranteed repayment of the EFA obligation to the extent of funds that will be owed to him by the Company in connection with the purchase of Edelman. The outstanding balance of the Company’s loan to EFA was $8.0 million at December 31, 2007. There was no balance outstanding on this loan at December 31, 2006. EFA has entered into an agreement with Radio Networks, LLC, an affiliate of ABC, Inc. and The Walt Disney Company, to nationally syndicate Mr. Edelman’s weekly radio program. The program is being syndicated into sixteen additional markets, including Atlanta, Baltimore, Chicago, Columbus, Dallas, Detroit, Houston, Indianapolis, Los Angeles, Miami, New York City, Orlando, Phoenix, Portland, Oregon, San Diego, and San Francisco.

The Company owns controlling interests in several limited liability companies that act as the general partners in several limited partnerships (the “Partnerships”). The Partnerships pay management fees to the general partners. Certain officers of SMH serve on the boards of directors of entities in which the Partnerships invest. In addition, SMH has served, and may in the future serve, as the placement agent advisor, offering manager, or underwriter for companies in which the Partnerships invest.

On March 1, 2006, Salient Partners sold a 4.0% ownership interest in the advisor to The Endowment Fund to six employees of Salient for cash consideration of $593,000.

During 2001, the Company formed PTC - Houston Management, L.P. (“PTC”) to secure financing for a new proton beam therapy cancer treatment center to be constructed in Houston. A former advisory director of SMHG and his family are the principal owners of an entity that is a 50% owner of PTC. Net operating income recognized by PTC totaled $248,000, $593,000, and $216,000 in 2007, 2006, and 2005, respectively, of which $118,000, $297,000, and $108,000, respectively, was attributable to the Company and $124,000, $297,000, and $108,000, respectively, was attributable to the advisory director-owned entity. During 2007, the Company granted a 5% ownership interest in PTC to an employee who serves as a manager of PTC. The Company owned 50% of PTC through September 30, 2007 and 45% of PTC thereafter.

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24. UNAUDITED QUARTERLY FINANCIAL INFORMATION

	Three Months Ended,
	March 31, 2007		June 30, 2007		Sept. 30, 2007		Dec. 31, 2007
	(in thousands, except per share amounts)
Total revenue	$	45,483	$	46,197	$	46,150	$	47,982
Net income (loss)	$	2,741	$	1,105	$	1,843	$	(596	)
Basic earnings (loss) per common share	$	0.11	$	0.04	$	0.07	$	(0.02	)
Diluted earnings (loss) per common share	$	0.11	$	0.04	$	0.07	$	(0.02	)
Weighted average common shares oustanding and committed - basic		24,611		24,731		24,801		24,959
Weighted average common shares outstanding and committed - diluted		24,939		25,075		25,095		25,224

	Three Months Ended,
	March 31, 2006			June 30, 2006			Sept. 30, 2006			Dec. 31, 2006
	(in thousands, except per share amounts)
Total revenue	$	42,003		$	42,440		$	41,260		$	41,045
Income from continuing operations	$	3,459		$	2,494		$	787		$	3,568
Loss from discontinued operations, net of tax		(699	)		(4,196	)		(1,085	)		(922	)
Net income (loss)	$	2,760		$	(1,702	)	$	(298	)	$	2,646
Basic earnings (loss) per common share:
Continuing operations	$	0.18		$	0.13		$	0.04		$	0.15
Discontinued operations		(0.03	)		(0.22	)		(0.06	)		(0.04	)
Net earnings (loss)	$	0.15		$	(0.09	)	$	(0.02	)	$	0.11
Diluted earnings (loss) per common share:
Continuing operations	$	0.18		$	0.13		$	0.04		$	0.14
Discontinued operations		(0.04	)		(0.22	)		(0.05	)		(0.03	)
Net earnings (loss)	$	0.14		$	(0.09	)	$	(0.01	)	$	0.11
Weighted average common shares oustanding and committed - basic		18,989			19,119			19,561			24,373
Weighted average common shares outstanding and committed - diluted		19,482			19,581			19,994			24,743

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25.DISCONTINUED OPERATIONS

During the third quarter of 2006, the Company made the decision to close and closed the activities in the division known as Fixed Income National, which began operations during the first quarter of 2006. This decision was made due to the division’s inability to achieve sufficient revenue to offset is costs, many of which were in the form of guaranteed salaries and bonuses. In conjunction with the discontinuance of the Fixed Income National division, during the year ended December 31, 2006, the Company recorded a loss of $3.8 million, net of tax, for operating losses and for costs related to the exit of the business including compensation commitments, abandoned leases, and other expenses.

During the fourth quarter of 2006, the Company made the decision to close and closed Charlotte Capital. This decision was made due to the continuing decline of assets under management and to the fact that Charlotte Capital was not profitable. The assets and liabilities of the business consist primarily of accounts receivable from customers and obligations incurred in the normal course of business. In conjunction with the closure of Charlotte Capital, during the year ended December 31, 2006, the Company recorded a loss of $3.1 million, net of tax, for operating losses and for costs related to the exit of the business, primarily consisting of goodwill impairment.

A summary of selected financial information of discontinued operations is as follows for the years ended December 31, 2006 and 2005:

	Year Ended December 31,
	2006			2005
	(in thousands)
Operating activities:
Revenue	$	3,034		$	2,817
Expenses		9,304			1,902
Goodwill impairment charge		4,456			-
Income (loss) from discontinued operations before minority interests and income taxes		(10,726	)		915
Minority interests in net (income) loss of consolidated companies		203			(284	)
Income (loss) from discontinued operations before income taxes		(10,523	)		631
Provision (benefit) for income taxes		(3,839	)		252
Net income (loss) from operations, net of tax		(6,684	)		379
Costs related to exit of business, net of tax		(218	)		-
Income (loss) from discontinued operations	$	(6,902	)	$	379

Major classes of assets and liabilities of the Fixed Income National division and Charlotte Capital accounted for as discontinued operations in the accompanying consolidated balance sheets at December 31, 2007 and 2006 were as follows:

	December 31,
	2007		2006
	(in thousands)
Receivables	$	-	$	74
Other assets		-		8
Total assets of discontinued operations	$	-	$	82
Accounts payable and accrued liabilities	$	65	$	438
Total liabilities of discontinued operations	$	65	$	438
Minority interest	$	676	$	676

26.SUBSEQUENT EVENTS

On February 19, 2008, the Company’s board of directors declared a cash dividend for the first quarter of 2008 in the amount of $0.045 per share of common stock. The cash dividend will be payable on April 16, 2008, to holders of record as of the close of business on April 2, 2008.

On February 29, 2008, the Company completed the acquisition of a 50.1% interest in Leonetti & Associates, Inc., a wealth management firm based in Buffalo Grove, Illinois with approximately $400 million in assets under management, for $5.75 million payable in a combination of cash and shares of the Company’s common stock.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

The Company had no disagreements on accounting or financial disclosure matters with its independent accountants to report under this Item 9.

Item 9A.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 December 31, 2007, 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.

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and board of directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, we believe that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Sanders Morris Harris Group Inc.:

We have audited that Sanders Morris Harris Group Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of the internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.       

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Sanders Morris Harris Group Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sanders Morris Harris Group Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated March 13, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

KPMG LLP

Houston, Texas

March 13, 2008

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Item 9B. Other Information

Not applicable.

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PART III

Item 10.Directors, Executive Officers and Corporate Governance

The information required in response to this Item 10 is incorporated herein by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.

We have adopted a Business Ethics Policy or code of ethics for our employees, which applies to our principal executive officer, principal financial officer, and principal accounting officer, pursuant to section 406 of the Sarbanes-Oxley Act. A copy of our Business Ethics Policy is publicly available on our internet website at www.smhgroup.com. The information contained on our internet website is not incorporated by reference into this Report on Form 10-K.

Item 11. Executive Compensation

The information required in response to this Item 11 is incorporated herein by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required in response to this Item 12 is incorporated herein by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information, if any, required in response to this Item 13 is incorporated herein by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.

Item 14.Principal Accountant Fees and Services

The information required in response to this Item 14 is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.

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PART IV

Item 15.Exhibits, Financial Statement Schedules

1.Financial Statements

The following financial statements of the Company and Report of Independent Registered Public Accounting Firm’s Report are included under Part II Item 8 of this Form 10-K. 

	Page
Sanders Morris Harris Group Inc.
Report of Independent Registered Public Accounting Firm		39
Consolidated Balance Sheets as of December 31, 2007 and 2006		40
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2007		41
Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2007		42
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2007		43
Notes to Consolidated Financial Statements		44

2.Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the consolidated financial statements.

3. Exhibits

The exhibits filed in response to Item 601 of Regulation S-K are listed in the Index to Exhibits contained elsewhere herein.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on March 13, 2008.

SANDERS MORRIS HARRIS GROUP INC.

By:  /s/ BEN T. MORRIS

Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 13th day of March 2008.

Signature	Title
/s/ BEN T. MORRIS	Chief Executive Officer and Director
Ben T. Morris	(Principal Executive Officer)
/s/ ROBERT E. GARRISON II	President
Robert E. Garrison II
/s/ GEORGE L. BALL	Chairman of the Board
George L. Ball
/s/ DON A. SANDERS	Vice Chairman
Don A. Sanders
/s/ RICHARD E. BEAN	Director
Richard E. Bean
/s/ CHARLES W. DUNCAN, III	Director
Charles W. Duncan, III
/s/ SCOTT MCCLELLAND	Director
Scott McClelland
/s/ ALBERT W. NIEMI, JR., PH.D.	Director
Albert W. Niemi, Jr., Ph.D.
/s/ NOLAN RYAN	Director
Nolan Ryan
/s/ W. BLAIR WALTRIP	Director
W. Blair Waltrip
/s/ RICK BERRY	Chief Financial Officer
Rick Berry	(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Articles of Incorporation of the Company, as amended (Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 000-30066), and incorporated herein by reference).
3.2	Amended and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (File No. 000-30066), and incorporated herein by reference).
†10.01	Sanders Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as Appendix A to the Definitive Proxy Statement on Schedule 14A of the Company dated May 3, 2002 (File No. 000-30066), and incorporated herein by reference).
†10.02	Sanders Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit 10.1 to the Company’s 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	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).
*10.06	Eleventh Amendment to Lease Agreement dated as of December 21, 2006, between Texas Tower Limited and Sanders Morris Harris Inc.
10.07	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).
10.08	Agreement and Fourth Amendment to Credit Agreement dated as of May 7, 2007, among Sanders Morris Harris Group Inc. and JPMorgan Chase Bank, National Association (Filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 000-30066), and incorporated herein by reference).
10.09	Reorganization and Purchase Agreement dated as of May 10, 2005, among Sanders Morris Harris Group Inc., The Edelman Financial Center, Inc., The Edelman Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated May 10, 2005 (File No. 000-30066), and incorporated herein by reference).
*10.10	Contribution Agreement dated as of April 28, 2003, by and between Salient Partners, L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas limited partnership, Salient Capital, L.P., a Texas limited partnership, Salient Partners GP, LLC, a Texas limited liability company, John A. Blaisdell, Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc.
*21.1	List of Subsidiaries.
*23.1	Consent of KPMG LLP.
*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.

74

EX-10.06

Draft of 12/14/06

EXHIBIT 10.06

ELEVENTH AMENDMENT TO LEASE AGREEMENT

THIS ELEVENTH AMENDMENT TO LEASE AGREEMENT (this “Eleventh Amendment”) is made and entered into as of the 21st day of December, 2006, by and between TEXAS TOWER LIMITED, a Texas limited partnership (the “Landlord”), and SANDERS MORRIS HARRIS INC., a Texas corporation (successor in interest to Sanders Morris Mundy Inc.) (the “Tenant”).

WITNESSETH

WHEREAS, by that certain Lease Agreement dated September 22, 1987 (the “Original Lease”), Landlord leased to Tenant approximately 8,064 square feet of net rentable area of office space located on Floor 31 (the “Leased Premises”), of the building now known as JPMorgan Chase Tower, located at 600 Travis Street, in Houston, Harris County, Texas 77002 (the “Building”), all as is more fully described in the Original Lease; and

WHEREAS, Landlord and Tenant have amended the Original Lease pursuant to the following instruments: (i) First Amendment to Lease Agreement dated October 26, 1990 (the “First Amendment”); (ii) Second Amendment to Lease Agreement dated December 1, 1990 (the “Second Amendment”); (iii) Third Amendment to Lease Agreement dated May 21, 1991 (the “Third Amendment”); (iv) Fourth Amendment to Lease Agreement dated April 20, 1992 (the “Fourth Amendment”); (v) Fifth Amendment to Lease Agreement dated July 25, 1994 (the “Fifth Amendment”); (vi) Sixth Amendment to Lease Agreement dated September 25, 1996 (the “Sixth Amendment”); (vii) Seventh Amendment to Lease Agreement dated January, 1998 (the “Seventh Amendment”); (viii) Eighth Amendment to Lease Agreement dated April 27, 2000 (the “Eighth Amendment”); Ninth Amendment to Lease Agreement dated September 18, 2000 (the “Ninth Amendment”); and Tenth Amendment to Lease Agreement dated December 7, 2001 (the “Tenth Amendment”) (the Original Lease, as so amended, is collectively referred to herein as the “Lease”); and

WHEREAS, the current area of the Leased Premises is 44,295 square feet of net rentable area, consisting of 22,222 square feet of net rentable area on Floor 30 of the Building, and 22,073 square feet of net rentable area on Floor 31 of the Building, respectively (collectively, the “Existing Premises”), and the existing Lease term is scheduled to expire on November 30, 2007; and

WHEREAS, Landlord and Tenant desire to further amend the Lease, to provide, among other things, for a relocation of the Leased Premises and an extension of the Lease term, and the parties are willing to agree to such an amendment upon the terms and conditions as set forth below.

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend, and do hereby amend, the Lease as follows:

1.New Premises. Subject to and upon the terms, provisions and conditions hereinafter set forth and each in consideration of the duties, covenants and obligations of the other hereunder and under the Lease, as amended, Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord approximately 67,024 square feet of net rentable area being the entirety of Floor 57 (22,561 square feet of net rentable area), Floor 58 (22,561 square feet of net rentable area) and Floor 59 (21,902 square feet of net rentable area) of the Building (the “New Premises”), as depicted on the floor plans of the New Premises attached hereto and made a part hereof for all purposes as EXHIBIT A.

2.Term. The term (the “Term”) of the Lease with respect to the New Premises shall be one hundred twenty (120) months commencing on the later to occur of (i) December 1, 2007 or (ii) the date of Tenant’s occupancy of the New Premises for the purpose of conducting business therefrom (the “New Premises Commencement Date”), and expiring on the last day of the full calendar month from and after the New Premises Commencement Date (the “Expiration Date”) (unless sooner terminated, or extended, in accordance with the Lease). Landlord shall use reasonable efforts to deliver vacant, broom-clean possession of the New Premises to Tenant on or prior to July 1, 2007 for Tenant’s construction of leasehold improvements therein. Notwithstanding the foregoing, if Tenant has not occupied the New Premises by February 1, 2008 (such date to be extended one day for each day of delay beyond July 1, 2007 that Landlord fails to deliver possession of the New Premises to Tenant), the New Premises Commencement Date shall be deemed to be February 1, 2008 (or the applicable extended date). In addition, if Landlord does not deliver vacant, broom-clean possession of the New Premises to Tenant on or prior to September 1, 2007, Tenant shall be granted an abatement of Base Rental and Lessee’s Additional Rental commencing on the New Premises Commencement Date (as extended as provided above), equivalent to one day for each day of delay beyond September 1, 2007 that Landlord fails to deliver possession of the New Premises to Tenant. Promptly following the New Premises Commencement Date, the parties shall execute a certificate designating the New Premises Commencement Date and the Expiration Date (in a form provided by Landlord and reasonably acceptable to Tenant).

3.Net Rentable Area. Article I, Paragraph I of the Lease is hereby amended to provide that from and after the New Premises Commencement Date, and except as provided in Section 5 below, the “leased premises” shall be the New Premises and the “net rentable area” of the leased premises shall be stipulated to be 67,024 square feet.

4.Rent.

(a)Effective as of the New Premises Commencement Date and continuing through the Expiration Date, Base Rental payable by Tenant pursuant to Article II, Paragraph 4 of the Lease with respect to the New Premises shall be determined according to the following schedule:

Time Period	Base Rental Rate PSF/NRA		Annual Base Rental		Monthly Base Rental
NPCD - Month 48	$	15.50 net	$	1,038,872.00	$	86,572.67
Months 49 - 96	$	16.50 net	$	1,105,896.00	$	92,158.00
Months 97 - 120	$	17.50 net	$	1,172,920.00	$	97,743.33

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(b)The Base Rental rates quoted above are per square foot of net rentable area within the New Premises per annum. In addition to Base Rental, Tenant shall pay, with respect to the New Premises, during the Term, Lessee’s Additional Rental, Lessee’s Forecast Additional Rental, parking rent and all other sums required to be paid by Tenant pursuant to the terms and conditions of the Lease, in accordance with such terms and conditions.

5.Continued Occupancy of Existing Premises; Relinquishment of Existing Premises; Relocation to New Premises. The Base Rental rate payable by Tenant with respect to the Existing Premises shall decrease to $15.50 per square foot of net rentable area within the Existing Premises per annum effective as of December 1, 2007 if Tenant has not vacated the Existing Premises as of such date. Tenant’s obligation to pay Rent with respect to the Existing Premises shall terminate on the later to occur of: (i) the New Premises Commencement Date or (ii) the date Tenant vacates the Existing Premises and occupies the New Premises. Upon Tenant’s relocation to the New Premises, Tenant shall vacate the Existing Premises and surrender it to Landlord in broom-clean condition with all furniture, trade fixtures, equipment and other personal property removed therefrom. Upon Tenant’s relocation to the New Premises, the Lease and all of Tenant’s rights, privileges, duties and obligations accruing with respect to the Existing Premises (other than those that expressly or by their nature survive the termination of the Lease), including, without limitation, Tenant’s right to possession and use thereof, shall terminate.

6.Condition of the New Premises. Landlord agrees to deliver possession of the New Premises on or after July 1, 2007 in its then current condition, i.e., “AS IS”, “WITH ALL FAULTS” (Landlord’s obligation to perform any required asbestos remediation work and the Sprinklering Work therein excepted). Tenant’s possession of the New Premises prior to the New Premises Commencement Date shall be subject to all terms and conditions of the Lease other than the payment of rent, which obligation shall not commence until the New Premises Commencement Date. All proposed leasehold improvements or alterations to the New Premises shall be subject to Landlord’s prior written approval and shall be constructed by Tenant (utilizing its own design professionals and contractor(s) reasonably approved by Landlord) in accordance with and subject to the limitations set forth in Section 7 of the Sixth Amendment, except that Section 7 hereof shall govern the only improvements allowance to be provided by Landlord to Tenant in connection with such leasehold improvements. Landlord and Tenant each agree that this document constitutes the entire agreement of the parties and there were no verbal representations, warranties or understandings pertaining to this Eleventh Amendment. TENANT FURTHER ACKNOWLEDGES AND AGREES THAT LANDLORD DOES HEREBY DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THOSE OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE EXISTING PREMISES, THE NEW PREMISES AND/OR THE IMPROVEMENTS LOCATED THEREIN.

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7.Improvements Allowance. Landlord hereby agrees to provide Tenant an allowance in the amount of $38.55 per square foot of net rentable area within the New Premises (i.e., $2,587,775.20) (the “Improvements Allowance”) for the design and construction of leasehold improvements in the New Premises. Tenant shall contract directly for the design and construction of such improvements and shall engage a third-party construction manager; accordingly, Landlord shall not impose any construction management fee or plan review fee in connection with such improvements. The Improvements Allowance may be applied to any costs directly related to the design and construction of leasehold improvements in the New Premises including, without limitation, architectural and engineering fees, costs of construction and installation of improvements in the New Premises, relocation and installation of telecommunications and computer cabling and equipment, moving expenses, etc. Landlord acknowledges that Tenant shall stage the construction in phases, and accordingly, Landlord shall fund the Improvements Allowance to Tenant or to Tenant’s contractors (at Tenant’s option) in installments in accordance with Landlord’s reasonable draw requirements (i.e., presentation of partial (and when applicable, final) lien waivers, ten percent (10%) retainage, architect’s certifications, reasonable costs back-up documentation, etc. and an AutoCad diskette of the “as-built” plans and specifications for the New Premises following final completion of the leasehold improvements therein, all as more fully set forth in EXHIBIT C to this Eleventh Amendment). If the costs of Tenant’s improvements to the New Premises exceed the amount of the Improvements Allowance, Tenant shall pay all such excess costs. If the costs of Tenant’s improvements to the New Premises do not exceed the amount of the Improvements Allowances, Landlord shall retain any such savings as its sole property. During the construction period, Tenant’s contractors shall have access to the Building’s parking facilities, loading dock, freight elevators, electrical systems and related facilities in connection with such improvements at no additional charge to Tenant (other than for parking spaces utilized by Tenant’s contractors), and scheduling such facilities in advance with Landlord (i.e., subject to availability of such facilities). Tenant must utilize the Improvements Allowance on or prior to December 31, 2008 or Tenant’s right to utilize any remaining portion of the Improvements Allowance shall terminate in all respects. Landlord will conduct and provide Tenant (at Landlord’s cost separate from the Improvements Allowance) a copy of an asbestos survey with respect to the New Premises promptly following the mutual execution of this Eleventh Amendment.

8.Brokerage Commission. Landlord has agreed to pay CB Richard Ellis, Inc. (“Tenant’s Broker”) a real estate brokerage commission in connection with this Eleventh Amendment pursuant to a separate commission agreement by and between Landlord and Tenant’s Broker. Each party hereby represents and warrants to the other that it has not employed any other agents, brokers, or other parties in connection with this Eleventh Amendment, and each party agrees to hold the other party harmless from and against any and all claims of all other agents, brokers and/or other such parties claiming a commission by or through it in connection with this Eleventh Amendment.

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9.Parking.

(a)All parking rights previously granted Tenant pursuant to the Lease are terminated effective as of the New Premises Commencement Date. Effective as of such date and continuing through the Expiration Date, Tenant’s parking rights shall be governed by this Section 9.

(b)Landlord hereby agrees to make available to Tenant during the Term (i) for lease on a “must-take and pay” basis throughout the Term, permits to park fifteen (15) automobiles (collectively, the “Must-Take Building Parking Permits”) in reserved parking spaces located in the basement levels of the Building (the “Building Garage”), (ii) for lease on a month-to-month basis during the Term (cancelable by either party upon at least thirty (30) days’ prior written notice to the other), permits to park three (3) automobiles (the “Month-to-Month Building Parking Permits”) in reserved parking spaces in the Building Garage (iii) for lease on a “must-take and pay” basis throughout the Term, permits to park (x) sixty-three (63) automobiles in the unassigned parking areas located throughout the parking garage (the “Block 68 Garage”), in the building now known as JPMorgan Chase Center located on Block 68, South Side Buffalo Bayou, City of Houston, Harris County, Texas and (y) fifteen (15) automobiles in reserved parking spaces in the Block 68 Garage (such seventy-eight (78) permits being the “Must-Take Block 68 Parking Permits”) and (iv) for lease at Tenant’s option during the Term, permits to park up to forty-seven (47) additional automobiles in the unassigned parking areas in the Block 68 Garage (the “Optional Block 68 Parking Permits”), upon the terms and conditions of this Section 9. The Must-Take Building Parking Permits and the Month-to-Month Building Parking Permits shall be collectively referred to herein as the “Building Parking Permits”. The Must-Take Block 68 Parking Permits and the Optional Block 68 Parking Permits shall be collectively referred to herein as the “Block 68 Parking Permits”. The Building Parking Permits and the Block 68 Parking Permits shall be collectively referred to herein as the “Parking Permits”. The Building Garage and the Block 68 Garage shall be collectively referred to herein as the “Garage”.

(c)Tenant shall notify Landlord in writing on or prior to August 31, 2007 as to the number of Optional Block 68 Parking Permits Tenant will lease during that portion of the Term commencing on the New Premises Commencement Date and expiring October 31, 2008. If Tenant does not timely provide such notice, Tenant shall be deemed to have elected to lease all forty-seven (47) Optional Block 68 Parking Permits during such period. Thereafter, on or prior to August 31, 2008 and each August 31 thereafter during the Term, Tenant shall notify Landlord in writing as to the number of Optional Block 68 Parking Permits Tenant will lease during the next one year period commencing on November 1 and expiring on the following October 31. If Tenant fails to provide any such notice, Tenant shall be deemed to have elected to lease the same number of Optional Block 68 Parking Permits Tenant is then leasing as of such August 31. In addition, during the Term of this Lease, Tenant may surrender any Building Parking Permits and/or any Must-Take Block 68 Parking Permits, but when surrendered, Landlord shall have no further obligation to make the number of surrendered Parking Permits available to Tenant for lease (except on “as available” basis, in Landlord’s reasonable discretion).

(d)Tenant will pay the monthly rental established by the operator(s) of the applicable Garage from time to time during the Term for each of the Parking Permits Tenant leases hereunder. The rentals for the Parking Permits shall constitute rent and shall be due and payable in advance on the first day of each calendar month. If the Term commences on other than the first day of a calendar month or terminates on other than the last day of a calendar month, then rentals for the Parking Permits shall be prorated on a daily basis.

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(e)If the parking spaces covered by any of the Parking Permits are not available or become unavailable to Tenant (due to causes beyond the reasonable control of Landlord) during any portion of the Term, Landlord shall use good faith efforts to make available to Tenant alternate parking spaces located reasonably near the Building until the spaces covered by such Parking Permits are made available to Tenant. In such event, Tenant’s obligation to pay for Parking Permits shall be limited to those actually provided to Tenant by Landlord.

(f)Tenant’s use of the Parking Permits shall be subject to such rules and regulations as may be promulgated by the operator(s) of the applicable Garage from time to time.

(g)If Tenant hereafter expands the Leased Premises pursuant to Section 13 hereof, or otherwise, Tenant shall be entitled to lease additional Block 68 Parking Permits in the ratio of two and one-half (2.5) unreserved Block 68 Parking Permits per each additional 1,000 square feet of net rentable area leased by Tenant (ten percent (10%) of which, at Tenant’s option, may be converted to reserved Block 68 Parking Permits).

(h)Upon the occurrence of an event of default under the Lease by Tenant (i.e., after the expiration of the applicable cure period for any default by Tenant following notification thereof by Landlord) for which Landlord terminates the Lease or Tenant’s right of possession of the Leased Premises, Landlord shall have the right (in addition to all other rights, remedies and recourse hereunder and at law) to suspend any or all of the Parking Permits without prior notice or warning to Tenant.

10.ADA Matters; Sprinklering Work; Asbestos Remediation.

(a)Landlord and Tenant acknowledge and agree that the restrooms, drinking fountains and stairwell graphics located on Floors 57, 58, and 59 of the Building may not be in compliance with the Americans with Disabilities Act of 1990 (as amended, the “ADA”) and the Texas Architectural Barriers Act (as amended, the “TABA”). Tenant shall make, at its sole cost and expense (as part of the Improvements Allowance or otherwise), on or prior to the New Premises Commencement Date, all improvements required to be made to such restrooms, drinking fountains and stairwell graphics in order to bring same into current compliance with the ADA and the TABA to the extent not now compliant. Tenant shall also be responsible, at its sole cost and expense, for all other ADA and TABA compliance matters with respect to the New Premises.

(b)If the asbestos survey(s) to be provided to Tenant by Landlord at Landlord’s expense indicate the presence of asbestos within the New Premises, Landlord shall perform, at Landlord’s expense (separate from the Improvements Allowance), on or prior to the New Premises Commencement Date, any asbestos remediation work within the New Premises required in connection with Tenant’s improvements of the New Premises. In addition, Landlord shall install, at Landlord’s expense (not as part of the Improvements Allowance), on or prior to the New Premises Commencement Date, in compliance with applicable code requirements, a ceiling-mounted fire sprinklering system on Floors 57, 58 and 59 (“Sprinklering Work”) according to Building standard specifications and configuration and in accordance with all applicable laws. Landlord will coordinate the scheduling of the Sprinklering Work and any asbestos remediation work with Tenant’s construction of the leasehold improvements within the New Premises so that such work is performed at a mutually convenient time and in accordance with the Construction Drawings with respect to the New Premises.

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11.Renewal Options.

(a)Effective as of the date hereof, any and all renewal options previously granted Tenant pursuant to the Lease are hereby deleted in their entirety. Tenant shall have options to extend the Term of this Lease beyond the Term in accordance with the terms and conditions of this Section 11.

(b)Tenant shall have the option (each a “Renewal Option”) to renew and extend the term of this Lease with respect to all of the Leased Premises then leased by Tenant, or a portion of the Leased Premises (in contiguous full floor increment(s) only) of at least two (2) contiguous full floors, at either the highest or lowest portion of the Leased Premises (and if Tenant does not hereafter expand and elects not to renew with respect to one full floor within the Leased Premises, the floor Tenant gives back will be Floor 57) for two (2) additional periods of five (5) years each or one additional period of ten (10) years (as designated by Tenant in its first exercise notice) (as applicable, each a “Renewal Term”). Each Renewal Option may only be exercised by Tenant giving written notice thereof no more than fifteen (15) months nor less than twelve (12) months prior to the Expiration Date, or prior to the expiration of the first five (5) year Renewal Term, as applicable. If Tenant fails to give notice of exercise of a Renewal Option within the applicable time period, such Renewal Option shall be deemed waived and of no further force and effect and this Lease shall terminate upon the Expiration Date, or upon the expiration of the first five (5) year Renewal Term, as applicable. In addition, Tenant’s exercise of the second five (5) year Renewal Option shall be conditioned upon Tenant’s extension of the Term for the first five (5) year Renewal Term.

(c)Tenant’s right to extend this Lease as provided for herein can be exercised only if, at the time of Tenant’s exercise of the applicable Renewal Option and upon the commencement of the applicable Renewal Term, (i) no event of default then exists under this Lease, and (ii) Tenant is in possession of that portion of the Leased Premises consisting of at least two (2) full floors and all expansion space in the Building Tenant hereafter elects to Lease (the “Occupancy Threshold”) (unless Landlord, in its sole discretion, elects to waive such condition(s)). If either of such conditions are not satisfied or waived by Landlord, such Renewal Option shall be terminated and of no further force and effect, any purported exercise thereof shall be null and void, and this Lease shall terminate upon the Expiration Date, or upon the expiration of the first five (5) year Renewal Term, as applicable. No assignee of Tenant, or sublessee of the Leased Premises, may exercise a Renewal Option.

(d)If Tenant exercises a Renewal Option (in accordance with and subject to the provisions of this Section 11), all of the terms, covenants and conditions provided in this Lease shall continue to apply during the applicable Renewal Term, except that (i) the Base Rental payable by Tenant during such Renewal Term shall be the then Market Base Rental Rate (as defined in Section 12 below) for the Leased Premises, and (ii) any terms, covenants and conditions that are expressly or by their nature inapplicable to such Renewal Term (including, without limitation, this Section 11 if the Term is extended for the ten (10) year Renewal Term, or second five (5) year Renewal Term, as applicable) shall be deemed void and of no further force and effect.

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(e)If Tenant elects not to renew with respect to the entire Leased Premises, Tenant will be required at its expense to remove all cabling installed by or on behalf of Tenant in the Building riser(s) serving the floor(s) for which Tenant elect(s) not to renew, and to pay for the cost of removing the internal stairwell serving such floor(s), and returning the affected portion(s) of the Leased Premises, any slab penetrations and any other base building improvements affected by such removal to Building standard condition.

12.Market Base Rental Rate.

(a)As used herein, the term “Market Base Rental Rate” means the annual net amount per square foot of net rentable area that a willing tenant would pay and a willing landlord would accept in arm’s length, bona fide negotiations for a lease of the Leased Premises (or Expansion Premises) to be executed at the time of determination and to commence at the beginning of the applicable Renewal Term (or on the date that the Expansion Premises becomes part of the Leased Premises), determined as hereinafter provided based upon comparable lease transactions made in the Building and “Class A” office buildings in the Central Business District of Houston, Texas taking into account all relevant factors, including without limitation the effect of any allowances or tenant inducements that Landlord is obligated to provide to Tenant under the Lease or provides at its election or, if none are provided, the fact that Landlord declined to provide any allowances or inducements.

(b)Within ten (10) business days after receipt of Tenant’s notice of exercise of a Renewal Option or an Expansion Option, Landlord will notify Tenant in writing of the Market Base Rental Rate for the Leased Premises (or Expansion Premises) for the applicable Renewal Term (or applicable expansion term). If Tenant disagrees with Landlord’s determination, Tenant shall have a period of ten (10) business days after receipt of Landlord’s notice to either (i) withdraw its exercise of the applicable right or option by written notice to Landlord, in which event the applicable right or option shall terminate and shall be of no further force and effect (and, if the applicable option is a Renewal Option, the Lease shall terminate upon the Expiration Date, or upon the expiration of the first five (5) year Renewal Term, as applicable), or (ii) notify the Landlord that it contests Landlord’s finding of the Market Base Rental Rate (which contest must be reasonable and be made in good faith by Tenant), in which event the parties shall promptly and in good faith endeavor to resolve between themselves their disagreement as to the Market Base Rental Rate, failing of which the parties shall submit the determination to the binding dispute resolution procedure described below.

(c)If Landlord and Tenant are unable to reach an agreement as to the Market Base Rental Rate within thirty (30) days after Tenant notifies Landlord in accordance with clause (ii) of the preceding sentence, Landlord and Tenant shall each promptly appoint a Qualified Broker (as hereinafter defined) or a Qualified Appraiser (as hereinafter defined). As soon as reasonably possible following their appointment, and in any event within thirty (30) days thereafter, the two (2) Qualified Brokers (or two (2) Qualified Appraisers, as applicable) selected by Landlord and Tenant shall each make a separate determination of the Market Base Rental Rate for the Leased Premises (if the determination is being made pursuant to a Renewal Option) or the Expansion Premises with respect to which Tenant exercised an Expansion Option, as applicable, and shall deliver a written report of its determination (including reasonable detail supporting such determination) to Landlord and Tenant. If the higher of the two (2) Market Base Rental Rate determinations is not more than one hundred five percent (105%) of the lower determination, then the average of the two (2) determinations shall be used as the Market Base Rental Rate for the Leased Premises (or Expansion Premises) and shall be binding on Landlord and Tenant. If the higher determination is more than one hundred five percent (105%) of the lower determination, then the two (2) Qualified Brokers (or two (2) Qualified Appraisers, as applicable) shall select a third (3rd) Qualified Broker (or Qualified Appraiser, as applicable), and as soon as reasonably possible (but not to exceed thirty (30) days) thereafter the third (3rd) Qualified Broker (or Qualified Appraiser, as applicable) shall determine which of the two (2) Qualified Brokers’ (or two (2) Qualified Appraisers’, as applicable) determinations of the Market Base Rental Rate most closely approximates the Market Base Rental Rate, and the determination so selected shall be used as the Market Base Rental Rate for the subject space during the applicable term and shall be binding on both Landlord and Tenant.

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(d)Landlord and Tenant shall, separately and collectively and in good faith, use all reasonable diligence to ensure that all three (3) determinations are completed in good faith within sixty (60) days after the appointment of the first Qualified Broker (or Qualified Appraiser, as applicable) to be appointed. Each party shall be responsible for the compensation, if any, of the Qualified Broker (or Qualified Appraiser, as applicable) appointed by it and for one-half (½) of the compensation, if any, of the third (3rd) Qualified Broker (or Qualified Appraiser, as applicable). If Tenant does not timely withdraw its exercise of the Renewal Option (or Expansion Option) as provided in subsection (b)(i), or contest Landlord’s finding of the Market Base Rental Rate as provided in subsection (b)(ii) above, Tenant shall be conclusively deemed to have accepted the Market Base Rental Rate determined by Landlord as the Base Rental rate for the applicable Renewal Term (or expansion term).

(e)As used herein the term “Qualified Broker” means a real estate broker who (i) is licensed in the State of Texas, (ii) is a member of the Houston Office Leasing Brokers Association or the Society of Industrial and Office Realtors, (iii) has been actively involved in leasing office space in multi-story office buildings in the Central Business District of Houston, Texas for not less than the previous ten (10) year period, and (iv) has not represented Landlord or Tenant during the preceding five (5) year period. As used herein, the term “Qualified Appraiser” means an appraiser who (i) is licensed in the State of Texas, (ii) is a MAI Appraiser, (iii) has been actively involved in appraising multi-story office buildings in the Central Business District of Houston, Texas for not less than the previous ten (10) year period, and (iv) has not represented Landlord or Tenant during the preceding five (5) year period.

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13.Expansion Options.

(a)All expansion rights, preferential lease rights and refusal rights previously granted Tenant pursuant to the Lease are hereby deleted in their entirety. Subject to and upon the terms, provisions and conditions set forth in this Section 13, Tenant shall have, and is hereby granted, two (2) options (each an “Expansion Option”) to lease approximately one-half (1/2) of any single floor located in the elevator bank serving Floors 49-59 of the Building designated by Landlord as Tenant’s expansion floor (the “Expansion Premises”), in response to Tenant’s exercise of an Expansion Option (i.e., if Tenant leases one-half (1/2) of a floor pursuant to the first Expansion Option, the other one-half (1/2) of such floor shall be the Expansion Premises subject to the second Expansion Option, otherwise, if Tenant does not exercise the first Expansion Option, the second Expansion Premises shall be one-half (1/2) of a floor located in the elevator bank serving Floors 49-59 of the Building designated by Landlord, as applicable) by written notice to Landlord on or prior to the expiration of the forty-eighth (48th) full calendar month of the Term with respect to the first Expansion Option, and/or on or prior to the expiration of the eighty-fourth (84th) full calendar month of the Term with respect to the second Expansion Option, respectively. If Tenant does not timely exercise an Expansion Option, such Expansion Option shall be waived.

(b)An Expansion Option may be exercised only if, at the time of such exercise and at the time of Landlord’s delivery of the applicable Expansion Premises to Tenant (i) no event of default then exists under the Lease and (ii) Tenant is in possession of at least the Occupancy Threshold (unless Landlord, in its sole discretion, elects to waive such condition(s)). If such condition(s) are not satisfied or waived by Landlord, any purported exercise of an Expansion Option shall be null and void. No assignee of Tenant, or sublessee of the Leased Premises may exercise an Expansion Option.

(c)If Tenant elects to exercise an Expansion Option, Tenant’s lease of the applicable Expansion Premises shall be subject to all of the terms, covenants and conditions of this Lease except that the Base Rental rate shall be the Market Base Rental Rate (as defined in Section 12 hereof). The term of the Lease with respect to the applicable Expansion Premises shall commence on the date of Landlord’s delivery of possession of the applicable Expansion Premises to Tenant (which shall occur at any time after the expiration of the fifty-fourth (54th) full calendar month of the Term, but prior to the expiration of the sixty-sixth (66th) full calendar month of the Term with respect to the first Expansion Premises, and at any time after the expiration of the ninetieth (90th) full calendar month of the Term, but prior to the expiration of the one hundred second (102nd) full calendar month of the Term with respect to the second Expansion Premises, respectively), and shall be coterminous with the Term with respect to the remainder of the Leased Premises. Tenant’s obligation to pay the rent for the applicable Expansion Premises shall commence on the date (the “Expansion Rental Commencement Date”) that is the earlier to occur of (i) ninety (90) days following Landlord’s delivery of possession of the applicable Expansion Premises to Tenant, or (ii) the date that Tenant fully occupies the applicable Expansion Premises.

(d)If Landlord fails to deliver possession of the applicable Expansion Premises to Tenant within sixty (60) days following the applicable outside delivery date referenced above, the applicable Expansion Rental Commencement Date shall be extended one additional day for each day of delay beyond such sixty (60) day period that Landlord fails to deliver possession of the applicable Expansion Premises to Tenant.

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(e)If Tenant elects to lease Expansion Premises, Landlord will deliver possession of the applicable Expansion Premises to Tenant, and Tenant will accept such Expansion Premises, in its then current condition (i.e. “AS IS” and “WITH ALL FAULTS”). Landlord’s provision of (or failure to provide, as applicable) an improvements allowance with respect to the applicable Expansion Premises shall be reflected in the determination of the Market Base Rental Rate for such Expansion Premises.

(f)Upon request of Landlord at any time after Tenant’s exercise of an Expansion Option, Tenant shall execute and deliver to Landlord an amendment to the Lease (in a form provided by Landlord) specifying (i) the applicable Expansion Rental Commencement Date, (ii) the Base Rental schedule for the applicable Expansion Premises, (iii) the net rentable area of the applicable Expansion Premises, and (iv) any other terms applicable to Tenant’s lease of the applicable Expansion Premises.

14.Right of First Refusal.

(a)Subject to and upon the terms, provisions and conditions set forth in this Section 14, Tenant shall have, and is hereby granted, a continuing right of first refusal (the “Right of First Refusal”) during the Term of this Lease to lease any space (the “ROFR Premises”) located on Floors 52 and/or 53 of the Building that becomes available for lease and for which Landlord receives a bona fide written third-party offer to lease that Landlord desires to accept.

(b)Tenant may exercise a Right of First Refusal only if, at the time of such exercise and at the time of Landlord’s delivery of the ROFR Premises to Tenant, (i) no event of default exists and (ii) Tenant is in possession of at least the Occupancy Threshold (unless Landlord, in its sole discretion, elects to waive such condition(s)). If such condition(s) are not satisfied or waived by Landlord, any purported exercise of the Right of First Refusal shall be null and void. No assignee of Tenant, or sublessee of the Leased Premises may exercise a Right of First Refusal.

(c)If Landlord receives a bona fide written third-party offer to lease any of the ROFR Premises that Landlord desires to accept, Landlord will contemporaneously submit a proposal to Tenant upon the same terms except that the term shall be coterminous with the Term with respect to the remainder of the Leased Premises and any allowances shall be prorated (a “Refusal Lease Proposal”). Tenant shall have a period of five (5) business days after receipt of a Refusal Lease Proposal to irrevocably and unconditionally exercise its Right of First Refusal to lease the applicable ROFR Premises upon the terms of the Refusal Lease Proposal by written notice to Landlord. If Tenant does not exercise a Right of First Refusal within such five (5) business day period, the Right of First Refusal shall be waived with respect to such space. Any purported conditional or qualified exercise of a Right of First Refusal shall be null and void. Upon Tenant’s exercise of a Right of First Refusal, Landlord and Tenant shall execute an amendment to the Lease evidencing same, but an otherwise valid exercise of a Right of First Refusal shall be fully effective, whether or not such amendment is executed.

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(d)If Landlord does not receive written notice from Tenant of its exercise of the Right of First Refusal within said five (5) business day period, Landlord shall have a period of one hundred eighty (180) days thereafter to lease the applicable ROFR Premises for a net effective rental rate not less than ninety percent (90%) of the net effective rental rate reflected by the Refusal Lease Proposal. If Landlord does not lease such ROFR Premises within said one hundred eighty (180) day period, Tenant shall have a Right of First Refusal on any subsequent leasing thereof on the terms set forth above.

(e)Tenant acknowledges and agrees that the Right of First Refusal is subject and subordinate to any and all expansion options, refusal rights, preferential rights and renewal options hereafter granted to future tenant(s) of the ROFR Premises (and their respective successors and assigns) for which Tenant did not exercise a Right of First Refusal.

(f)Landlord acknowledges and agrees that Tenant’s failure to exercise any Right of First Refusal shall not affect the Expansion Options granted Tenant herein.

15.Riser Space.

(a)Landlord grants Tenant a non-exclusive license co-terminus with the Term for limited access to one or more Building risers (in Landlord’s sole, reasonable discretion) to install, operate and maintain up to four inches (4") of conduit in the aggregate for fiber optic telecommunications/data cabling (the “Riser Penetrations”) to be used in connection with Tenant’s use of the New Premises. The locations of and specifications for the Riser Penetrations installed pursuant to this Section 15 shall be subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld or delayed. The installation of the Riser Penetrations shall be performed at Tenant’s sole cost and expense. Tenant’s installation and use of the Riser Penetrations shall not interfere with the activities being carried on by other tenants or services of the Building. Any drilling, chipping, or other disruptive construction work shall be performed during non-business hours and, in any event, Tenant shall use its best efforts to minimize and contain all noise, dust and any other disturbance to tenants in the Building.

(b)Tenant shall not be required to pay to Landlord any license fee with respect to the Riser Penetrations.

(c)Prior to the installation or operation of the Riser Penetrations, Tenant shall obtain and at all times thereafter maintain all required governmental licenses, permits and/or consents. Tenant shall give Landlord reasonable advance notice of its intent to access the applicable Building riser(s) in order to install, maintain, repair or replace the Riser Penetrations. Tenant’s installation, maintenance, repair and/or replacement of the Riser Penetrations shall also be governed by the cable and conduit installation procedures set forth on EXHIBIT B attached hereto and made a part hereof for all purposes, which procedures are subject to change from time to time in Landlord’s sole discretion.

(d)Tenant, at its sole cost and expense, shall maintain, repair and/or replace the Riser Penetrations and shall at all times maintain the Riser Penetrations in a safe, clean and first class condition. Tenant shall not permit any liens, claims, charges or encumbrances to attach to the Riser Penetrations or the Building resulting from the furnishing of labor or materials in connection with the installation, maintenance, repair or replacement of the Riser Penetrations.

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(e)Tenant, at its sole cost and expense, shall repair any and all damage to the Building, including, without limitation, the Building riser(s), which results from or arises out of the use, repair, installations, maintenance, operation and/or removal of Riser Penetrations by Tenant, its employees, agents and contractors of the Building, including, without limitation, any and all loss, cost, damage or expense suffered by Landlord or the Building as a result of (i) the installation, operation, repair, maintenance, replacement or removal of any Riser Penetrations; (ii) access work in the Building riser(s) or (iii) unreasonable interference with Landlord or the Building’s tenants, occupants or invitees. Tenant shall indemnify and hold Landlord, its successors and assigns, harmless from and against any and all liens, costs, losses, liabilities, causes of action or claims by contractors, subcontractors, materialmen or laborers providing any materials to or performing any work on or in the Building for or on behalf of Tenant with respect to the use, repair, installation, maintenance, operation and/or removal of Riser Penetrations, including, without limitation, any reasonable attorneys’ fees and costs of suit incurred by Landlord in discharging or attempting to discharge any such liens or claims (if Tenant fails to discharge same within thirty (30) days following Tenant’s receipt of written notice thereof). Additionally, Tenant shall indemnify and hold Landlord, its successors and assigns, harmless from and against any and all liabilities, losses, damages, costs, expenses (including, without limitation, reasonable attorneys’ fees), causes of action, suits, claims or demands arising out of or in connection with the installation, use, repair, maintenance, operation and/or removal of the Riser Penetrations by Tenant, its employees, agents and contractors, or otherwise arising out of or in connection with the exercise by Tenant, its employees, agents and contractors of the license herein granted or under claim of the rights and privileges herein granted, including, without limitation, any future damages due to removal operations by Tenant pursuant to Section 15(g) below.

(f)If Tenant is not required to pay for the removal of the existing cabling in the Building riser(s) now serving the New Premises, upon Tenant’s relocation to the New Premises, Tenant will, at Tenant’s sole cost and expense within thirty (30) days thereafter, remove any cabling in the Building riser(s) now serving the Existing Premises and repair any damage to the Building resulting therefrom. In addition, upon the termination or expiration of the Lease (following any renewal periods, if exercised by Tenant), if Tenant is not required to pay for the removal of the existing cabling in the Building riser(s) now serving the New Premises, Tenant will, at Tenant’s sole cost and expense and within thirty (30) days thereafter, remove any cabling installed by or on behalf of Tenant in the Building riser(s) to serve the New Premises, and repair any damage to the Building resulting therefrom.

16.Sky Lobby Signage. In the event Landlord, at its sole election (and with no obligation to do so), grants name signage rights on the wall on Floor 60 adjacent to the elevator bank serving Floors 49-59 of the Building, to tenant(s) leasing space equal to or in excess of the net rentable area of the Leased Premises, Landlord shall also grant a similar name signage right to Tenant.

17.Lender Approval. The Lease is subject and subordinate to the mortgage lien of Landlord’s existing mortgagee, the New York State Teachers’ Retirement System (“Lender”), encumbering the Building, as set forth in that certain Subordination, Non-Disturbance and Attornment Agreement dated June 24, 2003 by and among Lender, Landlord and Tenant (the “SNDA”). Landlord shall use good faith efforts to obtain, as soon as reasonably practicable following the date hereof, Lender’s written approval of this Eleventh Amendment and/or a written acknowledgment from Lender that the SNDA applies to the Lease as amended by this Eleventh Amendment.

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18.Miscellaneous.

(a)Amendment to Lease. Tenant and Landlord acknowledge and agree that the Lease has not been amended or modified in any respect, other than by this Eleventh Amendment, and there are no other agreements of any kind currently in force and effect between Landlord and Tenant with respect to the Leased Premises or the Building. The term “Lease” shall mean the Lease as amended by this Eleventh Amendment unless the context requires otherwise.

(b)Counterparts. This Eleventh Amendment may be executed in multiple counterparts, and each counterpart when fully executed and delivered shall constitute an original instrument, and all such multiple counterparts shall constitute but one and the same instrument.

(c)Entire Agreement. This Eleventh Amendment sets forth all covenants, agreements and understandings between Landlord and Tenant with respect to the subject matter hereof and there are no other covenants, conditions or understandings, either written or oral, between the parties hereto except as set forth in this Eleventh Amendment.

(d)Full Force and Effect. Except as expressly amended hereby, all other items and provisions of the Lease, as amended, remain unchanged and continue to be in full force and effect.

(e)Conflicts. The terms of this Eleventh Amendment shall control over any conflicts between the terms of the Lease and the terms of this Eleventh Amendment.

(f)Authority of Tenant. Tenant warrants and represents unto Landlord that (i) Tenant is a duly organized and existing legal entity, in good standing in the State of Texas; (ii) Tenant has full right and authority to execute, deliver and perform this Eleventh Amendment; (iii) the person executing this Eleventh Amendment on behalf of Tenant was authorized to do so; and (iv) upon request of Landlord, such person will deliver to Landlord satisfactory evidence of his or her authority to execute this Eleventh Amendment on behalf of Tenant.

(g)Capitalized Terms. Capitalized terms not defined herein shall have the same meanings attached to such terms under the Lease.

(h)Successors and Assigns. This Eleventh Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

(i)No Guaranties. Landlord acknowledges and agrees that all guaranties previously executed by Tenant’s principals from time to time during the Lease term, including but not limited to the Original Guaranty, the Fourth Amendment Guaranty, the Sixth Amendment Guaranty and the joinder of Guarantors to the Seventh Amendment, have been terminated in all respects, and there are no guaranties now in effect with respect to the Lease.

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(j)Governing Law. This Eleventh Amendment shall be governed by and construed in accordance with the laws of the State of Texas.

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Executed as of the date first written above.

LANDLORD:
TEXAS TOWER LIMITED, a Texas limited partnership
By:	Prime Asset Management LLC,
	a Delaware limited liability company, its general partner
	By:Raha One (U.S.) Limited, Inc., a Delaware corporation, its managing member

By:	/s/ Rafic A. Bizri
	Rafic A. Bizri President

TENANT:
SANDERS MORRIS HARRIS INC., a Texas corporation
By:	/s/ Ben T. Morris
	Name: Ben T. Morris
	Title: Chief Executive Officer

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EXHIBIT A

Floor Plans of New Premises

[TO COME]

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EXHIBIT B

Building Cabling and Conduit Installation Procedures

1. All floor-to-floor vertical cable/conduit installations must be approved in advance, in writing by Hines Property Management.

2. Hines Property Management will approve the installation location.

3. Only plenum rated conduit shall be installed, and only plenum rated cable shall be installed if the proposed cable will not be installed in and enclosed by conduit.

4. All cable/conduit runs will be vertical. No “zigzag” installations are allowed.

5. Upon installation, all cable/conduit will be labeled by tenant on each floor to clearly indicate the tenant name.

6. Tenant or tenants’ cable/conduit contractor is responsible for repairing or replacing, as necessary, firestop in each penetration.

7. At such time that cable/conduit is no longer in use, but in any case, not later than the lease expiration, tenant is responsible for removing its cable.

8. Tenant is responsible for all costs associated with the cable/conduit installation, and cable removal. This may include labor to coordinate the installation, repair of damage to other cable/conduit or the surrounding area, removal and/or replacement of floor penetration sealant, etc.

9. The cable/conduit installed will be for the sole use of the tenant. Tenant shall not assign, sell, lease or in any other manner, share cable/conduit without Landlord’s prior written consent.

TENANT NAME:                             _____________________________________________________________________

CABLE/CONDUIT LOCATION: _______________________________________________________________________

FLOORS:                                         _______________________________________________________________________

TYPE OF CABLE/CONDUIT:     ______________________________________________________________________

I agree to install and remove this cable/conduit pursuant to the provisions and procedures as stated above:

_____________________________	_________________________________	______________
Name & Firm Name (print)	Signature	Date

B-1

(Tenant)

EXHIBIT C

Construction of Initial Leasehold Improvements

Tenant will have the right to construct and install the leasehold improvements and tenant finish desired by Tenant in the Leased Premises (collectively, the “Initial Leasehold Improvements”) in accordance with, and subject to the limitations and conditions set forth in, this EXHIBIT B.

1. Tenant shall have prepared and submitted to Landlord for approval no later than thirty (30) days prior to commencement of construction of the Initial Leasehold Improvements a set of preliminary plans (the “Proposed Space Plans”) in the form of a schematic design providing a conceptual layout and description of the Initial Leasehold Improvements.

2. Within ten (10) business days after delivery of the Proposed Space Plans to Landlord, Landlord shall either approve the Proposed Space Plans or notify Tenant of the item(s) of the Proposed Space Plans that Landlord disapproves and the reason(s) therefor. If Landlord disapproves the Proposed Space Plans, Tenant shall revise and resubmit same to Landlord for approval (the “Revised Space Plans”) within ten (10) business days following receipt of Landlord’s disapproval. Within five (5) business days after delivery of the Revised Space Plans to Landlord, Landlord shall either approve the Revised Space Plans or notify Tenant of the item(s) of the Revised Space Plans which Landlord disapproves and the reason(s) therefor. If Landlord disapproves the Revised Space Plans, Tenant shall further revise and resubmit same to Landlord for approval, which process shall continue until the plans are approved. Landlord shall have five (5) business days after delivery of the each set of Revised Space Plans to either approve the Revised Space Plans or notify Tenant of the item(s) of the Revised Space Plans which Landlord disapproves and the reason(s) therefor. The Proposed Space Plans or Revised Space Plans, as approved by Landlord, are hereinafter referred to as the “Space Plans”.

3. Upon Landlord’s approval of the Space Plans, Tenant shall have prepared, by a licensed architect and engineer reasonably acceptable to Landlord, construction drawings (in accordance with the Space Plans) and specifications including complete sets of detailed architectural, structural, mechanical, electrical and plumbing working drawings (the “Proposed Construction Drawings”) for the Initial Leasehold Improvements and shall deliver the Proposed Construction Drawings to Landlord for approval within one hundred twenty (120) days following Landlord’s approval of the Space Plans.

4. Within ten (10) business days after delivery of the Proposed Construction Drawings to Landlord, Landlord shall either approve the Proposed Construction Drawings or notify Tenant in writing of the item(s) of the Proposed Construction Drawings that Landlord disapproves and the reason(s) therefor. If Landlord disapproves the Proposed Construction Drawings, Tenant shall revise and resubmit same to Landlord for approval (the “Revised Construction Drawings”) within ten (10) business days following receipt of Landlord’s disapproval. Within five (5) business days after delivery of the Revised Construction Drawings to Landlord, Landlord shall either approve the Revised Construction Drawings or notify Tenant in writing of the item(s) of the Revised Construction Drawings which Landlord disapproves and the specific reason(s) therefor. If Landlord disapproves the Revised Construction Drawings, Tenant shall further revise and resubmit same to Landlord for approval, which process shall continue until the plans are approved. Landlord shall have five (5) business days after delivery of each set of Revised Construction Drawings to either approve the Revised Construction Drawings or notify Tenant of the item(s) of the Revised Construction Drawings which Landlord disapproves and the reason(s) therefor. The Proposed Construction Drawings or Revised Construction Drawings, as approved by Landlord, are hereinafter referred to as the “Construction Drawings”.

C-1

5. Landlord’s approval of the Construction Drawings shall in no manner indicate that Landlord believes the Construction Drawings are in compliance with all applicable codes, law and regulations and it shall be Tenant’s obligation to obtain all such requisite approvals.

6. Tenant shall submit to Landlord in writing the following information at least ten (10) days prior to the commencement of construction of the Initial Leasehold Improvements:

A. The name and address of Tenant’s proposed general contractor (the “General Contractor”), and the names of each of the subcontractors that the General Contractor intends to engage in the construction of the mechanical, electrical and plumbing system portions of the Initial Leasehold Improvements. The General Contractor and all such subcontractors (collectively, “Tenant’s Contractors”) shall be subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld, delayed or conditioned.

B. The anticipated commencement date of construction and estimated date of completion.

C. Evidence of property, liability and worker’s compensation insurance reasonably acceptable to Landlord as to insurer, policy terms and coverage (which, as to property and liability insurance policies, may include, without limitation, naming Landlord as additional insured).

7. Tenant, at its sole cost and expense, shall cause Tenant’s Contractors to perform all work required to complete the Initial Leasehold Improvements substantially in accordance with the approved Construction Drawings (“Tenant’s Work”). Landlord, at Landlord’s expense, shall have the right to observe the Tenant’s Work, but any such observation shall be strictly for Landlord’s own purposes and shall not impose upon Landlord any express or implied duty to Tenant or any third party with respect to the Tenant’s Work or the Leased Premises, including, without limitation, verification that the Initial Leasehold Improvements are constructed in a good and workmanlike manner, substantially in accordance with (a) the Construction Drawings, (b) all applicable laws, codes and ordinances and (c) Landlord’s insurance requirements.

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8. Tenant shall not be deemed to be the agent or representative of Landlord in making the Initial Leasehold Improvements, and shall have no right, power or authority to encumber the fee interest in the Building or the land on which it is located. Accordingly, any claims against Tenant with respect to the Tenant’s Work or the Initial Leasehold Improvements shall be limited to Tenant’s leasehold estate under this Lease. Should any mechanic’s or other liens be filed against the Leased Premises, the Building or any other property of Landlord or any interest therein by reason of Tenant’s acts or omissions or because of a claim against Tenant or Tenant’s Contractors, Tenant shall cause same to be canceled or discharged of record by bond or otherwise within thirty (30) days after notice by Landlord. If Tenant shall fail to cancel or discharge said lien or liens, within said thirty (30) day period (which failure shall be deemed to be a default hereunder), Landlord may, at its sole option and in addition to any other remedy of Landlord hereunder or at law, cancel or discharge same and Tenant shall promptly reimburse Landlord upon demand, for all reasonable costs incurred in canceling or discharging such lien or liens (including, without limitation, reasonable legal fees).

9. All Tenant’s Work shall be performed in a good and workmanlike manner in accordance with good industry practice, shall comply in all material respects with applicable federal, state, city and county statutes, ordinances, regulations, laws and codes, including, without limitation, the ADA and TABA and shall be performed so as not to alter the exterior appearance of the Building and so as not to adversely affect the structure or safety or systems or services of the Building, the Project or those of the other tenants therein. All required building and other permits in connection with the construction and completion of the Tenant’s Work shall be obtained and paid for by Tenant.

10. All material used in the performance of Tenant’s Work and in the fixturing of the Leased Premises shall be new and of good quality (other than materials already located in the Leased Premises on the date of this Lease).

11. Tenant’s Contractors (at no cost to Tenant prior to the Commencement Date) shall be allowed to utilize power, water and other existing utility facilities as necessary and required in connection with the Tenant’s Work in the Leased Premises.

12. Tenant shall maintain the Leased Premises and the surrounding areas in a clean and orderly condition during construction. Tenant shall promptly remove all unused construction materials, equipment, shipping containers, packaging, debris and flammable waste from the Building. Neither Tenant nor Tenant’s Contractors shall be permitted to deposit rubbish, dirt or debris in Landlord’s trash containers or elsewhere in the Building. Storage of construction materials, tools, equipment and debris shall be confined within the Leased Premises.

13. Landlord shall have the right at all times to inspect the Initial Leasehold Improvements. Tenant shall do structural work, coring, drilling and chipping, after normal business hours but shall have the right to construct all other Initial Leasehold Improvements at any hour. If at any time the entry by or presence of one or more persons furnishing labor or materials for the Initial Leasehold Improvements shall cause disharmony or interference with the other tenants in the Building or the operation of the Project, any consent granted by Landlord with respect to the disruptive contractor or subcontractor may be withdrawn following twenty-four (24) hours’ written notice to Tenant if such disharmony or interference is not cured within such twenty-four (24) hour period; provided however, Landlord shall have the right at all times to immediately terminate any particular activity or activities of Tenant or its employees, agents, or contractors which, in Landlord’s reasonable judgment, (i) causes unreasonable interference with other Building tenants’ usage of the Project, or (ii) poses an immediate threat of damage or injury to persons or property in or around the Project.

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14. Upon completion of Tenant’s Work, Tenant shall deliver to Landlord one set of the “records drawings” and specifications for the Leased Premises on a diskette in AutoCad or compatible format.

15. Landlord agrees to provide Tenant an allowance (the “Improvements Allowance”) of up to $38.55 per square foot of net rentable area of the Leased Premises in connection with the design, construction and installation of the Initial Leasehold Improvements. The Improvements Allowance shall be funded in installments (less ten percent (10%) retainage) (no more frequently than once per month) promptly following Landlord’s receipt of Tenant’s written draw request, accompanied by a partial lien waiver from the General Contractor and supporting detail for the costs incurred by Tenant reasonably acceptable to Landlord. The final installment of the Improvements Allowance shall be funded upon the later to occur of (i) the date that Tenant fully occupies the Leased Premises, and (ii) Landlord’s receipt of Tenant’s written request therefor, accompanied by a final lien waiver from the General Contractor and each of the other Tenant’s Contractors designated by Landlord, the AutoCad diskette of the “record drawings” and specifications for the Leased Premises and supporting detail for the costs incurred by Tenant reasonably acceptable to Landlord. If the total costs of the Initial Leasehold Improvements exceed the Improvements Allowance, the excess shall be at Tenant’s sole cost and expense. If the total costs of the Initial Leasehold Improvements do not exceed the Improvements Allowance, any savings may be utilized for future leasehold improvements in the Leased Premises if completed prior to December 31, 2011, failing of which Tenant shall forfeit any remaining balance of the Improvements Allowance as of such date.

16. In the event Tenant requests Landlord to contract for the construction and installation of any portion of the Tenant’s Work on behalf of Tenant, Landlord shall supervise the construction of that portion of Tenant’s Work and Tenant agrees to pay Landlord a reasonable construction management fee in an amount not to exceed five percent (5%) of the total construction costs of that portion of the Tenant’s Work performed by Landlord’s contractor.

17. From time to time as such schedules are revised, Tenant or Tenant’s Contractors shall provide Landlord with schedules showing the timing of construction of the Initial Leasehold Improvements. All Initial Leasehold Improvements shall comply in all material respects with the Construction Drawings.

C-4

EX-10.10

Exhibit 10.10

CONTRIBUTION AGREEMENT

This CONTRIBUTION AGREEMENT (this “Agreement”) is entered into as of April 28, 2003, by and between Salient Partners, L.P., a Texas limited partnership (“Salient Partners”), Salient Advisors, L.P., a Texas limited partnership (“Advisors”), Salient Capital, L.P., a Texas limited partnership (“Capital”), Salient Partners GP, LLC, a Texas limited liability company (the “General Partner”), John A. Blaisdell, Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A Haag Sherman, and Adam L. Thomas, (each a “Principal” and, collectively, the “Principals”), and Sanders Morris Harris Group, Inc., a Texas corporation (“SMHG”).

RECITALS:

A.Immediately prior to the closing of the transactions contemplated herein, the parties desire to form (i) a Delaware limited partnership under the name Salient Partners Acquisition, L.P. (or such similar name as may be available) (“Newco”), and (ii) a Delaware limited liability company under the name Salient Capital Management, LLC (or such similar name as may be available) (“Newco GP”);

B.Salient Partners, being the sole limited partner of Advisors and Capital, desires to contribute to Newco all of its limited partner interests in Advisors and Capital, respectively, in consideration for (i) 50% of the Class A limited partner units of Newco, and (ii) certain cash consideration as set forth herein;

C.The General Partner desires to contribute to Newco GP all of its general partner interests in each of Advisors and Capital in consideration for a 50% member interest in Newco GP;

D.SMHG being the owner of all the capital stock of Pinnacle Management & Trust Company, a state trust company organized under Chapter 181 of the Texas Finance Code (“PMT”) desires to convert PMT from a trust association organized as a Texas corporation to a limited trust association organized as a Texas limited liability company (“New PMT”) and thereafter to contribute to Newco, subject to approval of the Texas Department of Banking (the “Department of Banking”) all of the member interests of New PMT and cash, in consideration for (i) 50% of the Class A limited partners units of Newco, (ii) the Class B limited partner units (as defined in Section 3.4) of Newco, which shall have a liquidation preference equal to the members’ equity, of PMT as of the Closing Date (as determined in accordance with generally accepted accounting principles (“GAAP”)), but shall not participate in the net profits of Newco, and (iii) a 50% member interest in Newco GP;

E.Each of Salient Partners and the General Partner and SMHG desires to grant to the other or its designee an option to purchase such party’s 50% limited partner interest in Newco and member interest in Newco GP on the terms and conditions set forth herein; and

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F.Each of Advisors and Capital is governed by an Agreement of Limited Partnership dated as of March 15, 2002, as the same may be amended from time to time (collectively, the “Partnership Agreement”).

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

SECTION 1.Contribution of Interests; Purchase Option.

1.1SMHG and PMT. Subject to the terms and conditions of this Agreement, at the Closing:

(a)SMHG will form Newco and Newco GP and will contribute an amount equal to $1,485,000 in cash to Newco and $15,000 in cash to Newco GP,

(b)subject only to the approval of the Department of Banking, SMHG will convert PMT from a corporation to a limited liability company to form New PMT) and will contribute all of the member interest of New PMT to Newco,

(c)Newco will issue to SMHG 50% of the Class A limited partner units in Newco and all of the Class B limited partner units in Newco, and

(d)Newco GP will issue to SMHG a 50% member interest in Newco GP.

For the avoidance of doubt, the parties agree that, as among the parties, the contribution of New PMT to Newco shall be effective as of the Closing Date (as defined in Section 2.1), notwithstanding that approval of the Department of Banking for the transfer of the member interests of New PMT to Newco shall occur at a later date.

1.2 Advisors and Capital LP Interests. Subject to the terms and conditions of this Agreement, at the Closing:

(a)Salient Partners will convey to Newco all right, title and interest in its limited partner interests in Advisors and Capital, which shall constitute a 99.0% Percentage Interest and Allocation Ratio (as such terms are defined in the Partnership Agreement) in each of Advisors and Capital, respectively (such limited partnership interests being referred to collectively herein as the “LP Interests”), and

(b)Newco will pay over and deliver to Salient Partners $1,485,000 in cash and will issue to Salient Partners 50% of the Class A limited partner units of Newco.

1.3Advisors and Capital GP Interests. Subject to the terms and conditions of this Agreement, at the Closing:

(a)the General Partner will contribute to Newco GP all right, title and interest in its general partner interest in Advisors and Capital, which shall constitute a 1% Percentage Interest and Allocation Ratio of each of Advisors and Capital, as such terms are defined in the Partnership Agreement, respectively, and

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(b)Newco GP will pay over and deliver to the General Partner $15,000 in cash and shall issue to the General Partner a 50% member interest in Newco GP.

The general partner interests of each of Advisors and Capital so contributed are collectively referred to herein as the “GP Interests” and the GP Interests together with the LP Interests are collectively referred to herein as the “Interests” or the “Transferred Interests.” The Interests have the rights, preferences, powers, qualifications, limitations, and restrictions set forth in the Partnership Agreement of each of Advisors and Capital.

1.4Operation of Newco and Newco GP. Newco’s and Newco GP’s agreement of limited partnership and regulations, respectively, shall provide the following:

(a)Management Committee Composition. Newco, through Newco GP, shall be governed by a management committee (the “Management Committee”), which shall be comprised of seven members. Three of the seven members shall be selected by Salient Partners and shall be the three Principals with the highest percentage ownership of Newco (initially, Messrs. Blaisdell, Linbeck. and Sherman), with such persons being referred to herein as the “Salient Designees”). Three of the seven members shall be selected by SMHG (initially, George L. Ball, Robert E. Garrison II, and Ben T. Morris, with such persons being referred to herein as the “SMHG Designees”). The seventh member shall be mutually agreed by the Salient Partners Designees and the SMHG Designees (the “Independent Director”). The Independent Director shall serve a one-year term and shall be selected or re-elected (as the case may be) annually by a majority vote of the Management Committee. The Independent Director may be removed at any time by a majority vote of the SMHG Designees and Salient Partners Designees, at which time the SMHG Designees and Salient Partners Designees shall mutually agree to a new Independent Director. The Management Committee shall have the rights, powers and duties as set forth in Newco’s Limited Partnership Agreement and Newco GP’s Operating Agreement (as hereinafter defined).

(b)Executive Committee. Newco, through Newco GP, shall be operated pursuant to the directives of an executive committee (the “Executive Committee”). The Executive Committee shall be comprised of not less than 3 members or more than 5 members. The initial Executive Committee shall be comprised of Messrs. Blaisdell, Linbeck, Radcliffe, and Sherman and Stephen D. Strake. The Executive Committee shall be selected from time to time by the Management Committee, but shall always include the Salient Designees and any Principal that is responsible for a line of business within Newco. Subject to the overall supervision and guidance of the Management Committee, the Executive Committee shall have all rights, duties and obligations to conduct the affairs of Newco not specifically delegated to the Management Committee. The Executive Committee will keep a written record of all material actions taken by it and of any and all formal meetings thereof and will report such actions to the Management Committee at the regular meeting of the Management Committee next following the meeting of the Executive Committee at which such action is taken.

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1.5Purchase Option. Within 30 days following the occurrence of a Change in Control (as hereinafter defined), (a) SMHG, at its sole and absolute option (the “Purchase Option”), may purchase all remaining Class A limited partner interests of Newco and all remaining Class A member interests of Newco GP not then owned by it (the “Option Interests”) from Salient Partners, the General Partner, or the Principals (the “Salient Parties”), and the Salient Parties shall be obligated to sell the Option Interest to SMHG, for the Option Purchase Price (as hereinafter defined) and (b) if SMHG does not exercise the Purchase Option, the Salient Parties, at their sole and absolute option (the “Put Option”), may sell the Option Interests to SMHG, and SMHG shall be obligated to purchase the Option Interests, for the Option Purchase Price.

For purposes of this Section 1.6, a “Change in Control” shall be deemed to have occurred if and when, with or without the approval of the board of directors of the SMHG incumbent prior to the occurrence,

(a)any “person” (as such term is defined in Section 13(d) and 14(d of the Securities Exchange Act of 1934 (the “Exchange Act”)), other than any person who currently is an employee of the SMHG, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the SMHG representing 51% or more of the combined voting power of SMHG’s then outstanding securities computed on a fully diluted basis,

(b)the stockholders of SMHG approve (i) a merger or consolidation of SMHG with any other corporation, other than a merger or consolidation that would result in the voting securities of SMHG outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50.1% of the combined voting power of the voting securities of SMHG or such surviving entity outstanding immediately after such merger or consolidation or (ii) an agreement for the sale or disposition by SMHG of all or substantially all of the assets of SMHG, or

(c)as the result of a tender offer, merger, consolidation, sale of assets, or contested election, or any combination of such transactions, the persons who were directors immediately before the transaction or whose election was approved by a majority of the persons who were directors immediately before the transaction shall cease to constitute a majority of the board of directors of SMHG or of any successor to SMHG.

1.7Loans. Subject to the terms and conditions of this Agreement, at the Closing, SMHG shall make a loan to Salient Partners in the amount of $250,000 (the “Loan”). The Loan shall be evidenced by a promissory note issued by Salient Partners (the “Notes”) that is due and payable one-year following the Closing Date (the “Maturity Date”), is secured by a pledge of Salient Partner’s 50% Class A limited partner units in Newco, and provides for the right of offset by SMHG for any amounts due and owing to it by Salient Partners on or before the Maturity Date and an interest rate at the lowest short-term applicable federal rate published by the Internal Revenue Service.

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SECTION 2.Closings.

2.1.Closing. The closing of the transactions contemplated hereby (the “Closing”) shall occur at 10:00 a.m. (Houston time) on a Business Day mutually agreeable to Salient Partners and SMHG that is not more than 10 Business Days after the date hereof (the “Closing Date”). In the event that Salient Partners and SMHG cannot agree on a Closing Date, then the Closing Date shall occur on the tenth Business Day after the date hereof at the offices of SMHG. At the Closing:

(a)the respective parties transferring the Transferred Interests will deliver to the transferees thereof, in accordance with Section 1, the certificates, if any, representing the applicable interests so transferred, duly endorsed for transfer, and an Assignment in the form attached hereto as Exhibit A(an “Assignment of Interests”),

(b)each of Advisors and Capital shall mark its records to admit Newco as a limited partner of Advisors and Capital, respectively, with a 99% Percentage Interest and Allocation Ratio as of the Closing Date and to admit Newco GP as the general partner of each with a 1% Percentage Interest and Allocation Ratio as of the Closing Date,

(c)Newco will issue the Class A and Class B limited partner interests, and Newco GP will issue Class A and Class B member interests, to the parties in accordance with Section 1, and

(d)SMHG, Newco, and Newco GP will deliver the Cash Consideration (as defined in Section 3), in accordance with Section 1.

Salient Partners’ obligation to consummate the transactions contemplated hereby and to deliver the Transferred Interests at the Closing, shall be subject to the following conditions:

(a)receipt by Salient Partners of the Cash Consideration;

(b)the accuracy in all material respects of the representations and warranties made by SMHG and PMT and the fulfillment of those undertakings of SMHG and PMT to be fulfilled prior to or at the Closing;

(c)the fulfillment of those undertakings of SMHG and PMT to be fulfilled prior to or at the Closing;

(d)receipt by Salient Partners of any certificate or certificates of the officers of SMHG, or public officials of any state, in each case as may be reasonably requested by Salient Partners;

(e)receipt by Salient Partners of the Loan; and

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(f)the execution of an Agreement of Limited Partnership for Newco (the “Newco Partnership Agreement”) and Regulations for Newco GP (the “Newco GP Regulations”) containing such terms, provisions, and conditions as are acceptable to Salient Partners and the General Partner.

SMHG’s and PMT’s obligations to consummate the transactions contemplated hereby and to deliver the Purchase Price shall be subject to the following conditions:

(a)the accuracy in all material respects of the representations and warranties made by the Salient Parties, the General Partner, Advisors, and Capital herein;

(b)the fulfillment of those undertakings of the Salient Parties (as hereinafter defined), the General Partner, Advisors, and Capital to be fulfilled prior to or at the Closing;

(c)receipt by SMHG of any certificate or certificates of the officers of the Salient Parties, the General Partner, Advisors, and Capital, or public officials of any state, in each case as may be reasonably requested by SMHG;

(d)execution by Salient Partners of the Promissory Notes;

(e)the execution of the Newco Partnership Agreement and the Newco GP Regulations containing such terms, provisions, and conditions as are acceptable to SMHG; and

(f)the execution and delivery of the Option and Contribution Agreement (the “TEF Agreement”) dated of even date herewith, by and among The Endowment Fund GP, L.P., a Delaware limited partnership (“TEF GP”), The Endowment Fund Management LLC, a Delaware limited liability company (“TEF LLC” and together with TEF GP, “TEF”), certain Principals, Salient Endowment Enterprises, LLC, MWY Consulting, LLC, and SMHG, pursuant to which SMHG will acquire a 23.15% profits interest in each of TEF GP and TEF LLC and an option to purchase a 23.15% limited partner interest in each of TEF GP and TEF LLC.

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2.2Option Closing. The closing of the purchase and sale of the Option Interests (the “OptionClosing”) shall occur at any time agreed upon by the Salient Parties, on the one hand, and SMHG, on the other hand, but no later than 30 days after the date SMHG notifies the Salient Parties or the Salient Parties notify SMHG of its or their intention to exercise the Purchase Option or Put Option, respectively (in each case, the “Option Closing Date”). At the Option Closing, the Salient Parties will deliver to SMHG, the certificates, if any, representing the Option Interests sold by the Salient Parties, duly endorsed for transfer and an Assignment of Interests. The Salient Parties’ obligation to complete the sale and purchase of the Option Interests being sold by the Salient Parties hereunder and to deliver such certificates and the Assignment of Interests to SMHG at the Option Closing shall be subject to the receipt by each Salient Party of his or its allocable share of the Option Purchase Price (as hereinafter defined) for the Option Interests.

(a)SMHG’s obligation to accept delivery of such certificates and each Assignment of Interests, and to deliver the Option Purchase Price for the Option Interests shall be subject to:

(i)the receipt by SMHG of a certificate executed by the Salient Parties reaffirming the accuracy in all material respects of the representations and warranties made by the Salient Parties and Advisors and Capital herein as of the Option Closing Date; provided, however, for purposes of the representations and warranties set forth in (A) Sections 4.3 and 4.4, the term “Transferred Interests” shall mean the Option Interests and (B) Section 4.9, the term “Financial Statements” shall refer to (x) the audited balance sheet of Newco as of December 31 of the year ended immediately prior to the Option Closing Date, and the related audited statements of income, changes in partner’s capital, and cash flows for the year then ended, and the notes and schedules thereto and (y) the unaudited balance sheet of Newco as of the last day of the calendar quarter ended immediately prior to the Option Closing Date, and the related unaudited statements of income, partner’s capital, and cash flows for the three, six, or nine-month period then ended;

(ii)the fulfillment of those undertakings of the Salient Parties, the General Partner, Advisors and Capital to be fulfilled prior to or at the Option Closing; and

(iii)receipt by SMHG of any certificate or certificates of the officers of the Salient Parties, the General Partner, Advisors and Capital or public officials of any state as may be reasonably requested by SMHG.

(b)The Salient Parties’ obligations to consummate the transactions contemplated to occur at the Option Closing are subject to the following conditions:

(i)the fulfillment of those undertakings of SMHG to be fulfilled prior to or at the Option Closing;

(ii)receipt by the Salient Parties of any certificate or certificates of the officers of SMHG or public officials of any state as may be reasonably requested by the Salient Parties; and

(iii)immediate full vesting of any restricted stock purchased by Principals pursuant to Section 10.6 hereof.

In addition, on the Option Closing, each Principal agrees to enter into employment agreements with SMHG (or its successor) providing for the employment of each such person by Newco for a term of two years following the closing date relating to the Change of Control, with compensation and upon such terms and conditions, including a coterminous covenant not to compete, that are mutually acceptable to SMHG or its successor and each such person (but in no event shall such person’s compensation be less than the compensation received by such person prior to such Change of Control).

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SECTION 3.Consideration.

3.1.Cash Consideration. The aggregate cash consideration (the “Cash Consideration”) for the Interests contributed by Salient Partners pursuant to Section 1 shall be $1,500,000, which shall be allocated among the Interests as set forth on Schedule 3.1 and paid in cash by wire transfer of immediately available funds to an account or accounts designated by Salient Partners.

3.2Additional Consideration. In addition to the Cash Consideration, SMHG shall issue to Salient Partners and the General Partner on March 31, 2005, a number of shares of common stock, $0.01 par value per share, of SMHG (the “SMHG Stock”), not to exceed 1,200,000 shares (as adjusted for stock splits, stock dividends, or recapitalizations), based on the pre-tax income of Newco, Newco GP, and their subsidiaries and attributable to SMHG’s and the Principals’ (or successors thereto) direct or indirect ownership interests in TEF and any new business line established by the owners thereof but held outside of Newco, Newco GP, or any subsidiary thereof (“New Business Lines”) (collectively, the “Newco Group”) for the calendar year 2004 (which shall include all of New PMT’s pre-tax income in 2004, even if it has not been consolidated with Newco by January 1, 2004) (“Combined Pre-tax Income”) in excess of $500,000. The number of shares of SMHG Stock to be issued shall be equal to the product of such pre-tax income of the Newco Group for 2004 multiplied by 0.15 (the “Allocable Share Amount” and, together with the Cash Consideration, the “Purchase Price”). By way of example, if New PMT had not been combined with the Newco Group until June 30, 2004 for regulatory reasons and earned $500,000 in pre-tax income during that period and $250,000 thereafter ($750,000 for the entire year) and the Newco Group otherwise earned $500,000 in pre-tax income in 2004, then Combined Pre-tax Income would be $1,250,000 and the Allocable Share Amount would be 187,500 shares. In the event that the Combined Pre-tax Income for the Newco Group was $750,000, then the Allocable Share Amount would be 112,500. In the event that the Combined-Pre-tax Income is equal to or less than $500,000, no shares would be issued and if Combined-Pre-tax Income is equal to or greater than $500,000, the first $500,000 of pre-tax income would be included in determining Combined Pre-tax Income. For purposes of this Section 3.2, Combined Pre-tax Income shall be determined in accordance with GAAP consistently applied, subject to any adjustment required by Section 10.9.

3.3Option Purchase Price. The aggregate purchase price (the “Option Purchase Price”) (which shall be paid to the Salient Parties or the then current owners of the Option Interests pro rata in accordance with the number of Option Interests being sold by such person) for the Option Interests purchased by SMHG pursuant to Section 1.2 shall be

(a)if the Purchase Option is exercised and the Option Closing Date is on or prior to December 31, 2004, an amount equal to ten percent of the total consideration received by SMHG or its shareholders in the form in which it is received in connection with any Change in Control transaction,or

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(b)if (i) the Put Option is exercised or (ii) the Purchase Option is exercised and the Option Closing Date is subsequent to December 31, 2004, an amount equal to the earnings of the Newco Group (for purposes of this Section 3.3, Newco Group shall not include any interest in TEF GP or TEF LLC) allocable (directly or indirectly) to the Salient Parties or the then-current owners of the Option Interests for the twelve-month period ending prior to the Option Closing Date multiplied by the Option Multiple (as hereinafter defined), less the Liquidation Preference as provided in Section 3.4 in the case of the exercise of the Purchase Option subsequent to December 31, 2004.

For purposes of this Section 3.3, the earnings of Newco shall mean the trailing twelve months net income of the Newco Group, in each case determined in accordance with GAAP consistently applied (as adjusted pursuant to Section 10.9, if any), but using the effective tax rate of SMHG for the purposes of determining federal income tax; provided, however, that the Option Purchase Price shall be reduced on a dollar for dollar basis by any amount paid by SMHG to the Principals (or, in the case of Messrs. Linbeck, Sherman and Radcliffe, Salient Endowment Enterprises, LLC (“SEE”)) pursuant to the TEF Agreement as a result of such Change in Control transaction to purchase any interests in TEF GP or TEF LLC therefrom that SMHG does not already own; and provided further, however, that in determining the “net income” of the Newco Group, general and administrative expenses (salary, travel and entertainment, technology and occupancy expenses only (“G&A Expenses”)) of the Newco Group, on the one hand, and G&A Expenses of TEF GP and TEF LLC, on the other hand, shall be allocated to each proportionately based on their respective revenues. By way of example, if the Newco Group, on the one hand, and TEF GP and TEF LLC, on the other hand taken as one enterprise, had G&A Expenses of $1,000,000 and $100,000, respectively, and revenues of $3,000,000 and $3,000,000, respectively, such G&A Expenses would be allocated $550,000 to the Newco Group and $550,000 to TEF GP and TEF LLC (taken as one enterprise) for purposes of determining the net income of the Newco Group. Notwithstanding anything to the contrary herein, in no event shall SMHG pay more aggregate consideration in respect of the Option Purchase Price and the corresponding price applicable to TEF GP and TEF LLC as a result of the aforestated allocation of G&A Expenses.

The Option Multiple means the greater of:

(a)six or

(b)0.70 times the result of dividing

(i)an amount equal to the greater of (x) 5% of the sum of the closing prices for shares of SMHG Stock as reported by The Nasdaq Stock Market for the 20 trading days prior to the Option Closing Date or (y) the price per share of SMHG stock being offered to SMHG shareholders as a result of the Change of Control by

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(ii)the net income per fully diluted share of SMHG determined in accordance with GAAP for the twelve-month period ending on the last day of the month ending immediately preceding the Option Closing Date.

The Option Purchase Price shall be paid in the form in which it is received by SMHG. The Purchase Option and the Change In Control Option (as defined in the TEF Agreement) must be exercised simultaneously, if at all. The Option Purchase Price shall be paid in cash by wire transfer of immediately available funds to an account designated by the Salient Parties or, in the event a Change in Control transaction includes some or all consideration other than cash, by delivery to the Salient Parties of consideration in the form received by SMHG in the Change of Control transaction.

3.4Class B Units in Newco. At Closing, Newco shall issue to SMHG preference units equal (“Class B Units”). The Preference Units shall have a liquidation preference equal to the members’ equity of New PMT as of March 31, 2003, as determined in accordance with GAAP (the “Liquidation Preference”) and shall be manditorily redeemable by Newco upon the earlier to occur of:

(a)a Change in Control, provided that such Change in Control is not coupled with an exercise of the Purchase Option or the Put Option on or before December 31, 2004,

(b)the tenth anniversary after Closing or

(c)in the event that either the Salient Parties or SMHG exercises their right in Article 8 to purchase the other’s interest in Newco and Newco GP (in which case, the redemption of the Class B Units shall be subject to Article 8).

Class B Units shall not be allocated any profit or loss, have any voting rights, or be entitled to any distributions other than the Liquidation Preference, and shall not be transferable by SMHG without the prior written consent of Salient Partners. The remaining terms of the Class B Units shall be set forth in the Newco Limited Partnership Agreement. By way of example, in the event that there is a Change of Control occurring after December 31, 2004, and the net income of the Newco Group is $2 million and SMHG’s adjusted multiple is 21 (0.7 times 30, assumed multiple), then the total consideration for the Newco Group would be $42 million, which would be adjusted by Class B Units (assumed to be $4.5 million). Accordingly, in such an example, SMHG would have a $4.5 million Liquidation Preference and the remaining consideration of $37.5 million would be split 50% - 50% between the Salient Parties and SMHG; provided, however, that in no event shall the Liquidation Preference apply in the event that SMHG exercises its Purchase Option on or before December 31, 2004.

SECTION 4.Representations and Warranties of Salient Partners, the General Partner, Advisors, Capital and the Principals. The Principals severally, and Salient Partners, the General Partner, Advisors and Capital jointly and severally, represent and warrant to SMHG as follows:

4.1.Organization, Existence, and Qualification. Each of Salient Partners, Advisors and Capital is a limited partnership duly organized and validly existing under the laws of the State of Texas. The General Partner is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Texas. Each of Salient Partners, Advisors, Capital and the General Partner has the power and authority to carry on its business as it is now being conducted and to own, lease, and operate all of its properties and assets. Each of Salient Partners, Advisors, Capital, and the General Partner is duly qualified to do business in each other jurisdiction in which qualification is required, except where the failure to be so qualified will not have a Material Adverse Effect (as hereinafter defined). The General Partner has delivered to SMHG a true and correct copy of the Partnership Agreement of each of Advisors and Capital, together with all amendments thereto, as in effect on the date hereof.

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4.2.Outstanding Partnership Interests and Member Interests. The Principals constitute all of the members of the General Partner and all of the limited partners of Salient Partners. The General Partner is the sole general partner of each of Advisors and Capital and has a 1% Percentage Interest and Allocation Ratio in Advisors and Capital. Salient Partners is the sole limited partner of each of Advisors and Capital and holds a 99% Percentage Interest and Allocation Ratio in each of Advisors and Capital. No subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire limited partner or other equity interests of Advisors or Capital is outstanding on the Closing Date. The outstanding partnership interests of each of Advisors and Capital, have been duly authorized and have been issued in compliance with the applicable Partnership Agreement and all applicable securities laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase such partnership interests.

4.3.Sale and Delivery of the Transferred Interests. Except as set forth on Schedule 4.3, Salient Partners and the General Partner represents and warrants to SMHG that each of Salient Partners and the General Partner (i) has not pledged, sold, or encumbered the Transferred Interests to be contributed by Salient Partners or the General Partner pursuant to this Agreement and the Transferred Interests are free and clear of all liens and encumbrances, (ii) is the owner of the Transferred Interests and has full authority and power to transfer the Transferred Interests contributed or sold by Salient Partners or the General Partner pursuant to this Agreement, (iii) has paid in full all capital contributions of Salient Partners or the General Partner required by the applicable Partnership Agreement with respect to the Transferred Interests, (iv) has no outstanding obligations to Advisors or Capital with respect to the Transferred Interests contributed by Salient Partners or the General Partner under the Partnership Agreement, and (v) has full power and authority to enter into this Agreement and perform the transactions contemplated by this Agreement. Each of Salient Partners and the General Partner waives any right of first refusal or similar rights with respect to the purchase of the Transferred Interests. No approval or authority of any person will be required for the sale of the Transferred Interests to be sold by Salient Partners and the General Partner as contemplated herein. Such sale of the Transferred Interests shall be in compliance with all applicable securities laws.

4.4.Authority, Due Execution, Delivery, and Performance of the Agreement. Except as set forth on Schedule 4.4,

(a)Each of Advisors and Capital has full limited partnership power and authority to enter into this Agreement and perform the transactions contemplated by this Agreement. This Agreement has been duly authorized, and at the Closing will have been duly executed and delivered by each of Advisors and Capital. The execution, delivery, and performance of this Agreement by Advisors and Capital and the consummation by Advisors and Capital of the transactions contemplated herein will not violate any provision of their respective Certificate of Limited Partnership or the Partnership Agreement.

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(b) Salient Partners has full limited partnership power and authority to enter into this Agreement and perform the transactions contemplated by this Agreement. This Agreement has been duly authorized, and at the Closing will have been duly executed and delivered by Salient Partners. The execution, delivery, and performance of this Agreement by Salient Partners and the consummation by Salient Partners of the transactions contemplated herein will not violate any provision of the Certificate of Limited Partnership or the Agreement of Limited Partnership of Salient Partners.

(c) The General Partner has full limited liability company power and authority to enter into this Agreement and perform the transactions contemplated by this Agreement. This Agreement has been duly authorized, and at the Closing will have been duly executed and delivered by the General Partner. The execution, delivery, and performance of this Agreement by the General Partner and the consummation by the General Partner of the transactions contemplated herein will not violate any provision of the Articles of Organization or the Regulations of the General Partner.

(d)Each Principal has full power and authority to enter into this Agreement and perform the transactions contemplated by this Agreement. This Agreement has been duly authorized, and at the Closing will have been duly executed and delivered by each Principal.

(e) The execution, delivery, and performance of this Agreement by each of the Salient Parties, Advisors, and Capital and the consummation by each of them of the transactions contemplated herein will not (i) result in the creation of any lien, charge, security interest, or encumbrance upon any of their respective assets pursuant to the terms or provisions of, or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to it is a party or by which it or any of its properties may be bound or affected and in each case which individually or in the aggregate would have a material adverse effect on the condition (financial or otherwise), properties, business, prospects, or results of operations of the Salient Parties, Advisors, or Capital (a “Material Adverse Effect”), or (ii) violate any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Salient Parties, Advisors, or Capital or any of their respective properties. No consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with all securities laws applicable to the sale of the Transferred Interests.

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(f)Upon the Salient Parties’, Advisors’, and Capital’s execution and delivery of this Agreement, and assuming the valid execution and delivery hereof by SMHG, this Agreement will constitute a valid and binding obligation of each of the Salient Parties, Advisors, and Capital, enforceable against each of them in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

4.5.Subsidiaries; Other Interests. Neither Advisors nor Capital has any investments or ownership interests in any corporations, partnerships, joint ventures, or other business enterprises.

4.6.No Defaults. Neither Advisors nor Capital is in violation of or default under any provision of its respective Certificate of Limited Partnership, the Partnership Agreement, or other organizational documents. The General Partner is not in violation of or default under any provisions of its Articles of Organization, Regulations, or other organizational documents. Neither Advisors, Capital nor, to the best knowledge of the Salient Parties, any other party thereto, is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit, or other instrument to which any of them is a party or by which any of their respective properties are bound; and there does not exist any state of facts which, with notice or lapse of time or both, would constitute an event of default as defined in such documents on the part of Advisors or Capital, except for such breaches and defaults that individually or in the aggregate would not have a Material Adverse Effect. Neither Advisors nor Capital is in violation of (a) any judgment, order, or decree by which any of them or their respective properties is bound or (b) any statute, rule, or regulation of any governmental authority, except for such violations that individually or in the aggregate would not have a Material Adverse Effect.

4.7.No Actions. There are no legal, administrative, or governmental actions, suits or proceedings, disciplinary proceedings, or investigations of any nature pending or, to the best knowledge of the Salient Parties, threatened to which Advisors, Capital, or any partner, officer, manager, or employee of any of them is or may be a party or of which property owned or leased by any of them is or may be subject (except for litigation that individually or in the aggregate would not have a Material Adverse Effect); and no material labor problem or labor disturbance by the employees of Advisors or Capital, exists, or, to the best knowledge of the Salient Parties, is imminent. Neither Advisors nor Capital is a party to or subject to the provisions of any injunction, judgment, decree, memorandum of understanding or similar arrangement, or order of any court, regulatory body, administrative agency or other governmental body charged with supervision or regulation of Advisors or Capital, including the supervision or regulation of investment Advisors.

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4.8.Compliance. Advisors is duly registered as an investment Advisor under the Investment Adviser’s Act of 1940, as amended (the “Advisers Act”) with the Securities and Exchange Commission (the “Commission”). Advisors has furnished to SMHG a true, correct, and complete copy of Advisor’s currently effective Form ADV (parts I and II), as filed with the Commission, and has made available to SMHG all state registration forms, all prior Form ADV filings, and all reports filed by Advisors with the Commission under the Advisers Act and the rules promulgated thereunder and under similar state statutes since its formation. Advisors is in possession of all permits, licenses, and other authorizations material to the conduct of its business as currently conducted or as proposed to be conducted. Advisors has timely filed all material reports, forms, schedules, statements, documents, and other filings, together with any amendments required to be made with respect thereto, with the Commission, any applicable federal, state, or local governmental authorities, or any non-governmental self-regulatory agency, commission, or authority, including all material reports, statements, and filings required under the Advisers Act and any applicable state securities laws, and has paid all fees and assessments due and payable in connection therewith. The information contained in such forms and reports was true and complete as of the time of filing and, except as indicated in a subsequent form or report filed before the Closing Date, continues to be true and complete. As of their respective dates each of such forms and reports complied in all material respects with the requirements of the applicable statutes, rules, and regulations pursuant to which they were filed, and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Schedule 4.8 lists the states in which Advisors has made all notice filings required in connection with its status as an investment Advisor. Except as set forth on Schedule 4.8, neither Advisors nor, to the knowledge of Advisors and the Salient Parties, any “associated person” (as defined in the Exchange Act) of Advisors is required to be registered as a broker-dealer or as an associated person to a registered broker-dealer. Advisors has not been advised, and has no reason to believe, that Advisors is not conducting business in compliance with all licenses, permits, and other authorizations material to the conduct of its business and with all applicable laws, rules, and regulations of the jurisdictions in which it is conducting business, except where failure to be in compliance would not have a Material Adverse Effect. No governmental authority has initiated any administrative proceeding or, to the knowledge of Advisors or the Salient Parties, investigation into or related to the business or operations of Advisors. Except as set forth on Schedule 4.8, there is no unresolved violation, criticism, or exception made in writing by any governmental agency with respect to any report or statement by any governmental agency relating to any examination of Advisors. Advisors has never been subject to an examination by the Commission.

4.9.Financial Statements. Salient Partners has delivered to SMHG accurate and complete copies of the unaudited balance sheet of each of Advisors and Capital as of March 31, 2003, and the related unaudited statements of income and partner’s capital for the three-month period then ended (collectively, the “Financial Statements”). The Financial Statements have been prepared in accordance with the books of account and records of each of Advisors and Capital and generally accepted accounting principles consistently applied except as otherwise indicated in such statements. The Financial Statements fairly present the respective financial positions of Advisors and Capital and the income, partners’ equity, and cash flows of such parties’ business at the dates and for the periods indicated (subject to normal year-end adjustments in the case of unaudited interim financial statements), in accordance with GAAP consistently applied except as otherwise indicated in such statements, and do not omit to state any information necessary in order to make such financial statements not materially misleading.

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4.10.Absence of Undisclosed Liabilities. Except as set forth in the Financial Statements or Schedule 4.10, or in this Agreement or in any Schedule attached to this Agreement or delivered pursuant hereto, neither Advisors nor Capital has any, and none of its respective assets or properties are subject to any, liabilities or obligations (accrued, absolute, contingent or otherwise), other than unsecured expenses and trade accounts payable arising in the ordinary course of business since December 31, 2002, and state income and franchise taxes accrued in respect of their respective operations since December 31, 2002. Except as disclosed to SMHG, neither Advisors nor Capital is in default in respect of any term or condition of any indebtedness or liability. There are no facts in existence on the date hereof and known to the Salient Parties which might reasonably serve as the basis for any material liabilities or obligations of Advisors or Capital that are not disclosed in this Agreement or in the Schedules attached to this Agreement and delivered pursuant hereto.

4.11.Taxes. Each of Advisors and Capital has elected to be taxed as a partnership for federal income tax purposes. Each of such parties has filed all federal, state, county and local tax and informational returns required to be filed by it and each of Advisors and Capital has paid all taxes, assessments, and governmental charges that have become due or payable, including, without limitation, all taxes that either Advisors or Capital is obligated to withhold from amounts owing to employees. No audit, action, suit, proceeding, claim, examination, deficiency, or assessment is currently pending or, to the best of the knowledge of the Salient Parties, threatened against any of such parties. There is no tax lien (other than for current taxes not yet due and payable), whether imposed by a federal, state, county, or local taxing authority, outstanding against the assets, properties or business of Advisors or Capital. No federal income tax returns of Advisors or Capital are presently being audited by the Internal Revenue Service and none of the Salient Parties has received any notice that any examination is being conducted by the Internal Revenue Service of the federal income tax returns of such parties for any taxable year. Copies of all federal and state income tax returns heretofore filed by such parties have been furnished to SMHG.

4.12.Properties. Each of Advisors and Capital, as of the applicable dates referred to therein, had good and marketable title to all the properties and assets reflected as owned by it in the Financial Statements, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in the Financial Statements or listed in Schedule 4.12, or (ii) those that are not material in amount and do not adversely affect the use made and currently proposed to be made of such property by such parties. Each of Advisors and Capital holds its respective leased properties under valid and binding leases. Each of Advisors and Capital owns or leases all such properties as are necessary to its operations as now conducted. Neither Advisors nor Capital owns any real property. Any real property and facilities held under lease by Advisors or Capital are held by it under valid, subsisting, and enforceable leases of which each of them is in compliance.

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4.13. Intellectual Property.

(a)Each of Advisors and Capital owns or has the right to use all Intellectual Property Rights (as hereinafter defined) used by them for the conduct of their respective business, which Intellectual Property Rights are the only Intellectual Property Rights necessary or required for the conduct of their respective businesses as they are currently being conducted.

(b)Neither Advisors nor Capital is in default of its obligations to pay royalties or other amounts to other persons by reason of the ownership or use of any Intellectual Property Rights used by such party for the conduct of its respective business.

(c)No Intellectual Property Right owned by any of Advisors or Capital violates or will violate any license or infringes or will infringe any Intellectual Property Rights of another. To the best knowledge of such parties, no Intellectual Property Right, product or service marketed, sold or licensed (as licensor or as licensee) by such parties violates or will violate any license or infringes or will infringe any Intellectual Property Rights of another, nor has any such party received any notice that any of the Intellectual Property Rights used by such party for the conduct of its respective business, conflicts or will conflict with the rights of others.

(d)There are no claims pending or, to the best of such party’s knowledge, threatened with respect to any Intellectual Property Rights necessary or required for the conduct of the respective businesses of such parties as currently conducted, nor, to the best knowledge of such parties, does there exist any basis therefor.

As used herein, the term “Intellectual Property Rights” means all patents, trademarks, service marks, trade names, copyrights, inventions, trade secrets, know-how, licenses, proprietary processes and formulae and applications for patents, trademarks, service marks, and copyrights. Schedule 4.13 sets forth all Intellectual Property Rights of Advisors and Capital.

4.14.Ineligible Persons. Neither Advisors nor, to the knowledge of any of the Salient Parties and Advisors, any “associated person” (as defined in the Advisers Act) of Advisors, has been convicted of any crime or has been subject to any disqualification that would be a basis for denial, suspension, or evocation of registration of an investment advisor under Section 203(e) of the Advisers Act or Rule 206(4)-4(b) thereunder or is otherwise ineligible pursuant to Section 203 of the Advisers Act to serve as an investment Advisor or associated person to a registered investment Advisor.

4.15.Absence of Certain Changes of Events. Except as set forth in Schedule 4.15 or in the Financial Statements, since December 31, 2002:

(a)there has been no material change in the condition, financial or otherwise, or operations of any of Advisors or Capital;

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(b)neither Advisors nor Capital has incurred any indebtedness for money borrowed or any material liability or obligation, contingent or otherwise, except in the ordinary course of business, or entered into any material commitment or other transaction not in the ordinary course of business;

(c)there has been no event, occurrence, or development that has resulted or that could result in a Material Adverse Effect with respect to any of Advisors or Capital;

(d)neither Advisors nor Capital has declared or made any payment or distribution of cash or other property to its partners or officers (other than in compliance with existing compensation agreements or incentive option plans), or purchased, redeemed (or made any agreements to purchase or redeem) any limited partner interest;

(e)neither Advisors nor Capital has altered its method of accounting;

(f)neither Advisors nor Capital has incurred or become subject to any material claim or material liability for any damages or alleged damages for any actual or alleged negligence or other tort or breach of contract;

(g)except in the ordinary course of business and consistent with past practices, neither Advisors nor Capital has sold, transferred, or otherwise disposed of, or agreed to sell, transfer or otherwise dispose of any of its assets, property or rights or canceled or otherwise terminated, or agreed to cancel or otherwise terminate, any debts or claims;

(h)neither Advisors nor Capital has entered or agreed to enter into any agreement or arrangement granting any preferential rights to purchase any of its assets, property or rights, or requiring the consent of any party to the transfer and assignment of any of such assets, property or rights;

(i)neither Advisors nor Capital has made any change in its authorized capital or outstanding securities;

(j)neither Advisors nor Capital has issued, sold, delivered or agreed to issue, sell or deliver any member interests, bonds or other securities, or granted or agreed to grant any options, warrants or other rights calling for the issue, sale or delivery thereof;

(k)neither Advisors nor Capital has adopted any new, or made any increase in, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement or other employee benefit plan, payment or arrangement made to, for or with any of such officers, directors or salaried employees;

(l)neither Advisors nor any employee of Advisors has been cited for any violations of the Advisers Act or the rules and regulations of the Commission promulgated thereunder; and

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(m)neither Advisors nor Capital has entered into any material oral or written agreement or other transaction that is not in the ordinary course of business.

4.16.Furniture and Equipment. Attached hereto as Schedule 4.16 is a list setting forth a description of all major items of furniture and equipment owned or leased by any of Advisors or Capital at March 31, 2003. All items of furniture and equipment reflected on the Financial Statements or Schedule 4.16 are in good operating condition and in a state of reasonable maintenance and repair, ordinary wear and tear excepted, and are free from any known defects except such as require routine maintenance and such minor defects as do not substantially interfere with the continued use thereof in the conduct of normal operations.

4.17.Material Contracts. Attached hereto as Schedule 4.17 is a list as of the date of this Agreement of certain written or oral leases, contracts, commitments, agreements, guarantees, and other documents to which any of Advisors or Capital is a party or by which it is bound. Except for contracts and documents listed in Schedule 4.17, neither Advisors nor Capital is a party to or bound by any written or oral (a) contract not made in the ordinary course of business; (b) employment contract; (c) bonus, pension, profit sharing, retirement, hospitalization, insurance or other plan providing employee benefits; (d) lease with respect to any property, real or personal, whether as lessor or lessee; (e) continuing contract for the future purchase of materials, supplies or equipment in excess of the requirements of its business now booked; (f) contract or commitment for capital expenditures; (g) contract continuing over a period of more than six months from its date; (h) contract providing for annual payments in excess of $25,000 or aggregate payments in excess of $50,000, or (i) contract between any member or employee of any of Advisors or Capital and such party, (j) promissory note, loan agreement, guarantee or other contract or commitment for the borrowing of money by any of Advisors or Capital, or (k) contract material or necessary to conduct the operations and business of any of Advisors or Capital. A true copy of each lease, contract, commitment and agreement listed in Schedule 4.17 has been furnished to SMHG or made available for review by SMHG, and, except as otherwise disclosed on Schedule 4.17, each such lease, contract, commitment and agreement is in full force and effect and neither Advisors nor Capital and, to the knowledge of the Salient Parties and the General Partner, none of the other parties thereto are in default thereunder.

4.18.Employees. Attached hereto as Schedule 4.18 is a schedule listing the names and annual rates of compensation of all the present officers, salaried employees and agents of each of Advisors and Capital. Schedule 4.18 summarizes the bonuses, profit sharing, incentive, percentage compensation and other like benefits, if any, paid or payable to such officers, directors, employees and agents on an annual basis (i.e., for calendar year 2003). Schedule 4.18 also sets forth all loans and advances (other than routine travel advances to be repaid or formally accounted for within 60 days) made by any of Advisors or Capital since December 31, 2002, to any Principal or to any director, officer or employee of any of Advisors or Capital, and the current status thereof, whether or not such loan or advance is presently outstanding. Each employee of Advisors who is required to be registered as an investment Advisor representative or solicitor (or in a similar capacity) with the securities commission of any state are duly registered as such and such registrations are in full force and effect.

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4.19.Investment Company, Etc. Neither Advisors nor Capital is regulated or required to be registered as an investment company, commodity trading advisor, commodity pool operator, futures commission merchant, introducing broker, or transfer agent under and federal, state, or local statute, laws, rule, or regulation; provided, however, that Capital is undergoing registration with the Commission and the National Association of Securities Dealers as a “broker-dealer.”

4.20.Insurance. Each of Advisors and Capital maintains the insurance policies summarized on Schedule 4.20. To the knowledge of the Salient Parties and the General Partner, all such insurance policies are in full force and effect.

4.21.Employee Benefit Plans. There are no employee “pension benefit” or “welfare” plans (as such terms are defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by any of Advisors or Capital or to which any of them contributes or is required to contribute. Since December 31, 2002, there has been no termination or partial termination, or commencement of proceedings seeking termination, with respect to any employee pension benefit plan previously maintained by any of Advisors or Capital or any employee pension benefit plan to which such party previously contributed or was required to contribute.

4.22Customer Relationships. Advisors is in compliance with the terms of each contract with any customer to whom Advisors provides services (a “Client”), and each such contract is in full force and effect. There are no disputes pending or, to the knowledge of the Salient Parties, threatened with any Client under the terms of such contract or with any former Client. Advisors has provided or made available to SMHG true and complete copies of the standard form of all advisory and similar agreement with Clients. To the knowledge of the Salient Parties, there have been no complaints or disputes with customers that have not been resolved that are expected to result in a Material Adverse Effect.

4.23.Brokers. None of Advisors, Capital or the Salient Parties is a party to or in any way obligated under any contract or other agreement and there are no outstanding claims against any such party for the payment of any broker’s or finder’s fee in connection with the origin, negotiation, execution or performance of this Agreement.

4.24.Questionable Payments. Neither Advisors nor Capital has made, and none of the Salient Parties has any knowledge or information that any member, manager, officer, employee, agent or other representative of Advisors or Capital or any person acting on behalf of any of them has made, directly or indirectly, any bribes, kickbacks, political contributions with corporate funds, payments from corporate funds not recorded on the books and records of Advisors or Capital, payments from corporate funds that were knowingly and falsely recorded on the books and records of Advisors or Capital, payments from corporate funds to governmental officials in their individual capacities or illegal payments from corporate funds to obtain or retain business.

4.25.Transactions with Affiliated Parties. Except as set forth on Schedule 4.25, neither Advisors nor Capital has engaged in any transactions with any Affiliated Party (other than transactions inherent in the normal capacities of partners, managers, officers, or employees). Except as set forth in Schedule 4.25, no Affiliated Party has any ownership interest, directly or beneficially, in any competitor or customer of any of Advisors or Capital (except with respect to no more than 1% of the issued stock of any company the securities of which are publicly traded on a national stock exchange or in the over-the counter market or accounts of the Principals or family members thereof). For purposes of this Section 4.25, “Affiliated Party” means the Principals, employees, officers, managers, and partners of any of Advisors or Capital; any spouse or child of the Principals or an employee, officer, manager, or partner of any of Advisors or Capital; any trust of which a Principal or any employee, officer, manager, or partner of any of Advisors or Capital is a grantor, trustee or beneficiary; any corporation of which a Principal or any employee, officer, manager, or partner of any of Advisors or Capital, or any spouse or child of a Principal or such employee, officer, manager or partner, is an officer, director or shareholder; or any partnership of which the any Principal, or any employee, officer, manager, or partner of any of Advisors or Capital, is a partner.

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4.26.Books and Records. The books and records of each of Advisors and Capital are in all material respects complete and correct and have been maintained in accordance with good business practice and reflect a true record of all meetings or proceedings of its managers and members.

4.27.Discretionary Accounts. Advisors has operated its investment accounts for which it has investment discretion in accordance with the investment objectives and guidelines in effect for each such investment account, except when lack of compliance would not be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on Advisors.

4.28.Environmental and Safety Laws. Neither Advisors nor Capital is in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation.

4.29.Accredited Investors; Acquisition for Investment. Except as set forth on Schedule 4.29, Salient Partners is an “accredited investor” as defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), is knowledgeable, sophisticated, and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the acceptance of SMHG Stock as part of the Purchase Price, and has requested, received, reviewed, and understood all information he deems relevant in making and informed decision to accept SMHG Stock as part of the Purchase Price. The SMHG Stock to be issued to Salient Partners pursuant to this Agreement will be acquired for Salient Partners’ own account for investment only. Salient Partners agrees that it will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the shares of SMHG Stock except in compliance with the Securities Act, rules and regulations promulgated under the Securities Act, and any applicable state securities or blue sky laws.

SECTION 5.Representations and Warranties of SMHG. SMHG hereby represents and warrants to the Salient Parties, Advisors and Capital as follows:

5.1Accredited Investor. SMHG: (a) is an “accredited investor” as defined in Rule 501 of Regulation D under the Securities act and is knowledgeable, sophisticated, and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the acquisition of a beneficial interest in the Transferred Interests (through its ownership of Newco and Newco GP), and has requested, received, reviewed, and understood all information it deems relevant in making an informed decision regarding such acquisition; (b) acknowledges that the transfer of the Transferred Interests pursuant to this Agreement has not been reviewed by the Commission or any state regulatory authority; (c) is acquiring the common equity in Newco and Newco GP and the Preference Units for its own account for investment only and with no present intention of reselling or distributing any of such securities in a manner that would require registration under the Securities Act and has no arrangement or understanding with any other persons regarding the distribution of such securities; and (d) will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of such securities except in compliance with the Securities Act, rules and regulations promulgated under the Securities Act and any applicable state securities or blue sky laws. SMHG recognizes that an investment in such securities is speculative and involves a high degree of risk, including a risk of total loss of SMHG’s investment.

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5.2.Authority, Due Execution, Delivery, and Performance of the Agreement. SMHG has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. No consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body that has not been obtained is required on the part of SMHG for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement. Upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of SMHG enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). There is not in effect any order enjoining or restraining SMHG from entering into or engaging in any of the transactions contemplated by this Agreement.

5.3. Organization and Existence. SMHG is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to carry on its business as now conducted. SMHG has delivered to Salient Partners and the Principals a true and correct copy of its Articles of Incorporation and By-laws.

5.4. Capitalization. The authorized capital stock of SMHG consists of (a) 100 million shares of SMHG Stock, of which 16,908,377 shares were validly issued and outstanding and fully paid and nonassessable as of March 31, 2003, and (b) 10 million shares of Preferred Stock, $0.10 par value, of SMHG, none of which are issued and outstanding. 1,533,340 shares of SMHG Stock are reserved as of March 31, 2003, for issuance upon exercise of outstanding employee and director stock options granted under SMHG’s stock option plans and stock purchase program. Except for the foregoing stock options and plans, no subscription, warrant, option, convertible security, stock appreciation, or other right to purchase or acquire shares of any class of capital stock of SMHG is authorized or outstanding, and there is not outstanding any commitment of SMHG or any of its subsidiaries to issue any shares, warrants, options, pr other such rights or to distribute to holders of any class of its capital stock any evidences of indebtedness or assets.

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5.5. Brokers. SMHG is not a party to or in any way obligated under any contract or other agreement and there are no outstanding claims against it for the payment of any broker’s or finder’s fee in connection with the origin, negotiation, execution or performance of this Agreement.

5.6. Stock to be Issued. The shares of SMHG Stock to be issued to Salient Partners and the Principals will, when issued, have been duly and validly authorized and issued by SMHG and will be fully paid and nonassessable.

5.7. SEC Filings. SMHG has filed all forms, reports, and documents required to be filed by it with the Commission since January 1, 2000, and SMHG has made available to Salient Partners and the Principals true and complete copies of (a) the Annual Report on Form 10-K of SMHG for the years ended December 31, 2002 and 2001, (b) all other reports (including Current Reports on Form 8-K), statements, and registration statements filed by SMHG with the Commission since December 31, 2001, and (iii) all Form ADVs, and all amendments thereto, filed by each subsidiary of SMHG that is registered as an investment Advisor (“SEC Filings”). The SEC Filings (a) complied when filed in all material respects with the requirements of the Securities Act and the Exchange Act, as the case may be, and (b) did not at the time of their filing (or if amended, supplemented, or superseded by a later filing, on the date of the later filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

5.8. Financial Statements. The consolidated balance sheets and consolidated statements of operations, stockholders’ equity, and cash flows of SMHG and its subsidiaries included in the SEC Filings (the “SMHG Financial Statements”) fairly present in all material respects the consolidated financial position of SMHG and its subsidiaries at their respective dates and the consolidated results of operations of SMHG and its subsidiaries for the respective periods then ended, in accordance with GAAP, subject, in the case of unaudited interim financial statements, to (a) year-end adjustments (which consist of normal recurring accruals) and (b) the absence of explanatory footnote disclosure required by GAAP.

5.9.Litigation. Except as disclosed in Schedule 5.9, there is no material action, suit, litigation, proceeding or governmental investigation pending or threatened against SMHG or its subsidiaries or the property or business of SMHG or its subsidiaries, or the transactions contemplated by this Agreement, nor to the knowledge of SMHG is there any basis for any such action or for any such claim, and SMHG is not subject to the provisions of any material decree or judgment of any court or of any governmental agency.

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5.10.Absence of Undisclosed Liabilities. Except as set forth in SMHG Financial Statements, or in this Agreement or in any Schedule attached to this Agreement or delivered pursuant hereto, SMHG has no, and none of its assets or properties are subject to any, liabilities or obligations (accrued, absolute, contingent or otherwise), other than unsecured expenses and trade accounts payable arising in the ordinary course of business since December 31, 2002, and federal and state income and franchise taxes accrued in respect of the operations of the Principal since December 31, 2002. Except as disclosed to SMHG, SMHG is not in default in respect of any term or condition of any material indebtedness or liability.

5.11.Other Information. All of the information provided to the Salient Parties, Advisors or Capital or their respective agents or representatives concerning SMHG’s suitability to invest in Newco and Newco GP, and the representations and warranties contained herein, are complete, true, and correct as of the date hereof, and understands that such parties are relying on the statements contained herein to establish an exemption from registration under federal and state securities laws.

5.12.Address. The address set forth in the signature page hereto is SMHG’s true and correct domicile.

SECTION 5A. Representations and Warranties of SMH with respect to PMT. SMHG hereby represents and warrants to the Salient Parties as follows:

5A.1.Organization, Existence, and Qualification. PMT is a state trust company within the meaning of, and chartered under the Texas Finance Code, and is duly organized, validly existing, and in good standing under the laws of the State of Texas. PMT has full authority and trust company power to carry on its business as it is now being conducted and to own, lease, and operate all of its properties and assets. PMT is duly qualified to do business in each other jurisdiction in which qualification is required, except where the failure to be so qualified will not have a Material Adverse Effect (as hereinafter defined). SMHG has delivered to the Purchaser a true and correct copy of the Articles of Incorporation and Bylaws of PMT together with all amendments thereto, as in effect on the date hereof. PMT has taken (and at the Closing New PMT will have taken) all necessary action (including, without limitation, all necessary corporate or limited liability company action, as the case may be, of the board of directors, board of managers, shareholders and/or members, as the case may be) to authorize the consummation of the transactions contemplated by this Agreement. Other than the approval of the Department of Banking, no consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body that has not been obtained is required on the part of PMT or New PMT for the consummation of the transactions contemplated by the Agreement.

5A.2.Outstanding Capital Stock. SMHG owns all of the issued and outstanding common stock, $1.00 par value (the “PMT Shares”), of PMT. No subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire common stock or other equity interests of PMT is outstanding on the Closing Date. The outstanding shares of common stock of PMT have been duly authorized and are validly issued, fully paid, and nonasessable and have been issued in compliance all applicable securities laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase such partner interests.

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5A.3.Contribution of PMT Shares. SMHG (i) has not pledged, sold, or encumbered the PMT Shares to be contributed by SMHG pursuant to this Agreement and the PMT Shares are free and clear of all liens and encumbrances, (ii) is the owner of the PMT Shares and has full authority and power to transfer the PMT Shares to be contributed pursuant to this Agreement to Newco, (iii) has paid in full the purchase price of the PMT Shares, (iv) has no outstanding obligations to PMT with respect to PMT Shares, and (v) has full power and authority to enter into this Agreement and perform the transactions contemplated by this Agreement. No approval or authority of any person other than the Department of Banking will be required for the contribution of the PMT Shares as contemplated herein. Such contribution of the PMT Shares shall be in compliance with all applicable securities laws.

5A.4.Subsidiaries. PMT has no investments or ownership interests in any corporations, partnerships, joint ventures, or other business enterprises.

5A.5.No Defaults. PMT is not in violation of or default under any provision of its Articles of Incorporation, Bylaws, or other organizational documents. To the best of SMHG’s knowledge, PMT is not in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit, or other instrument to which PMT is a party or by which PMT, or any of its properties are bound; and there does not exist any state of facts which, with notice or lapse of time or both, would constitute an event of default as defined in such documents on the part of PMT, except for such breaches and defaults that individually or in the aggregate would not have a Material Adverse Effect. PMT is not in violation of (a) any judgment, order, or decree by which PMT or its properties is bound or (b) any statute, rule, or regulation of any governmental authority, except for such violations that individually or in the aggregate would not have a Material Adverse Effect.

5A.6.No Actions. There are no legal, administrative, or governmental actions, suits or proceedings, disciplinary proceedings, or investigations of any nature pending or, to the best knowledge of SMHG, threatened to which PMT is or may be a party or of which property owned or leased by PMT is or may be subject (except for litigation that individually or in the aggregate would not have a Material Adverse Effect); and no material labor problem or labor disturbance by the employees of PMT exist, or, to the best knowledge of SMHG, is imminent. PMT is not a party to or subject to the provisions of any injunction, judgment, decree, memorandum of understanding or similar arrangement, or order of any court, regulatory body, administrative agency or other governmental body charged with supervision or regulation of PMT including Department of Banking.

5A.7.Compliance. PMT has not been advised, and has no reason to believe, that PMT is not conducting business in compliance with all licenses, permits, and other authorizations material to the conduct of their business and with all applicable laws, rules, and regulations of the jurisdictions in which it is conducting business, except where failure to be in compliance would not have a Material Adverse Effect. No governmental authority has initiated any administrative proceeding or, to the knowledge of SMHG, investigation into or related to the business or operations of PMT. There is no unresolved violation, criticism, or exception made in writing by any governmental agency with respect to any report or statement by any governmental agency relating to any examination of PMT.

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5A.8.Financial Statements. SMHG has delivered to Salient Partners accurate and complete copies of (a) the audited balance sheet of PMT as of December 31, 2002, and the related audited statements of income, changes in partner’s capital, and cash flows for the year then ended, and the notes and schedules thereto and (b) the unaudited balance sheet of PMT as of March 31, 2003, and the related unaudited statements of income and stockholders’ equity for the three-month period then ended ((a) and (b) collectively, the “PMT Financial Statements”). The PMT Financial Statements have been prepared in accordance with the books of account and records of Salient and generally accepted accounting principles consistently applied except as otherwise indicated in such statements. The PMT Financial Statements fairly present the financial position of PMT and the income, members’ equity, and cash flows of PMT’s business at the dates and for the periods indicated (subject to normal year-end adjustments in the case of unaudited interim financial statements), in accordance with GAAP consistently applied except as otherwise indicated in such statements, and do not omit to state any information necessary in order to make such financial statements not materially misleading.

5A.9.Absence of Undisclosed Liabilities. Except as set forth in the PMT Financial Statements, or in this Agreement or in any Schedule attached to this Agreement or delivered pursuant hereto, PMT has no, and none of its assets or properties are subject to any, liabilities or obligations (accrued, absolute, contingent or otherwise), other than unsecured expenses and trade accounts payable arising in the ordinary course of business since December 31, 2002, and state income and franchise taxes accrued in respect of the operations of Salient since December 31, 2002. Except as disclosed to the Salient Partners, PMT is not in default in respect of any term or condition of any indebtedness or liability. There are no facts in existence on the date hereof and known to the SMHG that might reasonably serve as the basis for any material liabilities or obligations of PMT not disclosed in this Agreement or in the Schedules attached to this Agreement or delivered pursuant hereto.

5A.10.Taxes. PMT filed all federal, state, county and local tax and informational returns, required to be filed by it, and PMT has paid all taxes shown to be due by such returns as well as all other taxes, assessments and governmental charges that have become due or payable, including, without limitation, all taxes that PMT is obligated to withhold from amounts owing to employees, creditors and third parties. PMT has established adequate reserves for all taxes accrued but not yet payable. No audit, action, suit, proceeding, claim, examination, deficiency, or assessment is currently pending or, to the best of SMHG’s knowledge, threatened against PMT. There is no tax lien (other than for current taxes not yet due and payable), whether imposed by a federal, state, county, or local taxing authority, outstanding against the assets, properties or business of PMT. No federal income tax returns of PMT are presently being audited by the Internal Revenue Service and PMT have not received any notice that any examination is being conducted by the Internal Revenue Service of the federal income tax returns of PMT for any taxable year.

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5A.11.Properties. PMT, as of the applicable dates referred to therein, good and marketable title to all the properties and assets reflected as owned by it in the PMT Financial Statements, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in the PMT Financial Statements or listed in Schedule 5A.11, or (ii) those that are not material in amount and do not adversely affect the use made and currently proposed to be made of such property by PMT. PMT holds its leased properties under valid and binding leases. PMT owns or leases all such properties as are necessary to its operations as now conducted. PMT does not own any real property. Any real property and facilities held under lease by PMT are held by it under valid, subsisting, and enforceable leases of which PMT is in compliance.

5A.12. Intellectual Property.

(a)PMT owns or has the right to use all Intellectual Property Rights used by PMT for the conduct of its business, which Intellectual Property Rights are the only Intellectual Property Rights necessary or required for the conduct of their respective businesses as they are currently being conducted.

(b)PMT is not in default of its obligations to pay royalties or other amounts to other persons by reason of the ownership or use of any Intellectual Property Rights used by PMT for the conduct of its business.

(c)No Intellectual Property Right owned by PMT violates or will violate any license or infringes or will infringe any Intellectual Property Rights of another. To the best of SMHG’s knowledge, no Intellectual Property Right, product or service marketed, sold or licensed (as licensor or as licensee) by PMT, violates or will violate any license or infringes or will infringe any Intellectual Property Rights of another, nor has PMT received any notice that any of the Intellectual Property Rights used by PMT for the conduct of its business, conflicts or will conflict with the rights of others.

(d)There are no claims pending or, to the best of SMHG’s knowledge, threatened with respect to any Intellectual Property Rights necessary or required for the conduct of the business of PMT as currently conducted, nor, to the best of PMT’s knowledge, does there exist any basis therefor.

5A.13.Absence of Certain Changes of Events. Except as set forth in Schedule 5A.13, since December 31, 2002,

(a)there has been no material change in the condition, financial or otherwise, or operations of PMT,

(b)PMT has not incurred any indebtedness for money borrowed or any material liability or obligation, contingent or otherwise, except in the ordinary course of business or entered into any material commitment or other transaction not in the ordinary course of business,

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(c)there has been no event, occurrence, or development that has resulted or that could result in a Material Adverse Effect,

(d)PMT has not declared or made any payment or distribution of cash or other property to its directors or officers (other than in compliance with existing compensation agreements or incentive option plans), or purchased, redeemed (or made any agreements to purchase or redeem) any limited partner interest,

(e) PMT has not altered its method of accounting,

(f)PMT has not incurred or become subject to any material claim or material liability for any damages or alleged damages for any actual or alleged negligence or other tort or breach of contract,

(g)except in the ordinary course of business and consistent with the past practice of PMT, PMT has not sold, transferred, or otherwise disposed of, or agreed to sell, transfer or otherwise dispose of any of its assets, property or rights or canceled or otherwise terminated, or agreed to cancel or otherwise terminate, any debts or claims,

(h)PMT has not entered or agreed to enter into any agreement or arrangement granting any preferential rights to purchase any of its assets, property or rights, or requiring the consent of any party to the transfer and assignment of any of such assets, property or rights,

(i)PMT has not made any change in its authorized capital or outstanding securities,

(j)PMT has not issued, sold, delivered or agreed to issue, sell or deliver any member interests, bonds or other securities, or granted or agreed to grant any options, warrants or other rights calling for the issue, sale or delivery thereof,

(k)PMT has not adopted any new, or made any increase in, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement or other employee benefit plan, payment or arrangement made to, for or with any of such officers, directors or salaried employees;

(l)neither PMT nor any employee of PMT has been cited for any violations of the Texas Finance Code or regulations of the Department of Banking promulgated thereunder, and

(m)PMT has not entered into any material verbal or written agreement or other transaction that is not in the ordinary course of business.

5A.14.Furniture and Equipment. Attached hereto as Schedule 5A.14 is a list setting forth a description of all major items of furniture and equipment owned or leased by PMT at February 28, 2003. All items of furniture and equipment reflected on the PMT Financial Statements or Schedule 5A.14 are in good operating condition and in a state of reasonable maintenance and repair, ordinary wear and tear excepted, and are free from any known defects except such as require routine maintenance and such minor defects as do not substantially interfere with the continued use thereof in the conduct of normal operations.

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5A.15.Material Contracts. Attached hereto as Schedule 5A.15 is a list and brief description as of the date of this Agreement of certain written or oral leases, contracts, commitments, agreements, guarantees, and other documents to which PMT is a party or by which it is bound. Except for contracts and documents listed in Schedule 5A.15, PMT is not a party to or bound by any written or oral (a) contract not made in the ordinary course of business; (b) employment contract; (c) bonus, pension, profit sharing, retirement, hospitalization, insurance or other plan providing employee benefits; (d) lease with respect to any property, real or personal, whether as lessor or lessee; (e) continuing contract for the future purchase of materials, supplies or equipment in excess of the requirements of its business now booked; (f) contract or commitment for capital expenditures; (g) contract continuing over a period of more than six months from its date; (h) contract providing for annual payments in excess of $25,000 or aggregate payments in excess of $50,000, or (i) contract between any member or employee of PMT and PMT, (j) promissory note, loan agreement, guarantee or other contract or commitment for the borrowing of money by PMT, or (k) contract material or necessary to conduct the operations and business of PMT. A true copy of each lease, contract, commitment and agreement listed in Schedule 5A.15 has been furnished to the Salient Parties or made available for review by the Salient Parties, and, except as otherwise disclosed on Schedule 5A.15, each such lease, contract, commitment and agreement is in full force and effect and the parties thereto are not in default thereunder.

5A.16.Employees. Attached hereto as Schedule 5A.16 is a schedule listing the names and annual rates of compensation of all the present officers, salaried employees and agents of PMT. Schedule 5a.16 summarizes the bonuses, profit sharing, incentive, percentage compensation and other like benefits, if any, paid or payable to such officers, directors, employees and agents for the year ended December 31, 2002, and for the period from December 31, 2002, to February 28, 2003. Schedule 5a.16 also sets forth all loans and advances (other than routine travel advances to be repaid or formally accounted for within 60 days) made by PMT since December 31, 2002, to any director, officer or employee of PMT, and the current status thereof, whether or not such loan or advance is presently outstanding.

5A.17.Investment Company, Etc.. PMT is not regulated or required to be registered as an investment company, commodity trading advisor, commodity pool operator, futures commission merchant, introducing broker, or transfer agent under and federal, state, or local statute, laws, rule, or regulation.

5A.18.Insurance. PMT maintains the insurance policies summarized on Schedule 5A.18. To the knowledge of SMHG, all such insurance policies are in full force and effect.

5A.19.Customer Relationships. PMT is in compliance with the terms of each contract with any customer to whom PMT provides services (a “Client”), and each such contract is in full force and effect. There are no disputes pending or, to SMHG’s knowledge, threatened with any Client under the terms of such contract or with any former Client. PMT has provided or made available to Salient Partners true and complete copies of the standard form of all advisory and similar agreement with Clients. To PMT’s knowledge, except as set forth on Schedule 5A.20, there have been no complaints or disputes with customers that have not been resolved that are expected to result in a Material Adverse Effect

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5A.20.Questionable Payments. PMT has not made, and SMHG has no knowledge or information that any director, officer, employee, agent, or other representative of PMT or any person acting on behalf of any of them has made, directly or indirectly, any bribes, kickbacks, political contributions with corporate funds, payments from corporate funds not recorded on the books and records of PMT, payments from corporate funds that were knowingly and falsely recorded on the books and records of PMT, payments from corporate funds to governmental officials in their individual capacities or illegal payments from corporate funds to obtain or retain business.

5A.21.Transactions with Affiliated Parties. Except as set forth on Schedule 5A.22, PMT has not engaged in any transactions with any Affiliated Party (other than transactions inherent in the normal capacities of partners, managers, officers, or employees). Except as set forth in Schedule 5A.21, no Affiliated Party has any ownership interest, directly or beneficially, in any competitor or customer of PMT (except with respect to no more than 1% of the issued stock of any company the securities of which are publicly traded on a national stock exchange or in the over-the counter market). For purposes of this Section 5A.21, “Affiliated Party” means the SMHG, directors, employees, officers, and managers of PMT; any spouse or child of an employee, officer, manager, or director of PMT; any trust of which any employee, officer, manager, or director of PMT is a grantor, trustee or beneficiary; any corporation of which any employee, officer, manager, or director of PMT, or any spouse or child of such employee, officer, manager or director, is an officer, director or shareholder; or any partnership of which SMHG, or any employee, officer, manager, or director of PMT is a partner.

5A.22.Books and Records. The books and records of PMT are in all material respects complete and correct and have been maintained in accordance with good business practice and reflect a true record of all meetings or proceedings of its managers and members.

5A.23.Discretionary Accounts. PMT has operated its investment accounts for which it has investment discretion in accordance with the investment objectives and guidelines in effect for each such investment account, except when lack of compliance would not be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on PMT.

5A.24.Environmental and Safety Laws. PMT is not in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation.

SECTION 6.Survival of Representatives and Warranties; Indemnification. Notwithstanding any investigation made by any party to this Agreement, all representations and warranties made by the Salient Parties, Advisors, Capital, and SMHG herein and in any certificates or documents delivered pursuant hereto or in connection therewith shall survive following the Closing and shall remain in full force and effect until March 31, 2005, and shall, with respect to the Option Closing, remain in full force and effect until the date twelve months following the Option Closing Date. The maximum liability of each Salient Party for breaches of representations, warranties, or covenants hereunder shall be equal to the amount of Purchase Price received by such Salient Party.

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SECTION 6A. Indemnification. The respective indemnification obligations of the parties are:

6A.1Indemnification by SMHG. SMHG agrees to pay and to indemnify and hold harmless and defend each Salient Party and their respective successors and assigns from and against any and all obligations, claims, liabilities, damages, penalties, losses, judgments, fines, and reasonable costs and expenses and disbursements incurred in connection with any investigation or defense of the foregoing (collectively, “Damages”) caused by or arising out of or in respect of: (i) any breach or default in the performance by SMHG of any covenant or agreement of SMHG contained in this Agreement; and (ii) any breach of warranty or inaccurate or erroneous representation made by an SMHG in Section 5 and 5A of this Agreement.

6A.2 Indemnification by Principals. Each Principal severally agrees to pay and to indemnify and hold harmless each Salient Party, SMHG, each other Principal, and their respective successors and assigns from and against any and all Damages caused by, arising out of or in respect of: (i) any breach or default in the performance by the Principal of any covenant or agreement made by the Principal in this Agreement; or (ii) any breach of warranty or inaccurate or erroneous representation made by the Principal in Section 4 of this Agreement.

6A.3 Indemnification by the Salient Parties. The Salient Parties jointly and severally with respect to Salient Partners and the General Partner and severally with respect to the Principals, agree to pay and to indemnify and hold harmless and defend SMHG and its successors and assigns from and against any and all Damages caused by or arising out of or in respect of: (i) any breach or default in the performance by any Salient Party of any covenant or agreement of such Salient Party contained in this Agreement; and (ii) any breach of warranty or inaccurate or erroneous representation made by such Salient Party in Section 4 of this Agreement.

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6A.4Requests for Indemnification. If any party (an “Indemnified Party”) becomes aware of a fact, circumstance, claim, situation, demand or other matter for which it or any other Indemnified Party has been indemnified under this Section 6A (any such item being herein called an “Indemnity Matter”), the Indemnified Party shall give prompt written notice of the Indemnity Matter to the Indemnifying Party, requesting indemnification therefor, specifying the nature of and specific basis for the Indemnity Matter and the amount or estimated amount thereof to the extent then feasible; provided, however, a failure to give such notice will not waive any rights of the Indemnified Party except to the extent the rights of the Indemnifying Party are actually materially prejudiced by such failure. The Indemnifying Party shall have the right to assume the defense or investigation of such Indemnity Matter and to retain counsel and other experts to represent the Indemnified Party and shall pay the fees and disbursements of such counsel and other experts. If within 30 days after receipt of the request (or five days if litigation is pending) the Indemnifying Party fails to give notice to the Indemnified Party that the Indemnifying Party assumes the defense or investigation of the Indemnity Matter, an Indemnified Party may retain counsel and other experts (whose fees and disbursements shall be at the expense of the Indemnifying Party) to file any motion, answer or other pleading and take such other action which the Indemnified Party reasonably deems necessary to protect its interests or those of the Indemnifying Party until the date on which the Indemnified Party receives such notice from the Indemnifying Party. If an Indemnifying Party retains counsel and other experts, any Indemnified Party shall have the right to retain its own counsel and other experts, but the fees and expenses of such counsel and other experts shall be at the expense of the Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party mutually agree to the retention of such counsel and other experts or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would, in the opinion of counsel retained by the Indemnifying Party, be inappropriate due to actual or potential differing interests between them. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any Indemnity Matter which the Indemnifying Party defends, or, if appropriate and related to the Indemnity Matter in question, in making any counterclaim against the person asserting the Indemnity Matter, or any cross-complaint against any person. No Indemnity Matter may be settled by the Indemnified Party without the consent of the Indemnifying Party, which consent will not be unreasonably withheld. Unless the Indemnifying Party agrees in writing that the Damages to the Indemnified Party resulting from such settlement are fully covered by the indemnities provided herein and that such Damages are fully compensable in money, no Indemnity Matter may be settled without the consent of the Indemnified Party, which consent will not be unreasonably withheld. Except with respect to settlements entered without the Indemnified Party’s consent pursuant to the immediately preceding sentence, to the extent it is determined that the Indemnified Party has no right under this Section 6A to be indemnified by the Indemnifying Party, the Indemnified Party shall promptly pay to the Indemnifying Party any amounts previously paid or advanced by the Indemnifying Party with respect to such matters pursuant to this Section 6A. After the delivery of a notice of an Indemnity Matter hereunder, at the reasonable request of the Indemnifying Party the Indemnified Party shall grant the Indemnifying Party and its representatives full and complete access to the books, records and properties of the Indemnified Party to the extent reasonably related to the matters to which the notice relates. The Indemnifying Party will not disclose to any third person (except its representatives) any information obtained pursuant to the preceding sentence which is designated as confidential by the Indemnified Party and which is not otherwise generally available to the public or not already within the knowledge of the Indemnifying Party, except as may be required by applicable law. The Indemnifying Party shall request its representatives not to disclose any such information (unless already within its knowledge or as may be required by applicable law). All such access shall be subject to the normal safety regulations of the Indemnified Party, and shall be granted under conditions that will not unreasonably interfere with the business and operations of the Indemnified Party.

6A.5Exclusive Remedy. The indemnification provisions of this Section 6A shall constitute the parties’ exclusive remedy for breaches of the representations, warranties, and covenants herein, and shall be subject to the applicable limitations contained in Section 6.

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SECTION 7.Operations of Advisors, Capital and PMT.

7.1PMT. Commencing on the Closing Date and continuing until the earlier to occur of: (a) a Change of Control and exercise of the Put Option or Purchase Option or (b) SMHG or the Salient Parties exercise their buy-sell rights pursuant to Section 8 hereof (a “Termination Event”), Messrs. Blaisdell, Linbeck, Sherman, and Radcliffe (“Salient Managers”) will be retained as the management team for PMT at salaries totaling $620,000 (which aggregate total may be increased or decreased upon mutual agreement of the Salient Managers and SMHG), which shall be allocated as salary 29% each to Messrs. Linbeck, Sherman, and Blaisdell and 13% for Mr. Radcliffe. In addition, until the earlier to occur of (a) the Contribution (as hereinafter defined) or (b) a Termination Event, the Salient Parties shall be entitled to receive, as a management fee, an amount equal to 50% of the annual net income of PMT before provision for taxes determined in accordance with GAAP; after such Contribution, PMT shall distribute its distributable cash to Newco and Newco shall distribute the same to its partners based on their respective ownership percentages (unless the Management Committee, by majority vote, determines to retain such distributable cash).

7.2Combination of Operations. Following the Closing and upon receipt of the approval of the Department of Banking, SMHG shall deliver the shares representing all of the issued and outstanding capital stock of PMT or, if PMT has been converted to a limited liability company, shall transfer all member interests in New PMT to Newco (the “Contribution”). The Contribution shall only be subject to obtaining the approval of the Department of Banking and shall occur as soon as practicable upon receipt of such regulatory approval. SMHG and each agent, officer, and/or representative thereof shall use its or their commercially reasonable best efforts, and shall cause PMT and New PMT and each agent, officer, and/or representative thereof to use its or their commercially reasonable best efforts (in each case including seeking the permission of the Department of Banking) to gain regulatory approval for the Contribution. Upon occurrence of the Contribution, the Board of Directors of PMT (or the board of managers of New PMT, as the case may be) shall be reconstituted to be the same individuals as the Management Committee.

7.3Excess Capital. SMHG agrees that cash and cash equivalents and marketable securities of PMT in excess of the minimum tangible capital requirement imposed on PMT (or New PMT, if after conversion) by the Department of Banking (“Excess Capital”) may be expended for acquisitions and expansion subject to the approval of the Management Committee of Newco GP. SMHG estimates such Excess Capital to be approximately $2.9 million as of March 31, 2003.

7.4Distributions. Newco shall make one or more distributions of Distributable Cash Flow (as defined in the Newco Partnership Agreement) during each fiscal year. In the event that a super majority of the Management Committee (5 of seven members or, if the Management Committee is comprised of a greater or lesser number of members, 67% of the members rounded up or down to the nearest whole number) recommends retention of all Distributable Cash Flow, then no cash distributions shall be made; provided, that there shall be at least one distribution each year at least equal to the taxable income of Newco multiplied by the highest marginal federal income tax rate.

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7.5Name Change. Immediately following the Closing, Salient Partners shall change its name and each of the Salient Parties shall cause each other related party to change its name so as not to include the name “Salient” and Newco shall change its name to “Salient Partners, L.P.”

7.6Services Post Closing. From and after the date of Closing and continuing through and including a Termination Event in which the Salient Parties acquire the Newco Group, SMHG, or its successor in interest, shall continue to provide to the Newco Group the same services that it has historically provided to PMT consistent with its current practice and for no greater charge that SMHG’s provides such services to any other subsidiary or division of SMHG, which services shall include: human resources, accounting support (maintaining the books and records of the Newco Group and issuing financial statements, etc.), administrative support, and such other services that SMHG has provided to PMT in the past.

7.7Application to Banking Commissioner. As soon as practicable after the execution of this Agreement, all parties required to do so by the Texas Finance Code shall prepare and file with the Texas Banking Commissioner an application under Section 182.302 of the Texas Finance Code seeking approval of the Texas Banking Commissioner to convert PMT from a trust association organized as a Texas corporation to a limited trust association organized as a Texas limited liability company and an application under Section 183.002 of the Texas Finance Code seeking approval of the Texas Banking Commissioner of any change of control of PMT that may occur as a result of the contribution of the member interest of New PMT to Newco, and upon being notified by the Texas Banking Commissioner that the application is complete, shall either (i) comply with the notice requirements of Section 183.002(d) of the Texas Finance Code or (ii) request a waiver of the notice requirements from the Texas Banking Commissioner under Section 183.002(f) of the Texas Finance Code. Thereafter, the appropriate parties shall take all such action and shall attend all such hearings and provide all such information to the Texas Banking Commissioner as the Commissioner may require in connection with the Commissioner’s consideration of the applications; provided, however, that nothing in this Section 7.7 shall require SMHG or PMT to (i) agree to the imposition of any material limitation on the ability of PMT to conduct its trust business after the Closing in substantially the same manner as before the Closing or (ii) make any undertaking relating to PMT or its assets, properties, business, operations or practices which, in the reasonable judgment of SMHG and Salient Partners would or could have, after the Closing, a material adverse effect on PMT.

SECTION 8.Buy-Sell Rights. The Newco Partnership Agreement and Newco GP Regulations, respectively, shall provide that, subsequent to May 1, 2008, either SMHG or Salient Partners shall have the right, at any time, exercisable by written notice (the “Offer”) to the other party to buy each other’s ownership interests in the Newco Group. The Offer shall constitute an offer by the offeror-party both (a) to sell its interests in the Newco Group and (b) to purchase the offeree-party’s interest in the Newco Group pursuant to the following provisions:

8.1Determination of Price. Following the giving and receipt of an Offer, SMHG and Salient Partners shall have a period of 30 days to arrive at a mutually agreeable price for the interest in the Newco Group. If SMHG and Salient Partners cannot agree on a price within such 30-day period, within 10 Business Days after the end of the 30-day period SMHG and Salient Partners shall each select an independent appraiser nationally recognized as qualified to appraise businesses in the financial services industry, each of whom shall deliver its appraisal of the Fair Market Value (as hereinafter defined) to an independent person (to be agreed by SMHG and Salient Partners) within 20 Business Days of its selection as an appraiser. If the higher appraisal is more than 20% greater than the lower appraisal, the independent person shall notify SMHG and Salient Partners and each appraiser of that fact (but not of the amounts). In such a case, the two appraisers shall within 10 Business Days of such notification from the independent person agree on a third independent appraiser nationally recognized as qualified to appraise businesses in the financial services industry, who shall deliver its appraisal of Fair Market Value to the independent person within 20 Business Days of the selection of such third appraiser, and Fair Market Value shall be the median of the three appraisals. If the higher of the first two appraisals is not more than 20% greater than the lower of the first two appraisals, Fair Market Value shall be the arithmetic mean of the first two appraisals and there shall not be any third appraisal. The independent person shall promptly give written notice of Fair Market Value to SMHG and Salient Partners.

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8.2Right of Salient Partners. Following determination of Fair Market Value pursuant to Section 8.1, Salient Partners shall have the right to buy from SMHG, and SMHG shall be obligated to sell, its interests in the Newco Group at the Fair Market Value; provided, however, that the Fair Market Value shall be appropriately adjusted to reflect the net decline in pre-tax earnings that result due to the anticipated payment of the SMHG Residual Net Revenues (hereafter defined). Salient Partners shall have 10 Business Days to exercise such right by written notice to SMHG. If Salient Partners elects to exercise its right to purchase SMHG’s interest in the Newco Group, Salient Partners and SMHG shall, within 45 days after receipt of notice, execute such documents and instruments reasonable necessary by Salient Partners to sell and transfer SMHG’s interest in the Newco Group at the purchase price, and the closing of such sale shall take place on a Business Day not more than 45 calendar days after receipt of the notice. The purchase price shall be paid 50% in cash and the balance in the form of a promissory note maturing three years following its date of issuance and bearing interest at the prime rate of interest published in The Wall Street Journal. At such closing, SMHG shall sell and transfer its interest in Newco and Newco GP to Salient Partners free and clear of any liens, encumbrances, or security interests. In addition to payment of the Fair Market Value, Newco shall pay to SMHG on a quarterly basis a portion of the management fees received by Newco or TEF GP with respect to clients of SMHG (other than existing clients or affiliates of PMT) who invest in The Endowment (Domestic) Fund, L.P., The Endowment (Exempt) Fund I, L.P., and/or The Endowment (Exempt) Fund II, L.P. (collectively and taken as a group) equal to the management fees paid by such persons to Newco or charged by TEF GP multiplied by one (1) minus a fraction the numerator of which is the general and administrative expenses of the Newco Group in the 12 months prior to the Offer and the denominator of which is the revenues of the Newco Group during such time frame (“SMHG Residual Net Revenues”).

8.3Right of SMHG. If Salient Partners does not elect to purchase SMHG’s interests in the Newco Group pursuant to Section 8.2, SMHG shall have the right to buy from Salient Partners, and Salient Partners shall be obligated to sell, its interests in the Newco Group at the Fair Market Value. If SMHG elects to exercise its right to purchase Salient Partner’s interests in the Newco Group, Salient Partners and SMHG shall, within 45 days after receipt of notice, execute such documents and instruments reasonable necessary by SMHG or its successor to sell and transfer Salient Partner’s interests in the Newco Group at the purchase price, and the closing of such sale shall take place as soon as practicable but in any event within 45 days after receipt of the notice. The purchase price shall be paid 50% in cash and the balance in the form of a promissory note maturing three years following its date of issuance and bearing interest at the prime rate of interest published by The Wall Street Journal. At such closing, Salient Partners shall sell and transfer its interest in the Newco Group to SMHG or its successor free and clear of any liens, encumbrances, or security interests. In addition, if SMHG or its successor exercises its right to purchase Salient Partner’s interest, each Principal, who is then employed by the Newco Group, Advisors, or Capital, agrees to enter into an employment agreement with SMHG or its successor with a minimum term of two-years (which shall contain a coterminous non-compete provision) with compensation and upon terms mutually acceptable to the parties (but in no event shall the compensation be less than that which was being received by a Principal prior to such date). ). The purchase of SMHG’s interests by the Salient Parties or the Salient Parties’ interests by SMHG shall be done simultaneously with the purchase of SMHG’s Interests in TEF GP and TEF LLC or the Salient Parties’ (or, in the case of Messrs. Linbeck, Sherman and Radcliffe, SEE’s) Interests in TEF GP or TEF LLC, respectively, pursuant to the terms of the TEF Agreement (with Interests, as used in this sentence, having the meaning set forth in the TEF Agreement).

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8.4Fair Market Value.For purposes of this Section 8, “Fair Market Value” shall mean the fair market value of the Newco Group (collectively and considered as a whole) as a going concern in a sale on an arm’s length basis between an informed and willing buyer and an informed and willing seller under no compulsion to buy or sell, taking into account all the facts and circumstances then prevailing, including the Newco Group’s consolidated business at the time of valuation, agreements to which the Newco Group is a party, assuming consummation of the sale of the Newco Group to a party not affiliated with Salient Partners or SMHG. For the purposes of determining the Fair Market Value, (a) the Class B Units shall be valued at the Liquidation Preference, (b) the Fair Market Value shall be appropriately adjusted to reflect the net decline in pre-tax earnings that result due to the anticipated payment of the SMHG Residual Net Revenues in the event that the Salient Parties acquire the Newco Group pursuant to Section 8.2 above, and (c) the Fair Market Value shall be reduced on a dollar for dollar basis by any amount paid by SMHG pursuant to the TEF Agreement to purchase any interests in TEF GP or TEF LLC from the Principals (or, in the case of Messrs. Linbeck, Sherman and Radcliffe, SEE) that SMHG does not already own. Fair Market Value shall be allocated to the interests in the Newco Group as follows: (a) first, to the Class B Units and (b) the balance to the remaining interests in the Newco Group. SMHG and Salient Partners shall pay all costs of the appraisals performed under Section 8.1 on an equal basis.

SECTION 9. Right of First Refusal With Respect to Newco Interests. If SMHG or Salient Partners (a “Selling Partner”) proposes to sell, assign, encumber, hypothecate, distribute, pledge, convey in trust, give, or otherwise transfer or dispose of (a “Transfer”) all or any portion of its interests in the Newco Group, whether voluntarily or involuntarily, then the Selling Partner shall promptly give written notice (the “Offer Notice”) to the other partners at least 30 days prior to the proposed closing of such Transfer. The Offer Notice shall describe in reasonable detail the proposed Transfer including, without limitation, the Percentage Interest and Allocation Ratio of the interest to be transferred (the “Offered Interest”), the nature of such Transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. For a period of 30 days following receipt of any Offer Notice, all partners of the Newco Group that are not the Selling Partner (“Offered Parties”) shall have the right to purchase all or a portion of the Offered Interest subject to the Offer Notice. Such purchase right shall be exercised by written notice signed the other partner and delivered to the Selling Partner within such 30-day period. The exercising partner shall effect the purchase of the Offered Interest, including payment of the purchase price, not more than ten days after delivery of the notice of exercise of the right of first refusal. In the event that the Selling Partner is a Salient Party, the Offered Interest shall be first offered to the other Salient Parties until they have been satisfied (if the other Salient Parties have oversubscribed, then they shall participate ratably) and, in the event that any Offered Interest remains, SMHG shall be entitled fulfill its subscription (if any). Upon each such exercise, the Selling Partner shall deliver to the exercising partner an assignment of the Offered Interest in such form as may be required to effect the Transfer of the Offered Interest. The purchase of SMHG’s interests by the Salient Parties or the Salient Parties’ interests by SMHG shall be done simultaneously with the purchase of SMHG’s Interests in TEF GP and TEF LLC or the Salient Parties’ Interests in TEF GP or TEF LLC, respectively, pursuant to the terms of the TEF Agreement (with Interests, as used in this sentence, having the meaning set forth in the TEF Agreement).

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SECTION 10.Covenants and Additional Agreements. On and after the Closing:

10.1.Corporate Existence. Each of Salient Partners, the General Partner, Advisors, Capital, PMT, Newco and Newco GP will (and SMHG shall cause PMT to) take all steps necessary to preserve and continue the corporate, partnership or limited liability company existence of such parties. Each of such parties will comply with all applicable laws and regulations, decrees, orders, judgments, licenses, and permits (“Applicable Laws”), except where non-compliance with such Applicable Laws would not have a Material Adverse Effect.

10.2Taxes. Each of Advisors, Capital, PMT, Newco and Newco GP will (and SMHG shall cause PMT to) promptly pay and discharge all lawful taxes, assessments, and governmental charges or levies imposed on it or upon its income or profits, or upon any of its properties, real or personal, before the same shall become in default, as well as all lawful claims for labor, materials, and supplies or otherwise which, if unpaid, might become a lien or charge upon its properties or any part thereof, except where the failure to do so would not have a Material Adverse Effect; provided, however, that neither Advisors, Capital, PMT, Newco or Newco GP shall be required to pay or cause to be paid any such tax, assessment, charge, levy or claim prior to institution of foreclosure proceedings if the validity thereof shall be contested in good faith by appropriate proceedings and if such party shall have established reserves deemed by such party to be adequate with respect to such tax, assessment, charge, levy, or claim.

10.3Insurance. The Newco Group will maintain liability, property damage, and insurance on its insurable property against fire and other hazards with responsible insurance carriers in the relative proportionate amounts consistent with past practice and usually carried by reasonable and prudent companies conducting businesses similar to that of such parties, except where the failure to do so would not have a Material Adverse Effect.

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10.4Financial Statements and Compliance Certificates. The Newco Group (including PMT) will keep true books of record and account in which full, true, and correct entries in accordance with generally accepted accounting principles will be made of all dealings or transactions in relation to its business and activities. After the Closing Date until such date on which SMHG or Salient Partners ceases to own any securities of the Newco Group and the Option Interests, the Newco Group shall furnish, by email, facsimile or overnight mail, to each of SMHG and Salient Partners:

(a)commencing with the fiscal quarter ending March 31, 2003, within 30 days after the end of each quarter, a consolidated balance sheet of the Newco Group as of the end of such quarter and consolidated statements of operations and cash flows of the Newco Group for such quarter and for the expired portion of the then current fiscal year, setting forth comparable figures for the same quarter and expired portion of the previous fiscal year, and prepared and certified by the chief financial or accounting officer of Newco, subject to year-end audit adjustment;

(b)commencing with the fiscal year ending December 31, 2003, within 60 days after the end of each fiscal year, an audited consolidated balance sheet of the Newco Group as of the end of such fiscal year and audited consolidated statements of operations, partner’s capital, and cash flows of the Newco Group for such fiscal year, setting forth comparable figures for the previous fiscal year, all reported upon, and certified by, the independent accountants and registered auditors of the Newco Group; and

(c) any other financial statements or reports as may reasonably be requested by SMHG or Salient Partners.

10.5Investment Advisory Agreement Acknowledgements. Upon being notified by SMHG that it intends to exercise the Purchase Option or its purchase right under Section 8.2, Advisors agrees to use its commercially reasonable best efforts to obtain as soon as reasonable practicable (a) any consents of Clients necessary in connection with the “assignment” of the contracts pursuant to which Advisors provides investment advisory services to a Client with the meaning of the Advisers Act (an “Advisory Agreement”) resulting from SMHG’s exercise of the Purchase Option or purchase right; provided that SMHG agrees that other than with respect to any Advisory Agreement which by its terms expressly requires written consent to its assignment, effective consent to such assignment of an Advisory Agreement may be obtained for all purposes hereunder and under applicable law by informing such Client of (i) the intention to consummate the Purchase Option or purchase right, which may result in a deemed assignment of such Advisory Agreement, (2) Advisors’ intention to continue the advisory services pursuant to the existing Advisory Agreement with such Client after the Option Closing Date, and (3) that the consent of such Client will be deemed to have been granted if such Client continues to accept such advisory services for at least 40 days after receipt of such notice without termination, and the consent or approval of all persons party to contract with Advisors, to the extent such consent or approval is required in order to consummate the Purchase Option and for Advisors to continue to receive the benefits of such contract.

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10.6SMHG Capital Incentive Plan Participation. SMHG agrees to permit the Principals or Newco to purchase shares of SMHG Stock through the Sanders Morris Harris Group Inc. Capital Incentive Program or any similar plan adopted by SMHG. Any employee who receives a bonus from Newco may use such bonus to purchase shares of SMHG Stock at a purchase price equal to 66.67% of an amount equal to 5% of the sum of the closing prices for shares of SMHG Stock as reported by The Nasdaq Stock Market for the 20 trading days prior to such purchase. In addition, Salient Partners and the Principals agree that, until the date five years after the Closing Date, Salient Partners and/or each Principal shall have the option to purchase shares of SMHG Stock pursuant to the Capital Incentive Program or otherwise from SMHG in an amount at least equal to 25% of cash distributed (net of taxes actually paid by Salient Partners or a Principal) to Salient Partners by Newco or to a Principal by Salient Partners. Shares purchased pursuant to this Section will vest 50% at the end of the first year, 75% at the end of the second year, and 100% at the end of the third year.

10.7Registration of SMHG Stock. SMHG shall prior to March 31, 2005, file with the Commission a registration statement on Form S-3 relating to the issuance of SMHG Stock to Salient Partners and the Principals pursuant to Section 3.2 and the resale of such SMHG Stock by Salient Partners and the Principals and use commercially reasonable efforts to have such registration statement declared effective on or before such date. In the case of such registration, SMHG will keep Salient Partners and the Principal reasonably advised in writing as to the initiation of each registration and as to the completion thereof. At its expense with respect to any registration statement filed pursuant to this Section 10.7, SMHG will use its commercially reasonable best efforts to:

(a)prepare and file with the Commission with respect to SMHG Stock, a registration statement on form S-3 or such other form for which SMHG then qualifies or which counsel for SMHG shall deem appropriate, and which form shall be available for the sale of SMHG Stock in accordance with the intended method(s) of distribution thereof, and use its commercial efforts to cause such registration statement to become and remain effective at least for a period ending with the first to occur of (i) the sale of all SMHG Stock covered by the registration statement or (ii) the availability under Rule 144(e) or 144(k) for Salient Partners and the Principals to immediately resell all SMHG Stock covered by the registration statement (in either case, the “Effectiveness Period”); provided that no later than five business days before filing with the Commission a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, SMHG shall (i) furnish to one counsel (“Holders Counsel”) selected by Salient Partners and the Principals copies of all such documents proposed to be filed (excluding any exhibits other than applicable underwriting documents), in substantially the form proposed to be filed, which documents shall be subject to the review of such counsel, and (ii) notify Salient Partners and the Principals of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered;

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(b)if a registration statement is subject to review by the Commission, promptly respond to all comments and diligently pursue resolution of any comments to the satisfaction of the Commission;

(c)prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective during the Effectiveness Period (but in any event at least until expiration of the 90-day period referred to in Section 4(3) of the Securities Act and Rule 174 if applicable), and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended method(s) of disposition by the sellers thereof set forth in such registration statement;

(d)furnish, without charge, to Salient Partners and the Principals such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any other prospectus filed under Rule 424 under the Securities Act) as such Persons may request, in conformity with the requirements of the Securities Act;

(e)use its commercially reasonable best efforts to register or qualify SMHG Stock under such other applicable securities or blue sky laws of such jurisdictions as Salient Partners and the Principals reasonably request as may be necessary for the marketability of SMHG Stock (such request to be made by the time the applicable registration statement is deemed effective by the Commission); provided that SMHG shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (e), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction;

(f)promptly notify Salient Partners and the Principals at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event which comes to SMHG’s attention if as a result of such event the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and SMHG shall promptly prepare and furnish to Salient Partners and the Principals a supplement or amendment to such prospectus (or prepare and file appropriate reports under the Exchange Act) so that, as thereafter delivered to SMHG’s of such SMHG Stock, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading;

(g)comply, and continue to comply during the period that such registration statement is effective under the Securities Act, in all material respects with the Securities Act and the Exchange Act and with all applicable rules and regulations of the Commission with respect to the disposition of all securities covered by such registration statement, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act;

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(h)as promptly as practicable after becoming aware of such event, notify Salient Partners and the Principals of the issuance by the Commission of any stop order or other suspension of effectiveness of the registration statement at the earliest possible time; and

(i)use its best efforts to cause SMHG Stock covered by the registration statement to be quoted on the Nasdaq National Market or such other principal securities market on which securities of the same class or series issued by SMHG are then listed or traded.

10.8Voting of Shares of Newco GP. The Newco GP Regulations shall provide that until the aggregate purchase price of shares of SMHG Stock purchased by Salient Partners and the Principals subsequent to the Closing or the distributions of Newco and Newco GP made to its partners (collectively and taken as a whole) exceed the Cash Consideration, the following actions shall require the approval of at least two thirds (5 out of 7) of members of the Management Committee: (a) the sale or other disposition of all of substantially all of the assets of Newco or Newco GP, (b) the merger, consolidation, or conversion of Newco or Newco GP with or into another entity, (c) capital expenditures by Newco or Newco GP in excess of $200,000, (d) borrowings in excess of a working capital facility of $500,000.

10.9Relocation of Offices. The principal executive offices of Newco and Newco GP (or any subsidiary thereof, including, without limitation, Advisors, Capital, PMT (whether before or after Contribution)) shall be as determined by a majority vote of the Executive Committee, provided, however, that in the event that the Executive Committee determines to relocate the executive offices to 600 Travis, SMHG shall reimburse Newco and Newco GP for all relocation costs and absorb any costs and expenses of terminating the existing Salient Partners’ lease and PMT lease and such expenses shall not be considered and shall be specifically excluded for the purposes of calculating Fair Market Value, the value of the Put Option or Purchase Option, or the Allocable Share Amount, except to the extent such costs and expenses are included in determining SMHG’s net income.

10.10Commission Recapture. The parties agree that any recapture or commission rebates paid by Sanders Morris Harris Inc. with respect to investment funds managed by the Newco Group shall be reduced by 50% of the standard recapture of commission.

SECTION 11.Expenses. Each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated.

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SECTION 12.Notices. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be delivered by hand, sent via overnight courier, sent by facsimile, or mailed by first class certified or registered mail, return receipt requested, postage prepaid:

if to the Salient Parties

or any Principal, to: Salient Partners, L.P.

4625 San Felipe, Suite 740

Houston, Texas 77027

Facsimile: 713-629-0379

Attn: A. Haag Sherman

with a copy to: Jonathan W. DePriest

Chamberlain, Hrdlicka, White, Williams & Martin

1200 Smith Street, Suite 1400

Houston, Texas 77002

Facsimile: (713) 658-2553

if to SMHG, to: Sanders Morris Harris Group, Inc.

600 Travis, Suite 3100

Houston, Texas 77002

Attn: Robert E. Garrison II

Facsimile: (713) 993-4617

with a copy to: John T. Unger

Thompson & Knight LLP

333 Clay Street, Suite 3300

Houston, Texas 77002

Facsimile: (713) 654-1871

or to such other person at such other place as such party shall designate to the other parties in writing. If Notices provided in accordance with this Section 12 shall be deemed delivered (i) upon personal delivery with signature required, (ii) one Business Day after they have been sent to the recipient by reputable overnight courier service (charges prepaid and signature required) (iii) upon confirmation, answer back received, of successful transmission of a facsimile message containing such notice if sent between 9 a.m. and 5 p.m., local time of the recipient, on any Business Day, and as of 9 a.m. local time of the recipient on the next Business Day if sent at any other time, or (iv) three Business Days after deposit in the mail. The term “Business Day” as used in this Section 12 shall mean any day other than Saturday, Sunday or a day on which banking institutions are not required to be open in the State of Texas.

SECTION 13.Amendment and Waiver. This Agreement may be amended or modified only upon the written consent of the parties hereto. The rights and obligations of the of the parties under this Agreement may be waived only with the written consent of the party from whom such waiver is sought.

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SECTION 14.Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.

SECTION 15.Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

SECTION 16.Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to any choice of law provisions thereof.

SECTION 18.Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each party will be entitled to specific performance of the obligations of each other party under this Agreement. Each party hereby agrees that, in view of the uniqueness of the transaction contemplated by this Agreement, monetary damages may not be adequate compensation for any loss incurred by reason of any breach of the obligations under this Agreement and hereby agree to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

SECTION 19. Dispute Resolution.

19.1Negotiation. Any controversy or claim (“Dispute”) arising out of or relating to this Agreement shall be set forth in a written notice to the other party. Upon receipt of the written notice, the parties hereby agree to enter into a good faith negotiation to resolve the Dispute. If such good faith negotiation has not resolved the controversy or claim after 30 days, the parties hereby agree to enter into a formal arbitration proceeding pursuant to paragraph 19.2.

19.2 Arbitration. Any and all Disputes by either party arising from or related to this Agreement that are not settled pursuant to paragraph 19.1, except actions arising or requesting equitable or injunctive relief, shall be determined solely and exclusively by arbitration (“Arbitration”) in accordance with the Federal Arbitration Act and using the Commercial Arbitration Rules of the American Arbitration Association (the “AAA”). On any Dispute where the matter in controversy is less than $100,000, the parties shall us a single arbitrator. With respect to any Disputes with matters in controversy exceeding $100,000, if the parties agree on a single arbitrator within 30 days of commencement of the proceeding, a single arbitrator shall be used. If the parties do not so agree, a panel of three (3) arbitrators shall be used. Each party shall choose one (1) arbitrator, and the third arbitrator shall be chosen by the two (2) arbitrators selected by the parties. If the first two arbitrators cannot agree within 60 days after commencement of the proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the AAA in accordance with its then existing rules. For purposes of this paragraph, the “commencement of the proceeding” shall be deemed to be the date upon which a written demand for arbitration is received by the AAA from one of the parties. The arbitration hearing will be confidential and will be held in Houston, Texas. In any arbitration proceeding the parties shall be permitted to conduct discovery in accordance with the Federal Rules of Civil Procedure. The arbitrators shall provide the parties with a written opinion in connection with any award, and the arbitrators’ decision shall be final, binding and may be entered and enforced in any court judgment of competent jurisdiction.

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19.3Costs.Each party shall bear its own expenses in connection with alternative dispute resolution procedures set forth in this paragraph, except that the parties shall split equally the costs associated with any Arbitration.

19.4Communications. All communications made in connection with the alternative dispute resolution procedure set forth in this section shall be treated as communications for the purposes of settlement and as such shall be deemed to be confidential and inadmissible in any subsequent litigation by virtue of Rule 408 of the Federal Rules of Evidence.

SECTION 20.Entire Agreement. This Agreement (including the attachments hereto) contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and is in full substitution for any and all prior oral or written agreements and understandings between them related to such subject matter, and neither party hereto shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any representations, indemnities, covenants or agreements except as specifically set forth herein.

SECTION 21.Binding Effect; Persons Benefiting; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors, and assigns. Nothing in this agreement is intended or shall be construed to confer upon any entity or person other than the parties hereto and their respective heirs, personal representatives, successors, and assigns any right, remedy, or claim under or by reason of this Agreement or any part thereof. This Agreement may not be assigned by any parties hereto without the prior written consent of each of the other parties hereto; provided, however, that SMHG may assign its rights hereunder to a subsidiary of SMHG, directly or indirectly, controlled by SMHG.

SECTION 22.Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but both of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other party.

[Signatures on following page]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement or have caused this Agreement to be executed by their duly authorized representatives shown below:

SALIENT ADVISORS, L.P.
By:	Salient Partners GP, LLC, general partner
By:	Haag Sherman
	Name: Haag Sherman
	Title: Manager

SALIENT CAPITAL, L.P.
By:	Salient Partners GP, LLC, general partner
By:	Haag Sherman
	Name: Haag Sherman
	Title: Manager

SALIENT PARTNERS, L.P.
By:	Salient Partners GP, LLC, general partner
By:	Haag Sherman
	Name: Haag Sherman
	Title: Manager

SALIENT PARTNERS GP, LLC
By:	Haag Sherman
	Name: Haag Sherman
	Title: Manager

THE PRINCIPALS:
	John A. Blaisdell
	JOHN A. BLAISDELL

Andrew B. Linbeck

ANDREW B. LINBECK

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J. Matthew Newtown

J. MATTHEW NEWTOWN

Jeremy L. Radcliffe

JEREMY L. RADCLIFFE

A. Haag Sherman

A. HAAG SHERMAN

Adam L. Thomas

ADAM L. THOMAS

SANDERS MORRIS HARRIS GROUP, INC.
By:	George L. Ball
	Name: George L. Ball
	Title: Chairman of the Board

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EXHIBIT A

ASSIGNMENT OF INTERESTS

The undersigned (“Assignor”), the holder of _________________ (the “Securities”), representing a _____ % Sharing Ratio in ________________________ (the “Company”), for such good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, does hereby sell, assign, transfer and convey the Securities to ______________(“Assignee”), to have and to hold unto Assignee and its successors and assigns forever.

IN WITNESS WHEREOF, this Assignment has been executed and delivered effective as of April __, 2003.

ASSIGNOR:

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EX-21.1

Exhibit 21.1

SUBSIDIARIES OF SANDERS MORRIS HARRIS GROUP INC.

Subsidiary	State of Organization	Percentage Ownership		Names Under Which Subsidiary Does Business
SMH Capital Inc.	Texas	100	%	Sanders Morris Harris
				SMH Asset & Wealth Management
				SMH Partners
				Kissinger Financial Services
SMH Capital Advisors, Inc.	Texas	100	%	Cummer/Moyers Capital Advisors
Salient Capital Management, LLC	Texas	50	%
Select Sports Group Holdings, LLC	Texas	50	%
Select Sports Group, Ltd.	Texas	50	%
The Edelman Financial Center, LLC	Delaware	51	%
Fund II Mgt. Co., LLC	Delaware	99	%
SMM Corporate Management, LLC	Delaware	99	%
SOF Management, LLC	Delaware	100	%
SMH Life Science Management, LLC	Delaware	99	%
Signet Healthcare Partners, LLC	Delaware	50	%
SMH PEG Management, LLC	Delaware	53.2579	%
SMH PEG Management II, LLC	Delaware	51.36	%
SMH Colorado, LLC	Delaware	50	%
10 Sports Marketing GP, LLC	Delaware	50	%
10 Sports Marketing, LP	Delaware	64.95	%
PTC GP Management, LLC	Texas	50	%
SMH GP LP	Texas	100	%(8)
Environmental Opportunities Fund II, L.P.	Delaware	0.1655	%(1) (*)
Environmental Opportunities Fund II
(Institutional), L.P.	Delaware	0.043	%(1) (*)
Corporate Opportunities Fund, L.P.	Delaware	0.339	%(2) (*)
Corporate Opportunities Fund
(Institutional), L.P.	Delaware	0.0629	%(2) (*)
Life Sciences Opportunity Fund, L.P.	Delaware	16.4811	%(3) (*)
Life Sciences Opportunity Fund
(Institutional), L.P.	Delaware	0.9901	%(3) (*)
Life Sciences Opportunities Fund II, L.P.	Delaware	0.5	%(4) (*)
Life Sciences Opportunities Fund II
(Institutional), L.P.	Delaware	0.5	%(4) (*)
SMH Credit Opportunity Fund, L.P.	Delaware	44.575	%(5) (*)
Edelman Business Services, LLC	Delaware	100	%(6)
Edelman Mortgage Services, LLC	Delaware	100	%(6)
Edelman Financial Services, LLC	Delaware	100	%(6)
Edelman Financial Advisors, LLC	Delaware	10	%
Salient Partners, L.P.	Texas	50	%
Salient Trust Co., LTA	Texas	100	%(7)
Salient Advisors, L.P.	Texas	100	%(7)
Salient Capital, L.P.	Delaware	100	%(7)
The Endowment Fund GP, L.P.	Delaware	26	%
The Endowment Fund Management, LLC	Delaware	26	%
The Rikoon Group, LLC	Delaware	75	%
The Dickenson Group, LLC	Ohio	50.1	%

(1) By Fund II Mgt. Co., LLC

(2) By SMM Corporate Management, LLC

(3) By SMH Life Science Management, LLC

(4) By Signet Healthcare Partners, LLC

(5) By SMH GP LP

(6) By The Edelman Financial Center, LLC

(7) By Salient Partners, L.P.

(8) By SMH Capital Advisors, Inc.

(*) Does not include any investment by the Company as a limited partner.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Sanders Morris Harris Group Inc.:

We consent to incorporation by reference in the registration statements (Nos. 333-72325, 333-37326 and 333-99859) on Form S-8 and (Nos. 333-122973, 333-126672, 333-134448, and 333-140506) on Form S-3 of our reports dated March 13, 2008 with respect to the consolidated balance sheets of Sanders Morris Harris Group Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and the effectiveness of internal control over financial reporting as of December 31, 2007 which reports appear in the December 31, 2007 annual report on Form 10-K of Sanders Morris Harris Group Inc.

As described in note 2, the Company has restated the consolidated statement of cash flows for the year ended December 31, 2005.

As described in note 1, the Company changed its method for accounting for stock-based compensation in 2006.

/s/ KPMG LLP

KPMG LLP

Houston, Texas

March 13, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ben T. Morris, certify that:

1.I have reviewed this annual report on Form 10-K of Sanders Morris Harris Group Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:March 13, 2008

/s/ BEN T. MORRIS

Ben T. Morris, Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Rick Berry, certify that:

1.I have reviewed this annual report on Form 10-K of Sanders Morris Harris Group Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:March 13, 2008

/s/ RICK BERRY

Rick Berry, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Sanders Morris Harris Group Inc. (the “Company”) on Form 10-K for the year ended December 31, 2007 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Ben T. Morris, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ BEN T. MORRIS

Ben T. Morris

Chief Executive Officer

March 13, 2008

A signed original of this written statement required by Section 906 has been provided to Sanders Morris Harris Group Inc. and will be retained by Sanders Morris Harris Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Sanders Morris Harris Group Inc. (the “Company”) on Form 10-K for the year ended December 31, 2007 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Rick Berry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ RICK BERRY

Rick Berry

Chief Financial Officer

March 13, 2008

A signed original of this written statement required by Section 906 has been provided to Sanders Morris Harris Group Inc. and will be retained by Sanders Morris Harris Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request.