10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

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)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 Exchange Act).  o Yes  x No

As of August 8, 2008, the registrant had 27,988,195 outstanding shares of common stock, par value $0.01 per share.

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007	2
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007 (unaudited)	3
	Condensed Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended June 30, 2008 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	31
Item 6.	Exhibits	32

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2008 and December 31, 2007

(in thousands, except share and per share amounts)

	June 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
Cash and cash equivalents	$	20,087		$	46,503
Receivables, net of allowance of $3,353 and $2,330, respectively
Broker-dealers and clearing organizations		478			232
Customers		26,047			25,147
Related parties		9,706			14,676
Other		1,094			4,408
Deposits with clearing organizations		1,060			1,095
Securities owned		78,519			84,898
Securities available for sale		721			759
Furniture, equipment, and leasehold improvements, net		20,915			16,613
Other assets and prepaid expenses		1,867			2,329
Goodwill, net		134,852			88,461
Other intangible assets, net		13,128			6,427
Total assets	$	308,474		$	291,548
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	26,892		$	29,523
Borrowings		450			200
Deferred tax liability, net		492			137
Securities sold, not yet purchased		8,861			15,432
Payable to broker-dealers and clearing organizations		3,017			2,973
Total liabilities		39,712			48,265
Commitments and contingencies
Minority interests		17,947			20,105
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; 29,039,105 and 25,765,806 shares issued,
respectively		290			258
Additional paid-in capital		230,778			204,596
Retained earnings		26,011			23,422
Accumulated other comprehensive income		157			161
Treasury stock, at cost, 1,049,085 and 929,285 shares, respectively		(6,421	)		(5,259	)
Total shareholders' equity		250,815			223,178
Total liabilities and shareholders' equity	$	308,474		$	291,548

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

2

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenue:
Investment advisory and related services	$	22,591		$	17,010		$	43,448		$	31,870
Commissions		14,628			13,808			28,617			27,326
Investment banking		6,660			9,086			9,025			19,245
Principal transactions		8,275			2,776			10,992			6,098
Interest and dividends		1,003			1,958			2,173			3,898
Other income		3,554			1,559			7,272			3,243
Total revenue		56,711			46,197			101,527			91,680
Expenses:
Employee compensation and benefits		29,147			27,236			57,585			53,752
Floor brokerage, exchange, and clearance fees		1,389			1,876			2,846			3,381
Communications and data processing		3,240			2,861			6,118			5,131
Occupancy		3,345			2,936			6,551			5,967
Interest		6			9			11			21
Amortization of intangible assets		234			139			403			139
Other general and administrative		8,166			8,708			15,328			14,381
Total expenses		45,527			43,765			88,842			82,772
Income before equity in income of limited partnerships,
minority interests, and income taxes		11,184			2,432			12,685			8,908
Equity in income of limited partnerships		4,501			3,902			2,752			3,587
Income before minority interests and income taxes		15,685			6,334			15,437			12,495
Minority interests in net income of consolidated companies		(5,371	)		(4,521	)		(8,472	)		(6,360	)
Income before income taxes		10,314			1,813			6,965			6,135
Provision for income taxes		4,122			708			2,880			2,289
Net income	$	6,192		$	1,105		$	4,085		$	3,846
Earnings per common share:
Basic	$	0.23		$	0.04		$	0.16		$	0.16
Diluted	$	0.23		$	0.04		$	0.16		$	0.15
Weighted average common shares outstanding:
Basic		26,760			24,731			25,739			24,671
Diluted		26,918			25,075			25,932			25,007

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

3

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the six months ended June 30, 2008

(in thousands, except share and per share amounts)

(unaudited)

	Amounts					Shares
Common stock:
Balance, beginning of period	$	258					25,765,806
Stock issued for acquisitions		28					2,859,996
Stock issued pursuant to employee benefit plan		4					413,303
Balance, end of period		290					29,039,105
Additional paid-in capital:
Balance, beginning of period		204,596
Stock issued for acquisitions		23,905
Stock issued pursuant to employee benefit plan; including tax benefit		841
Stock-based compensation expense		1,436
Balance, end of period		230,778
Retained earnings:
Balance, beginning of period		23,422
Cumulative effect of adoption of a new accounting principle		893
Cash dividends ($0.09 per share)		(2,389	)
Net income		4,085		4,085
Balance, end of period		26,011		4,085
Accumulated other comprehensive income (loss):
Balance, beginning of period		161
Net change in unrealized appreciation
on securities available for sale		(5	)	(5	)
Income tax benefit on change in unrealized
appreciation on securities available for sale		1		1
Balance, end of period		157		(4	)
Comprehensive income				4,081
Treasury stock:
Balance, beginning of period		(5,259	)				(929,285	)
Acquisition of treasury stock		(1,162	)				(119,800	)
Balance, end of period		(6,421	)				(1,049,085	)
Total shareholders' equity and common shares outstanding	$	250,815					27,990,020

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

4

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2008 and 2007

(in thousands)

(unaudited)

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,085		$	3,846
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized gain on securities available for sale		-			(1	)
(Gain) loss on sales of assets		89			(3	)
Depreciation		1,995			1,647
Provision for bad debts		805			3,047
Stock-based compensation expense		1,436			1,193
Amortization of intangible assets		403			139
Deferred income taxes		354			(661	)
Equity in income of limited partnerships		(2,752	)		(3,587	)
Minority interests in net income of consolidated companies		8,472			6,360
Unrealized and realized (gain) loss on not readily marketable
securities owned, net		(954	)		1,525
Not readily marketable securities owned received for payment
of investment banking fees		(581	)		(1,181	)
Net change in:
Receivables		6,343			(11,601	)
Deposits with clearing organizations		35			(7	)
Marketable securities owned		5,264			3,340
Other assets and prepaid expenses		161			(382	)
Accounts payable and accrued liabilities		(3,056	)		(4,375	)
Securities sold, not yet purchased		(6,571	)		(2,330	)
Payable to broker-dealers and clearing organizations		44			10,029
Net cash provided by operating activities		15,572			6,998
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(6,544	)		(1,662	)
Acquisitions, net of cash acquired of $126and $59, respectively		(29,058	)		(4,649	)
Purchases of not readily marketable securities owned		(205	)		(24,376	)
Proceeds from sales of not readily marketable securities owned		6,500			5,679
Proceeds from sales and maturities of securities available for sale		33			333
Proceeds from sales of assets		158			35
Net cash used in investing activities		(29,116	)		(24,640	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock		(1,162	)		-
Proceeds from shares issued pursuant to employee benefit plan		659			302
Tax benefit of stock options exercised		186			86
Proceeds from borrowings		250			145
Repayment of borrowings		-			(500	)
Investments by minority interests		-			40
Distributions to minority interests		(10,553	)		(5,367	)
Payments of cash dividends		(2,252	)		(2,214	)
Net cash used in financing activities		(12,872	)		(7,508	)
Net decrease in cash and cash equivalents		(26,416	)		(25,150	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		46,503			68,861
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	20,087		$	43,711

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

5

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.  BASIS OF PRESENTATION

Nature of Operations

Sanders Morris Harris Group Inc. (“SMHG” or “the Company”) provides a broad range of financial and other professional services, including 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’s operating subsidiaries include 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”), Leonetti & Associates, LLC (“Leonetti”), Miller-Green Financial Services, Inc. (“Miller-Green”), and Select Sports Group, Ltd. (“SSG”). The Company serves a diverse group of institutional, corporate, and individual clients.

Principles of Consolidation

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

In management's opinion, the unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of our consolidated financial position at June 30, 2008 and December 31, 2007, our consolidated results of operations for the three and six months ended June 30, 2008 and 2007, our consolidated changes in shareholders’ equity for the six months ended June 30, 2008, and our consolidated cash flows for the six months ended June 30, 2008 and 2007. All adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year.

These financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, 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.

6

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 U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 was effective for the Company on January 1, 2008. As a result of the adoption of SFAS No. 157, the Company recorded an increase in retained earnings of $893,000 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 was effective for the Company on January 1, 2008 and did not have an impact on the Company’s financial statements. The Company did not elect the fair value option as permitted by SFAS No. 159.

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 June 30, 2008, the Company had $17.9 million in minority interests that would be reported as a component of equity under the requirements of SFAS No. 160.

Reclassifications

Certain reclassifications have been made to the 2007 condensed consolidated financial statements to conform them to the 2008 presentation. These reclassifications had no effect on net income or stockholders’ equity.

2.  ACQUISITIONS

On April 1, 2008, the Company acquired Miller-Green for cash consideration of $3.0 million. At acquisition, Miller-Green, based in Houston, Texas, managed approximately $400 million in assets. The acquisition was accounted for as a purchase and, accordingly, the financial information of Miller-Green has been included in the Company’s consolidated financial statements from April 1, 2008. The consideration exceeded the fair market value of identifiable net tangible assets by $3.0 million, which has been recorded as other intangible assets.

On February 29, 2008, the Company acquired a 50.1% membership interest in Leonetti for consideration of $5.75 million paid in a combination of cash and shares of the Company’s common stock. The Company agreed to purchase additional 10% membership interests in March 2013, 2014, and 2015, payable in a combination of cash and shares of the Company’s common stock. The purchase price for the additional membership interests will be based on a multiple of the net income of Leonetti for the previous year. At acquisition, Leonetti, based in Buffalo Grove, Illinois, managed approximately $400 million in assets. The acquisition was accounted for as a purchase and, accordingly, the financial information of Leonetti has been included in the Company’s consolidated financial statements from February 29, 2008. The consideration exceeded the fair market value of identifiable net tangible assets by $6.1 million, which has been recorded as goodwill and other intangible assets.

7

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. Edelman, based in Fairfax, Virginia, manages approximately $3.6 billion in assets. On May 12, 2008, the Company purchased an additional 25% membership interest in Edelman. The Company paid an amount determined based upon Edelman’s 2007 pretax income (the “Second Tranche Consideration”). The Second Tranche Consideration of $44.4 million, which was paid in a combination of cash and the Company’s common stock, has been recorded as goodwill.

3.  SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

Securities owned and securities sold, not yet purchased as of June 30, 2008 and December 31, 2007 were as follows:

	June 30, 2008				December 31, 2007
			Sold, Not Yet				Sold, Not Yet
	Owned		Purchased		Owned		Purchased
	(in thousands)
Marketable:
Corporate stocks and options	$	18,984	$	8,861	$	23,799	$	15,432
Total marketable		18,984		8,861		23,799		15,432
Not readily marketable:
Limited partnerships		49,547		-		53,012		-
Warrants		9,430		-		5,649		-
Equities and options		558		-		2,438		-
Total not readily marketable		59,535		-		61,099		-
Total	$	78,519	$	8,861	$	84,898	$	15,432

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.

8

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are as follows:

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

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

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

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

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

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

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

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

9

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

The following table sets forth by level within the fair value hierarchy securities owned and securities sold, not yet purchased as of June 30, 2008:

	Level 1		Level 2		Level 3		Total
	(in thousands)
Securities owned	$	18,618	$	8,816	$	51,085	$	78,519
Securities sold, not yet purchased		8,661		200		-		8,861

The following table sets forth a summary of changes in the fair value of the Company’s level 3 securities owned for the three and six months ended June 30, 2008:

	Level 3 Securities Owned
	Three Months Ended			Six Months Ended
	June 30, 2008			June 30, 2008
	(in thousands)
Balance, beginning of period	$	53,776		$	55,880
Realized losses		(175	)		(175	)
Unrealized gains relating to securities still held at the reporting date		3,859			1,540
Purchases, issuances, and settlements		(6,375	)		(6,160	)
Balance, end of period	$	51,085		$	51,085

10

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

	Three Months Ended				Six Months Ended
	June 30, 2008				June 30, 2008
			Equity in Income				Equity in Income
	Principal		of Limited		Principal		of Limited
	Transactions		Partnerships		Transactions		Partnerships
	(in thousands)
Unrealized gains relating to securities still held at the reporting date	$	826	$	3,033	$	256	$	1,284

4. SECURITIES AVAILABLE FOR SALE

Securities available for sale at June 30, 2008 were as follows:

	Amortized		Gross Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
	(in thousands)
U.S. government and agency obligation	$	100	$	2	$	-	$	102
Marketable equity securities		359		260		-		619
Total	$	459	$	262	$	-	$	721

The contractual maturity of the debt security available for sale at June 30, 2008 was as follows:

	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Over 25 years	$	100	$	102

The following table sets forth by level within the fair value hierarchy securities available for sale as of June 30, 2008:

	Level 1		Level 2		Level 3		Total
	(in thousands)
Securities available for sale	$	619	$	102	$	-	$	721

Gross realized gains on sales of securities available for sale were $1,000 for the six months ended June 30, 2007. No such gains were recorded for the six months ended June 30, 2008. No realized losses on securities available for sale were recorded for the six months ended June 30, 2008 and 2007.

5. BORROWINGS

During May 2005, the Company entered into a $15.0 million revolving credit facility with a bank. In May 2008, this credit agreement was amended to decrease the revolving credit facility to the lesser of $5.0 million or the loan value of certain collateral pledged to secure the revolving credit facility. The line of credit expires on May 31, 2009, unless extended. Borrowings under the line of credit bear interest at LIBOR plus 200 basis points. Interest is payable quarterly on this line of credit. The credit facility is secured by a pledge of ownership interests in three of the Company’s subsidiaries. Debt covenants require the Company to maintain certain debt to EBITDA and liquidity to funded debt ratios, as well as minimum assets under management. At June 30, 2008, the Company was in compliance with all covenants. The line of credit has a commitment fee of 1/8% per annum. There was no outstanding balance on the line of credit at June 30, 2008. The amount of available borrowings under the line of credit, which is reduced by letters of credit issued by the Company, was $3.8 million at June 30, 2008.

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During December 2005, Salient entered into a $2.5 million revolving credit facility with a bank. In April 2008, this credit agreement was amended to increase the revolving credit facility to $5.0 million. The line of credit expires in March 2009. Borrowings under the line of credit bear interest at LIBOR plus 165 basis points. The interest rate of Salient’s borrowings ranged from 4.03% to 6.51% during 2008 and was 4.13% at June 30, 2008. 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 $450,000 at June 30, 2008.

6. INCOME TAXES

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
	(in thousands)
Expected federal tax at statutory rate of 34% for 2008 and 35% for 2007	$	3,507	$	634	$	2,368	$	2,147
State and other income taxes		615		74		512		142
Total	$	4,122	$	708	$	2,880	$	2,289

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.

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7. ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS

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

The following table sets forth pertinent information regarding stock option transactions for the six months ended June 30, 2008:

				Weighted
	Number			Average
	of Shares			Exercise Price
Outstanding at January 1, 2008		856,385		$	8.30
Granted		50,000			8.17
Exercised		(121,044	)		4.82
Outstanding at June 30, 2008		785,341			8.83
Options exercisable at June 30, 2008		687,008			8.26
Incentive award shares available for grant at June 30, 2008		2,652,499

During the six months ended June 30, 2008 and 2007, 121,044 and 37,500 options were exercised for which the Company received proceeds of $583,000 and $176,000, respectively. The Company recognized pretax compensation expense of $96,000 and $85,000 during the six months ended June 30, 2008 and 2007, respectively, related to stock options. The portion of stock-based compensation expense related to stock options that was unrecognized at June 30, 2008 was $197,000.

The following table summarizes certain information related to restricted common stock grants at June 30, 2008:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Nonvested at January 1, 2008		526,741	$	13.39
Nonvested at June 30, 2008		685,929		11.48
For the six months ended June 30, 2008:
Granted		293,733		8.76
Vested		133,071		13.08
Forfeited		1,474		9.99

Employees deferred compensation of $76,000 and $126,000 during the six months ended June 30, 2008 and 2007, respectively, that was used to purchase restricted common stock. The Company recognized pretax compensation expense of $1.3 million and $1.1 million during the six months ended June 30, 2008 and 2007, respectively, related to its restricted common stock plan. At June 30, 2008, total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock was $5.6 million.

8. 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 119,800 shares of its common stock during the six months ended June 30, 2008 related to this program.

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9. EARNINGS PER COMMON SHARE

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
	(in thousands, except per share amounts)
Net income	$	6,192	$	1,105	$	4,085	$	3,846
Earnings per common share:
Basic	$	0.23	$	0.04	$	0.16	$	0.16
Diluted	$	0.23	$	0.04	$	0.16	$	0.15
Weighted average number of common shares outstanding:
Basic		26,760		24,731		25,739		24,671
Incremental common shares issuable under stock option plan, net		158		344		193		336
Diluted		26,918		25,075		25,932		25,007

Outstanding stock options of 360,000 and 230,000 for the three months ended June 30, 2008 and 2007, respectively, and 310,000 and 305,000 for the six months ended June 30, 2008 and 2007, respectively, have not been included in diluted earnings per common share because to do so would have been antidilutive for the periods presented.

10. COMMITMENTS AND CONTINGENCIES

The Company has issued letters of credit in the amounts of $630,000, $245,000, $230,000, $144,000, and $92,000 to the owners of five of the offices that we lease to secure payment of our lease obligations for those facilities. The Company has issued a letter of credit in the amount of $100,000 to secure the payment of the deductible portion of the Company’s workers compensation insurance policy.

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 $20.0 million to cover its start-up expenses of which $10.0 million has been advanced and subsequently repaid. 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. There was no outstanding balance on the Company’s loan to EFA at June 30, 2008. 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 Albuquerque, Atlanta, Baltimore, Chicago, Columbus, Dallas, Detroit, Houston, Los Angeles, Miami, New York City, Orlando, Phoenix, Portland, Oregon, San Diego, and San Francisco.

On May 9, 2008, the Company received notice from the management group of Salient Partners, L.P. (“Salient Partners”) and The Endowment Fund GP, L.P. (“TEF GP”), the general partner, and The Endowment Fund Management, LLC (“TEF LLC”), the investment advisor, of The Endowment Master Fund, L.P. and The Endowment Registered Fund, L.P., initiating a process under which they have the option, if they so elect, to acquire SMHG’s interest in Salient Partners, TEF GP, and TEF LLC. The process for determining the price is described below. The parties did not agree on a price within the 30-day period described below and a process of determining the price through independent appraisers has commenced and is ongoing.

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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 Partners (the “Salient Owners”), pursuant to which Salient Partners was formed, and (b) the Contribution and Option Agreement dated as of April 28, 2003, among the Company, the Salient Owners, and MWY Consulting, LLC, pursuant to which the Company acquired an interest in TEF GP, TEF LLC, and Endowment Advisers, L.P. (“EA LP”), subsequent to May 1, 2008, the Company and the Salient Owners have the right, at any time, exercisable by written notice to the other party to buy each other’s ownership interests in Salient Partners, TEF GP, TEF LLC, 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 Partners, TEF GP, TEF LLC, and EA LP, will be determined by independent appraisers selected by the parties. Following determination of the price, the Salient Owners have the first right exercisable within ten days following the price determination to exercise their right to buy the Company’s interest in Salient Partners, TEF GP, TEF LLC, 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 Owners do not exercise their right to purchase the Company’s interest in Salient Partners, TEF GP, TEF LLC, and EA LP, the Company has the right to purchase the Salient Owners’ interests in such entities. If the Company exercises its right to purchase the Salient Owners’ interest, certain principals of Salient Partners 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). In the event of a sale, the Company would be obligated to fund an incentive plan payable to employees of Salient in an amount dependant upon the purchase price. 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 June 30, 2008.

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

In May 2005, SMH acted as placement agent for a private placement of $50.0 million in convertible preferred stock of Ronco Corporation, a company involved 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.  In 2007, SMH wrote off a $3.0 million subordinated working capital loan that it made to Ronco in 2006.  SMH is a defendant in one proceeding related to Ronco.

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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.

The Company and its subsidiaries have obligations under operating leases that expire through 2018 with initial noncancelable terms in excess of one year.

11. BUSINESS SEGMENT INFORMATION

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

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.

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

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The following summarizes certain financial information of each reportable business segment for the three and six months ended June 30, 2008 and 2007, respectively. SMHG does not analyze asset information in all business segments.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
	(in thousands)
Revenue:
Asset/Wealth Management	$	31,918		$	26,021		$	62,537		$	49,705
Capital Markets:
Investment banking		4,742			6,580			5,398			13,804
Institutional brokerage		4,981			3,721			8,738			8,365
Prime brokerage services		10,664			8,802			21,184			17,671
Capital Markets Total		20,387			19,103			35,320			39,840
Corporate Support and Other		4,406			1,073			3,670			2,135
Total	$	56,711		$	46,197		$	101,527		$	91,680
Income (loss) before equity in income (loss) of limited partnerships, minority interests, and income taxes:
Asset/Wealth Management	$	9,605		$	6,773		$	18,801		$	13,205
Capital Markets:
Investment banking		542			1,634			(2,630	)		3,205
Institutional brokerage		382			185			373			811
Prime brokerage services		940			936			1,447			2,009
Capital Markets Total		1,864			2,755			(810	)		6,025
Corporate Support and Other		(285	)		(7,096	)		(5,306	)		(10,322	)
Total	$	11,184		$	2,432		$	12,685		$	8,908
Equity in income (loss) of limited partnerships:
Asset/Wealth Management	$	4,395		$	3,907		$	4,858		$	3,319
Capital Markets:
Investment banking		-			-			-			-
Institutional brokerage		-			-			-			-
Prime brokerage services		-			-			-			-
Capital Markets Total		-			-			-			-
Corporate Support and Other		106			(5	)		(2,106	)		268
Total	$	4,501		$	3,902		$	2,752		$	3,587
Minority interests in net income of consolidated companies:
Asset/Wealth Management	$	(5,371	)	$	(4,521	)	$	(8,472	)	$	(6,360	)
Capital Markets:
Investment banking		-			-			-			-
Institutional brokerage		-			-			-			-
Prime brokerage services		-			-			-			-
Capital Markets Total		-			-			-			-
Corporate Support and Other		-			-			-			-
Total	$	(5,371	)	$	(4,521	)	$	(8,472	)	$	(6,360	)
Income (loss) before income taxes:
Asset/Wealth Management	$	8,629		$	6,159		$	15,187		$	10,164
Capital Markets:
Investment banking		542			1,634			(2,630	)		3,205
Institutional brokerage		382			185			373			811
Prime brokerage services		940			936			1,447			2,009
Capital Markets Total		1,864			2,755			(810	)		6,025
Corporate Support and Other		(179	)		(7,101	)		(7,412	)		(10,054	)
Total	$	10,314		$	1,813		$	6,965		$	6,135

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12. SUPPLEMENTAL CASH FLOW INFORMATION

	Six Months Ended June 30,
	2008			2007
	(in thousands)
Cash payment for income taxes, net	$	556		$	3,748
Cash paid for interest		9			16
Noncash investing activities:
Acquisitions:
Receivables		10			-
Accounts payable and accrued liabilities		(290	)		-
Minority interests		77			-
Common stock		(23,933	)		-
Noncash financing activities:
Dividends declared not yet paid		1,259			1,112

13. RELATED PARTIES

The Company had receivables from related parties totaling $9.7 million at June 30, 2008, primarily consisting of $4.5 million of advances to unconsolidated related entities to fund operating expenses, $3.9 million of notes receivable from employees and consultants representing loans made to induce the employees and consultants to affiliate with the Company, and $715,000 of management fees receivable from the limited partnerships that the Company manages.

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

Special Cautionary Notice Regarding Forward-Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements may relate to such matters as anticipated financial performance, future revenue or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. We caution you that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, include, but are not limited to (1) trading volume in the securities markets; (2) volatility of the securities markets and interest rates; (3) changes in regulatory requirements that could affect the demand for our services or the cost of doing business; (4) general economic conditions, both domestic and foreign, especially in the regions where we do business; (5) changes in the rate of inflation and related impact on securities markets; (6) competition from existing financial institutions and other new participants in the securities markets; (7) legal developments affecting the litigation experience of the securities industry; (8) successful implementation of technology solutions; (9) changes in valuations of our trading and warrant portfolios resulting from mark-to-market adjustments; (10) dependence on key personnel; and (11) demand for our services; and (12) litigation and securities law liabilities. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007. The Company does not undertake to publicly update or revise any forward-looking statements.

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

Overview

The Company is a holding company that, through its subsidiaries and affiliates, provides 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.

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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.

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.

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) fees from asset-based advisory services, asset management, financial planning, and fiduciary services, (2) commission revenue from wealth advisory, prime and institutional brokerage transactions, (3) investment banking revenue from corporate finance fees, merger and acquisition fees, and merchant banking fees, and (4) principal transactions. We also earn interest on cash held and receive dividends from the equity and fixed income securities held in our corporate capital accounts, 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 the second quarter of 2008, compensation and benefits represented 64.0% of total expenses and 51.4% of total revenue, compared to 62.2% of total expenses and 59.0% of total revenue during the second quarter of 2007. During the first six months of 2008, compensation and benefits represented 64.8% of total expenses and 56.7% of total revenue, compared to 64.9% of total expenses and 58.6% of total revenue for the same period in 2007.

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.

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Results of Operations

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Total revenue was $56.7 million for the second quarter of 2008 compared to $46.2 million for the same quarter in 2007, an increase of $10.5 million, or 22.8%, primarily reflecting increases in revenue from investment advisory and related services and principal transactions revenue partially offset by a decrease in investment banking revenue. Total expenses for the second quarter of 2008 increased $1.7 million, or 4.0%, to $45.5 million from $43.8 million in the same quarter of the previous year principally due to higher employee compensation and benefits due to the revenue growth in the asset/wealth management segment. Equity in income of limited partnerships increased to $4.5 million for the second quarter of 2008 compared to $3.9 million for the second quarter of 2007, primarily due to an increase in the value of the investment portfolio of one of the limited partnerships that we manage. Net income was $6.2 million, or $0.23 per diluted common share, for the second quarter of 2008 compared to net income of $1.1 million, or $0.04 per diluted common share, for the second quarter of 2007.

Revenue from investment advisory and related services increased to $22.6 million in the second quarter of 2008 from $17.0 million in the same quarter of 2007, primarily due to higher assets under management at Salient, as well as the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a retail branch in Boca Raton, Florida. Commission revenue increased to $14.6 million in the second quarter of 2008 from $13.8 million for the same period in 2007, primarily as a result of an increase in trading volume in the asset/wealth management segment. Investment banking revenue decreased to $6.7 million during the second quarter of 2008 from $9.1 million in the same period of 2007, principally due to decreases in private placement income and merger and acquisition fees. Principal transactions revenue increased from $2.8 million for the second quarter of 2007 to $8.3 million for the second quarter of 2008, primarily as the result of an increase in the value of our investment portfolios. Also, principal transactions revenue from the sale of fixed income products increased to $3.4 million during the second quarter of 2008 from $1.1 million in the same period of 2007. Interest and dividend income decreased to $1.0 million in the second quarter of 2008 from $2.0 million in the same period last year due to a decrease in the amount of money in the firm’s accounts that are earning interest income and a decline in interest rates. Other income increased from $1.6 million during the second quarter of 2007 to $3.6 million during the same period in 2008 reflecting growth in hedge fund servicing revenue and third-party marketing fees.

During the three months ended June 30, 2008, employee compensation and benefits increased to $29.1 million from $27.2 million in the same period last year due to higher employee compensation and benefits resulting from the revenue growth in the asset/wealth management segment. During the three months ended June 30, 2008, floor brokerage, exchange, and clearance fees decreased to $1.4 million from $1.9 million in the same period last year as the result of lower trading volume in the proprietary trading operations of our Concept Capital division. Communications and data processing costs increased to $3.2 million in the second quarter of 2008 from $2.9 million in the same period last year, primarily due to higher clearing firm service fees. Occupancy costs were $3.3 million in the second quarter of 2008 compared to $2.9 million in the second quarter of 2007 due to an increase in the amount of rental space occupied by Salient, the addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a new retail branch in Boca Raton, Florida. Amortization of intangible assets increased to $234,000 for the second quarter of 2008 compared to $139,000 for the second quarter of 2007 due to the addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Other general and administrative expenses decreased to $8.2 million during the second quarter of 2008 from $8.7 million in the second quarter of last year. The decrease in other general and administrative expenses was primarily due to a decrease in the provision for bad debts which was partially offset by increases in outside sales commissions and legal expenses.

Our effective tax rate was 40.0% for the three months ended June 30, 2008 compared to 39.1% for the three months ended June 30, 2007. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of state income taxes and certain nondeductible expenses.

22

RESULTS BY SEGMENT

Asset/Wealth Management

	Three Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	31,918	$	26,021
Income before income taxes	$	8,629	$	6,159

Revenue from asset/wealth management increased to $31.9 million from $26.0 million and income before income taxes increased to $8.6 million from $6.2 million. Investment advisory and related services revenue increased to $22.6 million from $17.0 million, primarily due to higher assets under management at Salient, as well as the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a retail branch in Boca Raton, Florida. Total expenses increased to $22.3 million from $19.2 million, primarily due to increased employee compensation related to the higher revenue. Asset/wealth management also experienced increases in occupancy costs, outside sales commissions, and legal expenses. Equity in income of limited partnerships increased to $4.4 million from $3.9 million, principally due to an increase in the value of the investment portfolio of one of the limited partnerships that we manage. Minority interests in net income of consolidated subsidiaries, which reduces the Company’s pretax income, increased to $5.4 million from $4.5 million, principally due to increases in the values of the investment portfolios of the limited partnerships.

Capital Markets

InvestmentBanking

	Three Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	4,742	$	6,580
Income before income taxes	$	542	$	1,634

Revenue from investment banking decreased to $4.7 million from $6.6 million and income before income taxes decreased to $542,000 from $1.6 million. The revenue decrease is due to decreases in private placement income and merger and acquisition fees caused by weakness in the financial markets that has adversely affected the volume and timing of our clients’ investment banking transactions. Total expenses decreased to $4.2 million from $4.9 million. The decrease in expenses is attributable to decreased employee compensation, which is partially tied to revenue.

Institutional Brokerage

	Three Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	4,981	$	3,721
Income before income taxes	$	382	$	185

23

Revenue from institutional brokerage increased to $5.0 million from $3.7 million and income before income taxes increased to $382,000 from $185,000. Commission revenue increased to $3.9 million from $2.4 million reflecting a $1.3 million increase in commissions from the sale of collateralized debt obligations in our fixed income division. Total expenses increased to $4.6 million from $3.5 million, primarily due to increased employee compensation related to the higher revenue.

Prime Brokerage Services

	Three Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	10,664	$	8,802
Income before income taxes	$	940	$	936

Revenue from prime brokerage services increased to $10.7 million from $8.8 million and income before income taxes increased to $940,000 from $936,000. Principal transactions revenue increased to $3.3 million from $1.6 million reflecting an increase in revenue earned from the sale of fixed income products. In addition, commission revenue and third-party marketing fees increased to $6.7 million from $6.1 million reflecting growth in hedge fund servicing revenue. Total expenses increased to $9.7 million from $7.9 million reflecting increased compensation and outside sales commissions related to the increased revenue.

Corporate Support and Other

	Three Months Ended June 30,
	2008			2007
	(in thousands)
Revenue	$	4,406		$	1,073
Loss before income taxes	$	(179	)	$	(7,101	)

Revenue from corporate support and other increased to $4.4 million from $1.1 million and the loss before income taxes decreased to $179,000 from $7.1 million. Revenue from principal transactions, which consists principally of changes in the values of our investment portfolios, increased to $3.7 million from a loss of $25,000. Total expenses decreased to $4.7 million from $8.2 million, primarily due to a $3.0 million provision for bad debts related to a note receivable that was recorded in the second quarter of 2007. Equity in income (loss) of limited partnerships increased to income of $106,000 from a loss of $5,000, principally due to an increase in the value of our direct investment in one limited partnership. This increase was partially offset by a decrease in the value of our direct investment in another limited partnership.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Total revenue was $101.5 million for the six months ended June 30, 2008 compared to $91.7 million for the same period in 2007, an increase of $9.8 million, or 10.7%, primarily reflecting increases in revenue from investment advisory and related services and principal transactions revenue partially offset by a decline in investment banking revenue. Total expenses for the six months ended June 30, 2008 increased $6.0 million, or 7.3%, to $88.8 million from $82.8 million in the same period of the previous year, principally due to higher employee compensation and benefits due to the revenue growth in the asset/wealth management segment. Also, communications and data processing expense increased primarily due to higher clearing firm service fees. Equity in income of limited partnerships was $2.8 million for the six months ended June 30, 2008 compared to $3.6 million for the same period in 2007, principally due to a smaller increase in the value of our investments in limited partnerships in 2008 compared to 2007. Net income was $4.1 million, or $0.16 per diluted common share, for the six months ended June 30, 2008 compared to net income of $3.8 million, or $0.15 per diluted common share, for the same period in 2007.

24

Revenue from investment advisory and related services increased to $43.4 million for the six months ended June 30, 2008 from $31.9 million in the same period of 2007, primarily due to the conversion of Edelman’s assets under management from a commission-based to a fee-based compensation structure and to the addition of assets under management at Salient. Additionally, the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a retail branch in Boca Raton, Florida, contributed to the growth in investment advisory fee revenue. Commission revenue increased to $28.6 million for the six months ended June 30, 2008 from $27.3 million for the same period in 2007, primarily as a result of an increase in trading volume in the asset/wealth management division. Investment banking revenue decreased to $9.0 million for the six months ended June 30, 2008 from $19.2 million in the same period of 2007, principally due to decreases in private placement income and merger and acquisition fees. Principal transactions revenue increased from $6.1 million for the six months ended June 30, 2007 to $11.0 million for the same period in 2008, primarily as the result of increases in the value of our investment portfolios. Also, principal transactions revenue from the sale of fixed income products increased to $5.7 million for the six months ended June 30, 2008 from $2.7 million for the same period of 2007. Interest and dividend income decreased to $2.2 million for the six months ended June 30, 2008 from $3.9 million in the same period last year due to a decrease in the amount of money in the firm’s accounts that are earning interest income and a decline in interest rates. Other income increased from $3.2 million for the six months ended June 30, 2007 to $7.3 million during the same period in 2008 reflecting growth in hedge fund servicing revenue and third-party marketing fees.

During the six months ended June 30, 2008, employee compensation and benefits increased to $57.6 million from $53.8 million in the same period last year due to higher employee compensation and benefits resulting from the revenue growth in the asset/wealth management segment. Floor brokerage, exchange, and clearance fees decreased to $2.8 million for the six months ended June 30, 2008 from $3.4 million in the same period in 2007 reflecting lower clearing and execution costs resulting from a decline in trading volume. Communications and data processing costs increased to $6.1 million for the six months ended June 30, 2008 from $5.1 million in the same period last year, primarily due to higher clearing firm service fees. Occupancy costs were $6.6 million for the six months ended June 30, 2008 compared to $6.0 million in the same period of 2007 due to an increase in the amount of rental space occupied by SMH and Salient, the addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a new retail branch in Boca Raton, Florida. Interest expense decreased to $11,000 for the six months ended June 30, 2008 from $21,000 for the same period in 2007. Amortization of intangible assets increased to $403,000 for the six months ended June 30, 2008 compared to $139,000 for the same period in 2007 due to the addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Other general and administrative expenses increased to $15.3 million during the six months ended June 30, 2008 from $14.4 million in the same period of last year. The increase in other general and administrative expenses was primarily due to increases in outside sales commissions and legal expenses partially offset by a decrease in the provision for bad debts.

Our effective tax rate was 41.3% for the six months ended June 30, 2008 compared to 37.3% for the six months ended June 30, 2007. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of state income taxes and certain nondeductible expenses.

25

RESULTS BY SEGMENT

Asset/Wealth Management

	Six Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	62,537	$	49,705
Income before income taxes	$	15,187	$	10,164

Revenue from asset/wealth management increased to $62.5 million from $49.7 million and income before income taxes increased to $15.2 million from $10.2 million. Investment advisory and related services revenue increased to $43.4 million from $31.7 million, primarily due to the conversion of Edelman’s assets under management from a commission-based to a fee-based compensation structure and to the addition of assets under management at Salient. Additionally, the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a retail branch in Boca Raton, Florida, contributed to the growth in investment advisory fee revenue. Commission revenue increased to $11.2 million from $10.1 million, primarily as a result of an increase in trading volume. Total expenses increased to $43.7 million from $36.5 million, primarily due to increased employee compensation related to the higher revenue. Asset/wealth management also experienced increases in occupancy costs, outside sales commissions, and legal expenses. Equity in income of limited partnerships increased to $4.9 million from $3.3 million, principally due to an increase in the value of the investment portfolio of one of the limited partnerships that we manage. Minority interests in net income of consolidated subsidiaries, which reduces the Company’s pretax income, increased to $8.5 million from $6.4 million, principally due to increases in the values of the investment portfolios of the limited partnerships.

Capital Markets

InvestmentBanking

	Six Months Ended June 30,
	2008			2007
	(in thousands)
Revenue	$	5,398		$	13,804
Income (loss) before income taxes	$	(2,630	)	$	3,205

Revenue from investment banking decreased to $5.4 million from $13.8 million and income (loss) before income taxes decreased to a loss of $2.6 million from income of $3.2 million. The revenue decrease is due to decreases in private placement income and merger and acquisition fees caused by weakness in the financial markets that has adversely affected the volume and timing of our clients’ investment banking transactions. Total expenses decreased to $8.0 million from $10.6 million. The decrease in expenses is attributable to decreased employee compensation, which is partially tied to revenue.

26

Institutional Brokerage

	Six Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	8,738	$	8,365
Income before income taxes	$	373	$	811

Revenue from institutional brokerage increased to $8.7 million from $8.4 million and income before income taxes decreased to $373,000 from $811,000. Commission revenue increased to $6.7 million from $5.5 million reflecting a $2.0 million increase in commissions from the sale of collateralized debt obligations in our fixed income division. This increase was partially offset by a decline in the number of shares traded in our institutional equity division. This decline is largely the result of the growth in electronic trading strategy execution software that replaces, in some cases, the role of traditional traders. Additionally, sales credits from syndicate and investment banking activities declined to $453,000 from $1.4 million reflecting a lower volume of offerings sold by the institutional division. Total expenses increased to $8.4 million from $7.6 million, primarily due to increased employee compensation related to the higher commission revenue.

Prime Brokerage Services

	Six Months Ended June 30,
	2008		2007
	(in thousands)
Revenue	$	21,184	$	17,671
Income before income taxes	$	1,447	$	2,009

Revenue from prime brokerage services increased to $21.2 million from $17.7 million and income before income taxes decreased to $1.4 million from $2.0 million. Commission revenue and third-party marketing fees increased to $14.2 million from $11.6 million reflecting growth in hedge fund servicing revenue. In addition, principal transactions revenue increased to $6.0 million from $4.1 million reflecting an increase in revenue earned from the sale of fixed income products. Total expenses increased to $19.7 million from $15.7 million reflecting increased compensation and outside sales commissions related to the increased revenue.

Corporate Support and Other

	Six Months Ended June 30,
	2008			2007
	(in thousands)
Revenue	$	3,670		$	2,135
Loss before income taxes	$	(7,412	)	$	(10,054	)

Revenue from corporate support and other increased to $3.7 million from $2.1 million and the loss before income taxes decreased to $7.4 million from $10.1 million. Revenue from principal transactions, which consists principally of changes in the values of our investment portfolios, increased to a gain of $2.3 million from a loss of $259,000. Interest and dividend income decreased to $1.2 million from $2.0 million due to a decrease in the amount of money in the firm’s accounts that are earning interest income and a decline in interest rates. Total expenses decreased to $9.0 million from $12.5 million, primarily due to a $3.0 million provision for bad debts related to a note receivable that was recorded in the second quarter of 2007. Equity in income (loss) of limited partnerships decreased to a loss of $2.1 million from income of $268,000, principally due to a decrease in the value of our direct investment in one limited partnership.

27

Liquidity and Capital Resources

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

At June 30, 2008, we had $20.1 million in cash and cash equivalents, which together with receivables from broker-dealers and clearing organizations, deposits with clearing organizations, marketable securities owned, and securities available for sale represented 13.4% of our total assets at the end of the second quarter.

Receivables turnover, calculated as annualized revenue divided by average receivables, was four for the six months ended June 30, 2008 compared to five for the same period in the prior year. The decrease in the receivables turnover is due to an increase in average receivables from related parties that typically mature in one to five years. The allowance for doubtful accounts as a percentage of receivables was 8.2% at June 30, 2008 compared to 5.0% at December 31, 2007. The increase in the allowance for doubtful accounts as a percentage of receivables was the result of a $805,000 provision for bad debts related to uncollectible receivables recorded in the first six months of 2008.

For the six months ended June 30, 2008, net cash provided by operations totaled $15.6 million versus net cash provided by operations of $7.0 million during the same period in 2007. Marketable securities owned decreased by $5.3 million during the first six months of 2008, securities sold, not yet purchased decreased by $6.6 million, and payables to broker-dealers and clearing organizations increased by $44,000. 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 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.

Not readily marketable securities owned, primarily investments in limited partnerships, were $59.5 million at June 30, 2008 compared to $61.1 million at December 31, 2007. This decrease is the result of net dispositions of investment positions as well as changes in the values of our investment portfolios. 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 first six months of 2008 were $6.5 million, mainly for the purchase of leasehold improvements, furniture, and computer equipment and software necessary for our growth.

At June 30, 2008, SMH, our registered broker-dealer subsidiary, was in compliance with the net capital requirements of the Securities and Exchange Commission's Uniform Net Capital Rules and had capital in excess of the required minimum. Salient Trust Co., LTA was in compliance with the Texas Department of Banking net capital requirements and had capital in excess of the required minimum.

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

28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

During the six months ended June 30, 2008, there have been no material changes to the information contained in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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.

At June 30, 2008, securities owned by the Company were recorded at a fair value of $78.5 million, including $19.0 million in marketable securities, $49.5 million representing the Company’s investments in limited partnerships, and $10.0 million representing other not readily marketable securities.

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

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

At June 30, 2008, Salient had securities available for sale with a fair value of $721,000. These securities have an original cost of $459,000 and are subject to equity price risk. At June 30, 2008, the unrealized increase in fair value totaling $262,000, less tax of $105,000, has been included as a separate component of shareholders’ equity.

Item 4. Controls and Procedures

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

29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

In May 2005, SMH acted as placement agent for a private placement of $50.0 million in convertible preferred stock of Ronco Corporation, a company involved 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.  In 2007, SMH wrote off a $3.0 million subordinated working capital loan that it made to Ronco in 2006.  SMH is a defendant in one proceeding related to Ronco.

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.

Item 1A. Risk Factors

Information regarding risk factors associated with our business is set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 13, 2008. These risk factors describe some of the assumptions, risks, uncertainties, and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. There have not been any material changes from the risk factors associated with our business as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

30

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

On May 12, 2008, the Company issued an aggregate of 2,673,429 unregistered shares of common stock to The Edelman Financial Center, Inc. and Ric Edelman as partial consideration for the purchase of an additional 25% member interest in The Edelman Financial Center, LLC. The shares were valued at $22.2 million, or $8.30 per share. In addition to the shares, The Edelman Financial Center, Inc. and Ric Edelman received a cash payment of $22.2 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.

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

On May 22, 2008, the Company held its annual meeting of shareholders to elect nine directors to the Company’s Board of Directors, each for a term of one year, and to ratify the appointment of KPMG LLP as the Company’s independent registered public accountants for fiscal 2008.

At the annual meeting, each nominee was elected and the results of the votes were as follows:

	Number of		Number of		Number of		Number of
	Shares		Shares		Shares		Broker
	Voted For		Voted Against		Withheld		Non-Votes
George L. Ball		22,827,114		-		243,928		-
Richard E. Bean		22,862,036		-		209,006		-
Charles W. Duncan III		22,861,836		-		209,206		-
Scott B. McClelland		22,861,836		-		209,206		-
Ben T. Morris		22,367,118		-		703,924		-
Dr. Albert W. Niemi, Jr.		22,740,394		-		330,648		-
Nolan Ryan		22,859,073		-		211,969		-
Don A. Sanders		22,861,346		-		209,696		-
W. Blair Waltrip		22,791,836		-		279,206		-

At the annual meeting, the appointment of KPMG LLP as the Company’s independent registered public accountants for fiscal 2008 was also approved. A total of 22,968,222 votes were cast in favor of such proposal with 91,074 votes cast against the proposal and 11,746 votes abstaining from voting on the proposal.

Item 5. Other Information

None.

31

Item 6. Exhibits

INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Articles of Incorporation of the Company, as amended (Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 000-30066), and incorporated herein by reference).
3.2	Amended and Restated Bylaws of the Company (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. (Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-30066), and incorporated herein by reference).
10.07	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 Fifth Amendment to Credit Agreement and Amendment to Interest Rate Agreement dated as of May 31, 2008, among Sanders Morris Harris Group Inc. and JPMorgan Chase Bank, National Association.
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. (Filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-30066), and incorporated herein by reference).
*31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
*31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
*32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32

*32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	_______________
	* Filed herewith.
	† Management contract or compensation plan or arrangement.

33

SIGNATURES

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

SANDERS MORRIS HARRIS GROUP INC.
By:	/s/ BEN T. MORRIS
	Ben T. Morris
	Chief Executive Officer
By:	/s/ RICK BERRY
	Rick Berry
	Chief Financial Officer

Date:August 11, 2008

34

EX-10.8

Exhibit 10.08

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ben T. Morris, certify that:

1.I have reviewed this quarterly report on Form 10-Q 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:August 11, 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 quarterly report on Form 10-Q 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)), 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:August 11, 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 Quarterly Report of Sanders Morris Harris Group Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2008 (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

August 11, 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 Quarterly Report of Sanders Morris Harris Group Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2008 (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

August 11, 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.