Pinnacle Summer Investments 10-Q 2008 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

OR

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

Commission File No. 000-30066

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 November 7, 2008, the registrant had 28,122,304 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 September 30, 2008 (unaudited) and December 31, 2007	2
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)	3
	Condensed Consolidated Statement of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2008 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
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 September 30, 2008 and December 31, 2007

(in thousands, except share and per share amounts)

	September 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
Cash and cash equivalents	$	26,025		$	46,503
Receivables, net of allowance of $3,360 and $2,330, respectively
Broker-dealers and clearing organizations		2,534			232
Customers		23,683			25,147
Related parties		11,086			14,676
Other		78,086			4,408
Deposits with clearing organizations		1,060			1,095
Securities owned		64,674			84,898
Securities available for sale		-			759
Furniture, equipment, and leasehold improvements, net		19,221			16,613
Other assets and prepaid expenses		1,921			2,329
Goodwill, net		119,538			88,461
Other intangible assets, net		12,991			6,427
Total assets	$	360,819		$	291,548
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	34,463		$	29,523
Borrowings		-			200
Deferred tax liability, net		19,474			137
Securities sold, not yet purchased		15,468			15,432
Payable to broker-dealers and clearing organizations		18			2,973
Total liabilities		69,423			48,265
Commitments and contingencies
Minority interests		11,616			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; 29,171,241 and 25,765,806 shares issued, respectively		292			258
Additional paid-in capital		232,203			204,596
Retained earnings		53,706			23,422
Accumulated other comprehensive income		-			161
Treasury stock, at cost, 1,049,085 and 929,285 shares, respectively		(6,421	)		(5,259	)
Total shareholders' equity		279,780			223,178
Total liabilities and shareholders' equity	$	360,819		$	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					Nine Months Ended
	September 30,					September 30,
	2008		2007			2008			2007
Revenue:
Investment advisory and related services	$	19,658	$	19,580		$	58,720		$	51,450
Commissions		13,880		12,883			42,497			40,209
Investment banking		4,094		8,449			10,792			27,694
Principal transactions		5,269		2,215			16,231			8,313
Interest and dividends		1,591		1,374			3,725			5,272
Other income		2,468		1,649			9,721			4,892
Total revenue		46,960		46,150			141,686			137,830
Expenses:
Employee compensation and benefits		29,978		26,371			83,401			80,123
Floor brokerage, exchange, and clearance fees		1,638		1,480			4,484			4,861
Communications and data processing		2,543		2,516			8,491			7,647
Occupancy		3,547		2,903			9,713			8,870
Interest		400		9			400			30
Amortization of intangible assets		165		95			568			234
Other general and administrative		6,220		5,976			20,540			20,357
Total expenses		44,491		39,350			127,597			122,122
Income before equity in income of limited partnerships, minority interests, and income taxes		2,469		6,800			14,089			15,708
Equity in income of limited partnerships		43,285		711			46,556			4,298
Income before minority interests and income taxes		45,754		7,511			60,645			20,006
Minority interests in net (income) loss of consolidated companies		941		(4,586	)		(7,011	)		(10,946	)
Income before income taxes		46,695		2,925			53,634			9,060
Provision for income taxes		17,735		1,082			20,589			3,371
Net income	$	28,960	$	1,843		$	33,045		$	5,689
Earnings per common share:
Basic	$	1.03	$	0.07		$	1.24		$	0.23
Diluted	$	1.03	$	0.07		$	1.23		$	0.23
Weighted average common shares outstanding:
Basic		28,033		24,801			26,583			24,715
Diluted		28,192		25,095			26,764			25,038

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

3

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the nine months ended September 30, 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		29					2,859,996
Stock issued pursuant to employee benefit plan		5					545,439
Balance, end of period		292					29,171,241
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		1,523
Stock-based compensation expense		2,179
Balance, end of period		232,203
Retained earnings:
Balance, beginning of period		23,422
Cumulative effect of adoption of a new accounting principle		893
Cash dividends ($0.135 per share)		(3,654	)
Net income		33,045		33,045
Balance, end of period		53,706		33,045
Accumulated other comprehensive income (loss):
Balance, beginning of period		161
Net change in unrealized appreciation on securities available for sale		(267	)	(267	)
Income tax benefit on change in unrealized appreciation on securities available for sale		106		106
Balance, end of period		-		(161	)
Comprehensive income				32,884
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	$	279,780					28,122,156

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 nine months ended September 30, 2008 and 2007

(in thousands)

(unaudited)

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	33,045		$	5,689
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gain on securities available for sale		(205	)		(1	)
Loss on sales of assets		79			53
Depreciation		2,866			2,462
Provision for bad debts		978			3,228
Stock-based compensation expense		2,179			1,780
Amortization of intangible assets		568			234
Deferred income taxes		19,443			(3,108	)
Equity in income of limited partnerships		(46,556	)		(4,298	)
Minority interests in net income of consolidated companies		7,011			10,946
Unrealized and realized loss on not readily marketable securities owned, net		4,836			2,185
Not readily marketable securities owned received for payment of investment banking fees		(581	)		(1,692	)
Net change in:
Receivables		820			(15,008	)
Deposits with clearing organizations		35			(9	)
Marketable securities owned		(1,404	)		5,824
Other assets and prepaid expenses		(393	)		(331	)
Accounts payable and accrued liabilities		906			(715	)
Securities sold, not yet purchased		36			(5,538	)
Payable to broker-dealers and clearing organizations		(2,955	)		6,983
Net cash provided by operating activities		20,708			8,684
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(7,203	)		(3,231	)
Acquisitions, net of cash acquired of $126 and $59, respectively		(29,070	)		(8,249	)
Purchases of not readily marketable securities owned		(882	)		(22,452	)
Proceeds from sales of not readily marketable securities owned		11,020			4,476
Proceeds from sales and maturities of securities available for sale		697			584
Proceeds from sales of assets		266			39
Net cash used in investing activities		(25,172	)		(28,833	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock		(1,162	)		-
Proceeds from shares issued pursuant to employee benefit plan		1,164			428
Tax benefit of stock options exercised		364			119
Proceeds from borrowings		250			145
Repayment of borrowings		(450	)		(500	)
Investments by minority interests		-			40
Distributions to minority interests		(13,791	)		(6,645	)
Payments of cash dividends		(2,389	)		(3,326	)
Net cash used in financing activities		(16,014	)		(9,739	)
Net decrease in cash and cash equivalents		(20,478	)		(29,888	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		46,503			68,861
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	26,025		$	38,973

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, 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”), 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 September 30, 2008 and December 31, 2007, our consolidated results of operations for the three and nine months ended September 30, 2008 and 2007, our consolidated changes in shareholders’ equity for the nine months ended September 30, 2008, and our consolidated cash flows for the nine months ended September 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 September 30, 2008, the Company had $11.6 million in minority interests that would be reported as a component of equity under the requirements of SFAS No. 160.

2. ACQUISITIONS

On April 1, 2008, the Company acquired 100% of 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, $2.0 million of which has been recorded as goodwill and $4.1 million of which has been recorded as 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, $4.6 million of which has been recorded as goodwill and $1.4 million of which has been recorded as 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 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 $3.4 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.

8

3. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

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

	September 30, 2008				December 31, 2007
			Sold, Not Yet				Sold, Not Yet
	Owned		Purchased		Owned		Purchased
	(in thousands)
Marketable:
Corporate stocks and options	$	19,739	$	15,468	$	23,799	$	15,432
Total marketable		19,739		15,468		23,799		15,432
Not readily marketable:
Limited partnerships		40,655		-		53,012		-
Warrants		3,722		-		5,649		-
Equities and options		558		-		2,438		-
Total not readily marketable		44,935		-		61,099		-
Total	$	64,674	$	15,468	$	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., SMH Private Equity Group I, L.P., SMH Private Equity Group II, L.P., and SMH NuPhysicia, LLC.

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.

9

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.

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 September 30, 2008:

	Level 1		Level 2		Level 3		Total
	(in thousands)
Securities owned	$	19,300	$	4,036	$	41,338	$	64,674
Securities sold, not yet purchased		15,416		52		-		15,468

10

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 nine months ended September 30, 2008:

	Level 3 Securities Owned
	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008
	(in thousands)
Balance, beginning of period	$	51,085		$	55,880
Realized gains		47,735			47,560
Unrealized losses relating to securities still held at the reporting date		(5,161	)		(3,621	)
Purchases, issuances, and settlements		(52,321	)		(58,481	)
Balance, end of period	$	41,338		$	41,338

Net unrealized gains (losses) 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						Nine Months Ended
	September 30, 2008						September 30, 2008
				Equity in Income					Equity in Income
	Principal			of Limited			Principal		of Limited
	Transactions			Partnerships			Transactions		Partnerships
	(in thousands)
Unrealized gains (losses) relating to securities still held at the reporting date	$	(104	)	$	(5,057	)	$	152	$	(3,773	)

In May 2008, the Company, Salient Partners, L.P., and Endowment Advisers, L.P. began an appraisal process relating to Salient Partners’ and Endowment Advisers’ option to acquire the Company’s 50% interest in Salient Partners and its 23.15% interest in Endowment Advisers. The option was granted as part of the Company’s 2003 purchase of the interests.

In August 2008, agreements were reached which provided for Salient Partners’ and Endowment Advisers’ purchase of the Company’s interest in such entities for a total of $95.3 million. The terms of the agreements provide that Endowment Advisers will pay the Company annually the greater of $12.0 million in priority to other distributions, or 23% of total distributions, until the Company has received a total of $86.0 million plus 6% per annum. The Company received an additional $9.3 million note for its 50% interest in Salient Partners, payable with interest over a five-year period.

The Company recorded a receivable in the amount of $74.7 million representing the net present value of the expected receipts. The Company recognized a $48.5 million gain on this sale in the third quarter of 2008.

4. 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 September 30, 2008, the Company was in compliance with all covenants. There was no outstanding balance on the line of credit at September 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 September 30, 2008.

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5. 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				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(in thousands)
Expected federal tax at statutory rate of 34% for 2008 and 35% for 2007	$	15,876	$	1,024	$	18,236	$	3,171
State and other income taxes		1,859		58		2,353		200
Total	$	17,735	$	1,082	$	20,589	$	3,371

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 with the exception of two jurisdictions which were voluntarily extended by the Company.

6. ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS

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

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

				Weighted
	Number			Average
	of Shares			Exercise Price
Outstanding at January 1, 2008		856,385		$	8.30
Granted		50,000			8.17
Exercised		(214,706	)		4.90
Outstanding at September 30, 2008		691,679			9.35
Options exercisable at September 30, 2008		620,846			9.06
Incentive award shares available for grant at September 30, 2008		2,647,547

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During the nine months ended September 30, 2008 and 2007, 214,706 and 55,200 options were exercised for which the Company received proceeds of $1.1 million and $257,000, respectively. The Company recognized pretax compensation expense of $131,000 and $116,000 during the nine months ended September 30, 2008 and 2007, respectively, related to stock options. The portion of stock-based compensation expense related to stock options that was unrecognized at September 30, 2008 was $151,000 and is expected to be recognized over a weighted average period of 0.92 years.

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

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Nonvested at January 1, 2008		526,741	$	13.39
Nonvested at September 30, 2008		702,386		11.21
For the nine months ended September 30, 2008:
Granted		334,558		8.74
Vested		155,088		13.28
Forfeited		3,825		12.15

Employees deferred compensation of $114,000 and $171,000 during the nine months ended September 30, 2008 and 2007, respectively, that was used to purchase restricted common stock. The Company recognized pretax compensation expense of $2.0 million and $1.7 million during the nine months ended September 30, 2008 and 2007, respectively, related to its restricted common stock plan. At September 30, 2008, total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock was $5.2 million and is expected to be recognized over the next 4.5 years.

7. 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 nine months ended September 30, 2008 related to this program.

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8. EARNINGS PER COMMON SHARE

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
	(in thousands, except per share amounts)
Net income	$	28,960	$	1,843	$	33,045	$	5,689
Earnings per common share:
Basic	$	1.03	$	0.07	$	1.24	$	0.23
Diluted	$	1.03	$	0.07	$	1.23	$	0.23
Weighted average number of common
shares outstanding:
Basic		28,033		24,801		26,583		24,715
Incremental common shares issuable under stock option plan, net		159		294		181		323
Diluted		28,192		25,095		26,764		25,038

Outstanding stock options of 310,000 and 305,000 for the three and nine months ended September 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.

9. 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 September 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 21 additional markets, including Albuquerque, Atlanta, Baltimore, Chicago, Cleveland, Columbus, Corsicana, Dallas, Detroit, Houston, Jackson, Los Angeles, Miami, Mt. Jackson, New York City, Orlando, Phoenix, Portland, San Diego, San Francisco, and Tucson.

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.

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

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.

10. 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, and financial planning 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.

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

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

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

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

The Corporate Support 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 nine months ended September 30, 2008 and 2007, respectively. SMHG does not analyze asset information in all business segments.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(in thousands)
Revenue:
Asset/Wealth Management	$	26,624		$	26,878		$	82,360		$	76,583
Capital Markets:
Investment banking		3,373			5,994			8,771			19,798
Institutional brokerage		5,039			3,936			13,777			12,301
Prime brokerage services		14,116			8,701			35,300			26,372
Capital Markets Total		22,528			18,631			57,848			58,471
Corporate Support and Other		(2,192	)		641			1,478			2,776
Total	$	46,960		$	46,150		$	141,686		$	137,830
Income (loss) before equity in income (loss) of limited partnerships, minority interests, and income taxes:
Asset/Wealth Management	$	8,891		$	8,414		$	26,627		$	21,619
Capital Markets:
Investment banking		(1,033	)		1,327			(3,663	)		4,532
Institutional brokerage		828			306			1,201			1,117
Prime brokerage services		1,303			739			2,750			2,748
Capital Markets Total		1,098			2,372			288			8,397
Corporate Support and Other		(7,520	)		(3,986	)		(12,826	)		(14,308	)
Total	$	2,469		$	6,800		$	14,089		$	15,708
Equity in income (loss) of limited partnerships:
Asset/Wealth Management	$	(1,661	)	$	2,827		$	3,716		$	6,146
Capital Markets:
Investment banking		-			-			-			-
Institutional brokerage		-			-			-			-
Prime brokerage services		-			-			-			-
Capital Markets Total		-			-			-			-
Corporate Support and Other		44,946			(2,116	)		42,840			(1,848	)
Total	$	43,285		$	711		$	46,556		$	4,298
Minority interests in net (income) loss of consolidated companies:
Asset/Wealth Management	$	941		$	(4,586	)	$	(7,011	)	$	(10,946	)
Capital Markets:
Investment banking		-			-			-			-
Institutional brokerage		-			-			-			-
Prime brokerage services		-			-			-			-
Capital Markets Total		-			-			-			-
Corporate Support and Other		-			-			-			-
Total	$	941		$	(4,586	)	$	(7,011	)	$	(10,946	)
Income (loss) before income taxes:
Asset/Wealth Management	$	8,171		$	6,655		$	23,332		$	16,819
Capital Markets:
Investment banking		(1,033	)		1,327			(3,663	)		4,532
Institutional brokerage		828			306			1,201			1,117
Prime brokerage services		1,303			739			2,750			2,748
Capital Markets Total		1,098			2,372			288			8,397
Corporate Support and Other		37,426			(6,102	)		30,014			(16,156	)
Total	$	46,695		$	2,925		$	53,634		$	9,060

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11. SUPPLEMENTAL CASH FLOW INFORMATION

	Nine Months Ended September 30,
	2008			2007
	(in thousands)
Cash payment for income taxes, net	$	2,056		$	3,671
Cash paid for interest		9			19
Noncash investing activities:
Acquisitions:
Receivables		10			-
Goodwill		24,136			2,400
Accounts payable and accrued liabilities		(290	)		-
Minority interests		77			-
Common stock		(23,933	)		(2,400	)
Sale of nonmarketable securities:
Receivables		74,732			-
Sale of limited partnerships		(70,666	)		-
Accounts payable and accrued liabilities		(4,066	)		-
Noncash financing activities:
Dividends declared not yet paid		1,265			1,126

12. RELATED PARTIES

The Company had receivables from related parties totaling $11.1 million at September 30, 2008, primarily consisting of $6.2 million of advances to unconsolidated related entities to fund operating expenses, $3.5 million of notes receivable from employees and consultants representing loans made to induce the employees and consultants to affiliate with the Company, and $609,000 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; (11) demand for our services; and (12) litigation and securities law liabilities. See “Risk Factors” in Part II, Item 1A below and 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, and financial planning 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, and financial planning 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 third quarter of 2008, compensation and benefits represented 67.4% of total expenses and 63.8% of total revenue, compared to 67.0% of total expenses and 57.1% of total revenue during the third quarter of 2007. The increase in compensation and benefits as a percentage of total revenue is principally due to an increase in revenue in our prime brokerage services division which has a higher payout than our other business lines. During the first nine months of 2008, compensation and benefits represented 65.4% of total expenses and 58.9% of total revenue, compared to 65.6% of total expenses and 58.1% 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 September 30, 2008 Compared to Three Months Ended September 30, 2007

Total revenue was $47.0 million for the third quarter of 2008 compared to $46.2 million for the same quarter in 2007, an increase of $810,000, or 1.8%, primarily reflecting increases in commissions and principal transactions revenue partially offset by a decrease in investment banking revenue. Total expenses for the third quarter of 2008 increased $5.1 million, or 13.1%, to $44.5 million from $39.4 million in the same quarter of the previous year principally due to higher employee compensation and benefits due to the revenue growth in the prime brokerage services division. Equity in income of limited partnerships increased to $43.3 million for the third quarter of 2008 compared to $711,000 for the third quarter of 2007, primarily due to the sale of our interests in two limited partnerships. Net income was $29.0 million, or $1.03 per diluted common share, for the third quarter of 2008 compared to $1.8 million, or $0.07 per diluted common share, for the third quarter of 2007.

Revenue from investment advisory and related services increased to $19.7 million in the third quarter of 2008 from $19.6 million in the same quarter of 2007. Commission revenue increased to $13.9 million in the third quarter of 2008 from $12.9 million for the same period in 2007, primarily as a result of an increase in trading volume in the institutional brokerage division. Investment banking revenue decreased to $4.1 million during the third quarter of 2008 from $8.4 million in the same period of 2007, principally due to decreases in advisory fees and syndicate income. Principal transactions revenue increased from $2.2 million for the third quarter of 2007 to $5.3 million for the third quarter of 2008, primarily as the result of an increase in proprietary trading gains to $3.4 million in the third quarter of 2008 from $837,000 for the same period in 2007. Also, principal transactions revenue from the sale of fixed income products increased to $3.9 million during the third quarter of 2008 from $1.1 million in the same period of 2007. Interest and dividend income increased to $1.6 million in the third quarter of 2008 from $1.4 million in the same period last year. Other income increased from $1.6 million during the third quarter of 2007 to $2.5 million during the same period in 2008 reflecting growth in hedge fund servicing revenue and third-party marketing fees.

During the three months ended September 30, 2008, employee compensation and benefits increased to $30.0 million from $26.4 million in the same period last year due to higher employee compensation and benefits due to the revenue growth in the prime brokerage services division. During the three months ended September 30, 2008, floor brokerage, exchange, and clearance fees increased to $1.6 million from $1.5 million in the same period last year. Communications and data processing costs were unchanged at $2.5 million in the third quarter of 2008 compared to the same period last year. Occupancy costs were $3.5 million in the third quarter of 2008 compared to $2.9 million in the third quarter of 2007 due to the addition of Dickenson, Leonetti, and Miller-Green, and the opening of a new retail branch in Boca Raton, Florida. Interest expense increased to $400,000 for the third quarter of 2008 compared to $9,000 for the third quarter of 2007 due to the accrual of interest for taxes payable on the income recognized as the result of the sale of our interests in two limited partnerships. Amortization of intangible assets increased to $165,000 for the third quarter of 2008 compared to $95,000 for the third quarter of 2007 due to the addition of Dickenson, Leonetti, and Miller-Green. Other general and administrative expenses increased to $6.2 million during the third quarter of 2008 from $6.0 million in the third quarter of last year.

Our effective tax rate was 38.0% for the three months ended September 30, 2008 compared to 37.0% for the three months ended September 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.

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RESULTS BY SEGMENT

Asset/Wealth Management

	Three Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	26,624	$	26,878
Income before income taxes	$	8,171	$	6,655

Revenue from asset/wealth management decreased to $26.6 million from $26.9 million and income before income taxes increased to $8.2 million from $6.7 million. Total expenses decreased to $17.7 million from $18.5 million, primarily due to a decrease in outside sales commissions. Equity in income (loss) of limited partnerships decreased to a loss of $1.7 million from income of $2.8 million, principally due to a decrease in the value of the investment portfolio of three of the limited partnerships that we manage. This decrease was partially offset by an increase in the value of the investment portfolio in another limited partnership. Minority interests in net (income) loss of consolidated subsidiaries, which reduces (increases) the Company’s pretax income, was $941,000 for the third quarter of 2008 compared to $(4.6) million for the same period last year, principally due to decreases in the values of the investment portfolios of the limited partnerships.

Capital Markets

InvestmentBanking

	Three Months Ended September 30,
	2008			2007
	(in thousands)
Revenue	$	3,373		$	5,994
Income (loss) before income taxes	$	(1,033	)	$	1,327

Revenue from investment banking decreased to $3.4 million from $6.0 million and income (loss) before income taxes decreased to a loss of $1.0 million from income of $1.3 million. The revenue decrease is due to a decrease in advisory 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 $4.4 million from $4.7 million. The decrease in expenses is attributable to decreased employee compensation, which is partially tied to revenue.

Institutional Brokerage

	Three Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	5,039	$	3,936
Income before income taxes	$	828	$	306

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Revenue from institutional brokerage increased to $5.0 million from $3.9 million and income before income taxes increased to $828,000 from $306,000. Commission revenue increased to $3.5 million from $2.4 million reflecting a $1.2 million increase in commissions from the sale of collateralized debt obligations in our fixed income division. Total expenses increased to $4.2 million from $3.6 million, primarily due to increased employee compensation related to the higher revenue.

Prime Brokerage Services

	Three Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	14,116	$	8,701
Income before income taxes	$	1,303	$	739

Revenue from prime brokerage services increased to $14.1 million from $8.7 million and income before income taxes increased to $1.3 million from $739,000. Principal transactions revenue increased to $7.0 million from $1.8 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 $6.8 million from $6.1 million reflecting growth in hedge fund servicing revenue. Total expenses increased to $12.8 million from $8.0 million reflecting increased compensation and outside sales commissions related to the increased revenue.

Corporate Support and Other

	Three Months Ended September 30,
	2008			2007
	(in thousands)
Revenue	$	(2,192	)	$	641
Income (loss) before income taxes	$	37,426		$	(6,102	)

Revenue from corporate support and other decreased to $(2.2) million from $641,000 and income (loss) before income taxes increased to income of $37.4 million from a loss of $6.1 million. Revenue from principal transactions, which consists principally of changes in the values of our investment portfolios, decreased to a loss of $3.5 million from a loss of $531,000. Total expenses increased to $5.3 million from $4.6 million, primarily due to the accrual of interest for taxes payable on the income recognized as the result of the sale of our interests in two limited partnerships. Equity in income (loss) of limited partnerships increased to income of $44.9 million from a loss of $2.1 million, primarily due to the sale of our interests in two limited partnerships.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Total revenue was $141.7 million for the nine months ended September 30, 2008 compared to $137.8 million for the same period in 2007, an increase of $3.9 million, or 2.8%, 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 nine months ended September 30, 2008 increased $5.5 million, or 4.5%, to $127.6 million from $122.1 million in the same period of the previous year, principally due to higher employee compensation and benefits due to the revenue growth in the prime brokerage services division. Also, occupancy costs were $9.7 million for the nine months ended September 30, 2008 compared to $8.9 million in the same period of 2007 due to an increase in the amount of rental space occupied by SMH, the addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a new retail branch in Boca Raton, Florida. Equity in income of limited partnerships was $46.6 million for the nine months ended September 30, 2008 compared to $4.3 million for the same period in 2007, primarily due to the sale of our interests in two limited partnerships. Net income was $33.0 million, or $1.23 per diluted common share, for the nine months ended September 30, 2008 compared to $5.7 million, or $0.23 per diluted common share, for the same period in 2007.

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Revenue from investment advisory and related services increased to $58.7 million for the nine months ended September 30, 2008 from $51.5 million in the same period of 2007, primarily due to the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green and the opening of a retail branch in Boca Raton, Florida. Commission revenue increased to $42.5 million for the nine months ended September 30, 2008 from $40.2 million for the same period in 2007, primarily as a result of an increase in trading volume in the institutional brokerage division. Investment banking revenue decreased to $10.8 million for the nine months ended September 30, 2008 from $27.7 million in the same period of 2007, principally due to a decrease in the number of banking transactions completed during 2008 caused by weakness in the financial markets. Principal transactions revenue increased from $8.3 million for the nine months ended September 30, 2007 to $16.2 million for the same period in 2008, primarily as the result of an increase in proprietary trading gains to $5.0 million for the nine months ended September 30, 2008 from $2.5 million for the same period in 2007. Also, principal transactions revenue from the sale of fixed income products increased to $9.6 million during the nine months ended September 30, 2008 from $3.8 million in the same period of 2007. Interest and dividend income decreased to $3.7 million for the nine months ended September 30, 2008 from $5.3 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. This decrease was partially offset by interest earned on a note receivable issued to fund the sale of our interests in two limited partnerships. Other income increased from $4.9 million for the nine months ended September 30, 2007 to $9.7 million during the same period in 2008 reflecting growth in hedge fund servicing revenue and third-party marketing fees.

During the nine months ended September 30, 2008, employee compensation and benefits increased to $83.4 million from $80.1 million in the same period last year due to higher employee compensation and benefits resulting from the revenue growth in the prime brokerage services division. Floor brokerage, exchange, and clearance fees decreased to $4.5 million for the nine months ended September 30, 2008 from $4.9 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 $8.5 million for the nine months ended September 30, 2008 from $7.6 million in the same period last year, primarily due to higher clearing firm service fees. Occupancy costs were $9.7 million for the nine months ended September 30, 2008 compared to $8.9 million in the same period of 2007 due to an increase in the amount of rental space occupied by SMH, the addition of Rikoon, Dickenson, Leonetti, and Miller-Green, and the opening of a new retail branch in Boca Raton, Florida. Interest expense increased to $400,000 for the nine months ended September 30, 2008 from $30,000 for the same period in 2007 due to the accrual of interest for taxes payable on the income recognized as the result of the sale of our interests in two limited partnerships. Amortization of intangible assets increased to $568,000 for the nine months ended September 30, 2008 compared to $234,000 for the same period in 2007 due to the addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Other general and administrative expenses increased to $20.5 million during the nine months ended September 30, 2008 from $20.4 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 38.4% for the nine months ended September 30, 2008 compared to 37.2% for the nine months ended September 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.

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RESULTS BY SEGMENT

Asset/Wealth Management

	Nine Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	82,360	$	76,583
Income before income taxes	$	23,332	$	16,819

Revenue from asset/wealth management increased to $82.4 million from $76.6 million and income before income taxes increased to $23.3 million from $16.8 million. Investment advisory and related services revenue increased to $58.6 million from $51.2 million, primarily due to the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green and the opening of a retail branch in Boca Raton, Florida. Additionally, the conversion of Edelman’s assets under management from a commission-based to a fee-based compensation structure contributed to the growth in investment advisory fee revenue. Commission revenue increased to $15.6 million from $14.5 million, primarily as a result of an increase in trading volume. Total expenses increased to $55.7 million from $55.0 million, primarily due to increased employee compensation related to the higher revenue. In addition, clearing firm service fees increased due to the conversion of Edelman’s assets under management from a commission-based to a fee-based compensation structure. Equity in income of limited partnerships decreased to $3.7 million from $6.1 million, principally due to a decrease 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, decreased to $7.0 million from $10.9 million, principally due to decreases in the values of the investment portfolios of the limited partnerships.

Capital Markets

InvestmentBanking

	Nine Months Ended September 30,
	2008			2007
	(in thousands)
Revenue	$	8,771		$	19,798
Income (loss) before income taxes	$	(3,663	)	$	4,532

Revenue from investment banking decreased to $8.8 million from $19.8 million and income (loss) before income taxes decreased to a loss of $3.7 million from income of $4.5 million. The revenue decrease is principally due to a decrease in the number of banking transactions completed during 2008 caused by weakness in the financial markets. Total expenses decreased to $12.4 million from $15.3 million. The decrease in expenses is attributable to decreased employee compensation, which is partially tied to revenue.

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Institutional Brokerage

	Nine Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	13,777	$	12,301
Income before income taxes	$	1,201	$	1,117

Revenue from institutional brokerage increased to $13.8 million from $12.3 million and income before income taxes increased to $1.2 million from $1.1 million. Commission revenue increased to $10.2 million from $7.9 million reflecting a $3.2 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 $667,000 from $2.5 million reflecting a lower volume of offerings sold by the institutional division. Total expenses increased to $12.6 million from $11.2 million, primarily due to increased employee compensation related to the higher commission revenue.

Prime Brokerage Services

	Nine Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	35,300	$	26,372
Income before income taxes	$	2,750	$	2,748

Revenue from prime brokerage services increased to $35.3 million from $26.4 million and income before income taxes increased to $2.8 million from $2.7 million. Commission revenue and third-party marketing fees increased to $21.0 million from $17.6 million reflecting growth in hedge fund servicing revenue. In addition, principal transactions revenue increased to $13.0 million from $5.9 million reflecting an increase in revenue earned from the sale of fixed income products. Total expenses increased to $32.6 million from $23.6 million reflecting increased compensation and outside sales commissions related to the increased revenue.

Corporate Support and Other

	Nine Months Ended September 30,
	2008		2007
	(in thousands)
Revenue	$	1,478	$	2,776
Income (loss) before income taxes	$	30,014	$	(16,156	)

Revenue from corporate support and other decreased to $1.5 million from $2.8 million and income (loss) before income taxes increased to income of $30.0 million from a loss of $16.2 million. Revenue from principal transactions, which consists principally of changes in the values of our investment portfolios, decreased to a loss of $1.2 million from a loss of $789,000. Interest and dividend income decreased to $2.4 million from $3.0 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 $14.3 million from $17.1 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 $42.8 million from a loss of $1.8 million, primarily due to the sale of our interests in two limited partnerships.

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Liquidity and Capital Resources

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

At September 30, 2008, we had $26.0 million in cash and cash equivalents, which together with receivables from broker-dealers and clearing organizations, deposits with clearing organizations, and marketable securities owned represented 13.7% of our total assets at the end of the third quarter.

Receivables turnover, calculated as annualized revenue divided by average receivables, was three for the nine months ended September 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 2.8% at September 30, 2008 compared to 5.0% at December 31, 2007. The decrease in the allowance for doubtful accounts as a percentage of receivables was the result of an increase in receivables from a note receivable issued to fund the sale of our interests in two limited partnerships.

For the nine months ended September 30, 2008, net cash provided by operations was $20.7 million versus net cash provided by operations of $8.7 million during the same period in 2007. Marketable securities owned increased by $1.4 million during the first nine months of 2008, securities sold, not yet purchased increased by $36,000, and payables to broker-dealers and clearing organizations decreased by $3.0 million. The change in marketable securities owned, securities sold, not yet purchased, and payables to broker-dealers and clearing organizations is primarily due to the trading portfolios of our proprietary trading operations. The Company’s proprietary trading operations carry both long and short 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 $44.9 million at September 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 nine months of 2008 were $7.2 million, mainly for the purchase of leasehold improvements, furniture, and computer equipment and software necessary for our growth.

At September 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.

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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

During the nine months ended September 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 September 30, 2008, securities owned by the Company were recorded at a fair value of $64.7 million, including $19.7 million in marketable securities, $40.7 million representing the Company’s investments in limited partnerships, and $4.3 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.

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 (“SEC”) 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.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Many aspects of our business involve substantial risks of liability. In the normal course of business, we have been and in the future may be named as defendant or co-defendant in lawsuits and arbitration proceedings involving primarily claims for damages. We are also involved in a number of regulatory matters arising out of the conduct of our business. There can be no assurance that these matters will not have a material adverse effect on our results of 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. 

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 SEC 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. Except for the addition of the risk factors below, 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.

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There is no assurance that recently enacted legislation authorizing the Department of the Treasury to establish programs to purchase illiquid mortgages and invest directly in financial institutions will stabilize the financial markets.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”). The legislation was the result of a proposal by President Bush and Treasury Secretary Henry M. Paulson, Jr. to the United States Congress on September 20, 2008 in response to the financial crises affecting the banking system and financial markets and going concern threats to major investment banks and other financial institutions. Pursuant to the EESA, the Department of the Treasury has the authority to, among other things, purchase and insure up to $700 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of providing liquidity to the United States financial system. The Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation (“FDIC”) are implementing an array of other assistance programs. There is no assurance that government intervention will succeed in reducing the extreme levels of volatility and increasing the limited credit availability currently being experienced. The failure of EESA to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, and the trading price of our common stock.

Difficult market conditions have adversely affected the financial services industry and could adversely affect us.

The stock and credit markets have been experiencing volatility and disruption for more than twelve months. In October, the volatility and disruption reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. In addition, the financial services industry is experiencing unprecedented change and volatility. During 2008, several banks and securities firms in the United States and elsewhere have failed outright or have been acquired by other financial institutions, often in distressed sales. The continuation or worsening of current conditions may cause us to face some or all of the following risks:

•The number of investment banking transactions where we act as advisor could be adversely affected by continued uncertainties in valuations related to asset quality and creditworthiness, volatility in the equity markets, and diminished access to financing.

•Our opportunity to act as underwriter or placement agent in equity and debt offerings could be adversely affected by competing government sources of equity or by volatile equity or debt markets.

•We may experience losses in securities trading activities or as a result of write-downs in the value of securities that we own as a result of deteriorations in the businesses or creditworthiness of the issuers of such securities.

•We may incur unexpected costs or losses as a result of the bankruptcy or other failure of companies for which we have performed investment banking services to honor ongoing obligations such as indemnification or expense reimbursement agreements.

•As an introducing broker to clearing firms, we are responsible to the clearing firms and could be held liable for the defaults of our customers, including losses incurred as the result of a customer’s failure to meet a margin call. Although we review credit exposure to specific customers, default risk may arise from events or circumstances that are difficult to detect or foresee. When we allow customers to purchase securities on margin, we are subject to risks inherent in extending credit. This risk increases when a market is rapidly declining and the value of the collateral held falls below the amount of a customer’s indebtedness. If a customer’s account is liquidated as the result of a margin call, we are liable to our clearing firm for any deficiency.

•Competition in our investment banking, sales, and trading businesses could intensify as a result of the increasing pressures on financial services companies and larger firms competing for transactions and business that historically would have been too small for them to consider.

•Our industry could face increased regulation as a result of legislative or regulatory initiatives, and the responsibilities of the SEC and other federal agencies may be reallocated. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

•Government intervention may not succeed in stabilizing the financial and credit markets and may have negative consequences for our business.

If one or more of the foregoing risks occurs, we could experience an adverse effect, which may be material, on our business, financial condition, and results of operations.

30

Lack of sufficient liquidity or access to capital could impair our business and financial condition.

Historically, we have satisfied our need for funding from internally generated funds, sales of shares of our common stock to our employees and to the public, and a revolving credit facility with a financial institution. As a result of the low level of leverage that we have traditionally employed in our business model, we have not been forced to significantly curtail our business activities as a result of lack of credit sources and we believe that our capital resources are currently sufficient to continue to support our current business activities. However, to complete our acquisition of Edelman Financial Center we will need approximately $50 million in available cash in May 2009. In the event existing internal and external financial resources do not satisfy our needs, we would have to seek additional outside financing. The availability of outside financing will depend on a variety of factors, such as our financial condition and results of operations, the availability of acceptable collateral, market conditions, the general availability of credit, the volume of trading activities, and the overall availability of credit to the financial services industry.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different counterparties and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the receivable due us. Any such losses could be material and could materially and adversely affect our business, financial condition, and results of operations.

Item 5. Other Information

None.

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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).
10.11	Agreement to Retire Partnership Interest and Second Amendment to the Limited Partnership Agreement of Endowment Advisers, L.P. dated as of August 29, 2008, among Sanders Morris Harris Group Inc. and Endowment Advisers, L.P., The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC, and their respective partners and members (Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated August 29, 2008 (File No. 000-30066), and incorporated herein by reference).

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*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.
*32.2	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.

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SIGNATURES

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

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

Date:November 10, 2008

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