Pinnacle Summer Investments 10K 2008 Annual report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(mark one)

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

For the Fiscal Year Ended December 31, 2008

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

Commission File No. 0-30066

Sanders Morris Harris Group Inc.

(Exact name of registrant as specified in its charter)

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

600 Travis, Suite 5800
Houston, Texas	77002
(Address of principal executive offices)	(Zip code)

(713) 993-4610

(Registrant's telephone number, including area code)

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

None

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

Common Stock, $0.01 Par Value

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

¨ Yes x No

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

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

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 ¨	Accelerated filer x

Non-accelerated filer ¨	Smaller reporting company ¨

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

As of June 30, 2008, the aggregate market value of the shares of Common Stock held by nonaffiliates of the registrant was $114.0 million. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant were deemed to be affiliates. Such determination is not an admission that such officers, directors, and beneficial owners are, in fact, affiliates of the registrant.

As of March 9, 2009, the registrant had 28,168,858 outstanding shares of Common Stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Information in the Registrant's definitive Proxy Statement pertaining to the 2009 Annual Meeting of Shareholders (the "Proxy Statement") to be filed with the SEC is incorporated herein by reference into Part III of this Report.

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

INDEX

	PART I

Item 1.	Business	1

Item1A.	Risk Factors	10

Item 1B.	Unresolved Staff Comments	20

Item 2.	Properties	21

Item 3.	Legal Proceedings	21

Item 4.	Submission of Matters to a Vote of Security Holders	21

	PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22

Item 6.	Selected Financial Data	25

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	36

Item 8.	Financial Statements and Supplementary Data	39

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	70

Item 9A.	Controls and Procedures	70

Item 9B.	Other Information	72

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	73

Item 11.	Executive Compensation	73

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	73

Item 13.	Certain Relationships and Related Transactions, and Director Independence	73

Item 14.	Principal Accountant Fees and Services	73

	PART IV

Item 15.	Exhibits, Financial Statement Schedules	74

PART I

Item 1. Business

General

Sanders Morris Harris Group Inc. (“SMHG” or “the Company”) is a holding company that, through our subsidiaries and affiliates, provides asset/wealth management and capital markets services. Our company, as it exists today, results largely from the merger in January 2000 of Sanders Morris Mundy Inc., a Houston-based full-service regional investment bank, and Harris, Webb & Garrison, Inc., a Houston-based investment management firm. Since the merger, we have grown significantly, both organically and through strategic acquisitions. From January 2000 through December 31, 2008, we have:

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grown our client assets from approximately $3.2 billion to $8.6 billion;

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increased our asset and wealth management business from 56 to 417 employees;

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expanded our client base by increasing the number of our client accounts from 21,000 to 76,000;

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expanded our geographic presence by growing from 11 offices in six states to 73 offices in 22 states; and

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broadened our product offerings and distribution networks.

We were founded on the belief that a financial services company should be not only a counselor to its clients but also a partner. We and members of our executive management, where suitable and permissible, often invest in our products on the same basis as our clients, which we refer to as a “wealth partnership”. We believe that becoming wealth partners with our clients demonstrates our confidence in the investment opportunities that we recommend and differentiates us from our competitors. Consistent with this belief, we analyze every potential product that we offer to our clients as if we are investing in it ourselves, which we believe results in higher quality investments. Our wealth partnerships that we form with our clients not only help expand our client base but also help increase revenue from our existing clients by solidifying long-term relationships built upon high quality products and services.

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

We believe that we have achieved strong brand recognition and a sound reputation in the southwestern United States. Additionally, our acquisitions have enabled us to add well-regarded asset managers and wealth advisors to our platform in other regions of the country. In all, we have 73 offices in 22 states. These factors have strengthened our brand recognition and reputation and have enabled us to attract new clients, not only in the Southwest but, increasingly, in other regions of the country.

We believe that our strategies have been successful. Our client assets have grown from approximately $3.2 billion at January 1, 2000 to $8.6 billion at December 31, 2008, representing a compound annual growth rate of 11.0%. Our revenue has grown from $43.9 million in 2000 to $196.3 million in 2008, representing a compound annual growth rate of 16.8%.

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

Our Products and Services

Asset/Wealth Management

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

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

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High Net Worth and Mass Affluent Individuals: We define high net worth individuals as individuals who have over $1 million in investable assets and mass affluent individuals as individuals who have $50,000 to $1 million in investable assets. Throughout their financial life cycle, we provide these clients with comprehensive investment advisory and asset and wealth management services, as either a fiduciary or an agent, including asset allocation, investment strategies and alternatives, tax efficient estate and financial planning, and private client services.

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

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

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

At December 31, 2008, our asset and wealth management subsidiaries had approximately $8.6 billion in client assets. Our asset and wealth management revenue in 2008 was $102.7 million and pre-tax income from continuing operations was $24.7 million, accounting for 52.3% of our total revenue.

Our nine asset and wealth management businesses are described below.

SMH Capital Inc. SMH Capital Inc. (formerly Sanders Morris Harris Inc.) (“SMH”), member FINRA/SIPC, headquartered in Houston, Texas, provides asset and wealth management services directly through its private client business and through its affiliation with independent contractors who are members of the SMH Partners program. Its financial advisors (both internal and affiliated through SMH Partners) serve high net worth and mass affluent clients, many of whom have long-standing relationships with us. As a full service firm, SMH offers its clients asset and wealth management services and financial advice relating to corporate debt and equity securities, including the securities of companies followed by our research analysts, underwritings that we co-manage or in which we participate, and private placements of securities in which we serve as placement agent, as well as mutual funds, defined contribution plans, wrap-fee programs, money market funds, insurance products, and tax, trust, and estate advice. At December 31, 2008, SMH had $3.7 billion in client assets, exclusive of our proprietary funds.

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

Additionally, SMH has organized 17 proprietary funds for the purpose of investing primarily in equity or equity-linked securities, interest-bearing debt securities, and debt securities convertible into common stock. These funds invest primarily in small to mid-capitalization companies, both public and private, that we believe are either significantly undervalued relative to their growth potential or that have substantial prospects for capital appreciation. Companies in which the funds invest represent a number of industries, including life sciences, energy, technology, and industrial services. We account for our interests in all of these funds using the equity method, which approximates fair value. At December 31, 2008, the 14 remaining proprietary funds had approximately $245.1 million in assets under management and committed capital.

The Edelman Financial Center, LLC. The Edelman Financial Center, LLC (“Edelman”), headquartered in Fairfax, Virginia, provides financial advisory services primarily to mass affluent individuals. Edelman has won more than 70 financial, business, community, and philanthropic awards and has been named three times by Inc. magazine as the fastest-growing privately-held financial planning firm in the country. Edelman founder and chairman Ric Edelman is one of the nation’s leading advocates of financial literacy. In addition, Edelman offers its clients a variety of life, disability, and long-term care insurance solutions to fit their needs. At December 31, 2008, Edelman had more than 8,900 clients and approximately $2.9 billion in assets under management or advisement. We own 76% of Edelman at December 31, 2008.

SMH Capital Advisors, Inc. SMH Capital Advisors, Inc. (“Capital Advisors”), located in Fort Worth, Texas, provides investment management services primarily related to high-yield fixed income securities. This business is also known by its previous name of Cummer/Moyers. Nelson’s World’s Best Money Managers ranked Capital Advisors as the No. 1 ranked firm in its U.S. High Yield Income rankings for the one-year, five-year, and ten-year periods ended March 31, 2006 and the No. 2 ranked firm in its U.S. Intermediate Duration Fixed Income rankings for the five-year period ended March 31, 2006. At December 31, 2008, Capital Advisors had approximately $1.1 billion in client assets.

Kissinger Financial Services. Kissinger Financial Services (“Kissinger”), a division of SMH based in Hunt Valley, Maryland, provides financial planning and investment management services to high net worth and mass affluent individuals. Kissinger derives revenue from fees charged to clients for the preparation of financial plans and for monitoring services and earns commissions and fees from investment and insurance products sold to clients. At December 31, 2008, Kissinger had approximately $256.3 million in assets under management or advisement.

The Rikoon Group, LLC. The Rikoon Group, LLC (“Rikoon”), based in Santa Fe, New Mexico, provides asset and wealth management services to high net worth individuals including financial and estate planning, investment management services, wealth education, and family retreats. Rikoon operates nationally with fee only investment counsel and also offers comprehensive family office services. At December 31, 2008, Rikoon had approximately $363.1 million in assets under management. We own 75% of Rikoon at December 31, 2008.

Leonetti & Associates, LLC. Leonetti & Associates, LLC (“Leonetti”), based in Buffalo Grove, Illinois, provides fee-based investment advice for individuals and small businesses. Leonetti provides investment management and financial planning services to enhance client portfolios and help them reach their financial goals. At December 31, 2008, Leonetti had approximately $326.8 million in assets under management. We own 50.1% of Leonetti at December 31, 2008.

Miller-Green Financial Services, Inc. Miller-Green Financial Services, Inc. (“Miller-Green”), based in The Woodlands, Texas provides financial, investment, retirement, and/or estate planning services to individuals and families. At December 31, 2008, Miller-Green had approximately $243.6 million in assets under management.

The Dickenson Group, LLC. The Dickenson Group, LLC (“Dickenson”), based in Solon, Ohio, offers extensive expertise on insurance planning for individuals, families, and businesses as well as employee benefits communications and estate planning. We own 50.1% of Dickenson at December 31, 2008.

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

Capital Markets

Our capital markets business provides investment banking, institutional equity and fixed income brokerage, prime brokerage services to institutional customers and third party management of a portion of our assets.

Investment Banking

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

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

Institutional Brokerage

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

Institutional Equity. Our institutional clients include a broad array of institutions throughout North America, Europe, and Asia, including banks, retirement funds, mutual funds, endowments, investment advisors, and insurance companies. Our institutional equity strategy is to provide equity research coverage and trading services focused on companies with a presence in the U.S. Areas of concentration include financial services, life sciences, oil and gas exploration and production, oilfield services, pipelines, entertainment and media, retailing, and technology. We provide our institutional clients with research and execution trading services in both exchange-listed equity securities and equity securities quoted on Nasdaq. We also distribute to institutional clients equity securities from offerings that we co-manage or underwrite. Commissions are charged on all institutional securities transactions based on rates formulated by us. These services are available to institutional clients of our financial advisors. As of December 31, 2008, we had institutional equity operations in Los Angeles, New Orleans, New York, Dallas/Fort Worth and Houston.

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

Institutional Research. We use our proprietary equity research analysis to drive our institutional equity business and, where regulatorily permitted, to assist our other businesses, such as our investment banking operations and proprietary funds. This research analysis is based on economic fundamentals, using tools such as price-to-earnings multiples, price-to-book value comparisons, both absolute and relative to historic norms, and our research department’s own earnings forecasts. We intend to rely primarily on our own research rather than on research products purchased from outside research organizations.

Prime Brokerage Services

The brokerage industry has developed a service known as prime brokerage in which a professional investor, usually a private investor or hedge fund, maintains a cash or margin account with a prime broker that provides trade execution, clearing, bookkeeping, reporting, custodial, securities borrowing, financing, research, and fund raising services. The Concept Capital division of SMH, based in New York, with 51 professionals as of December 31, 2008, provides prime brokerage services to 25 hedge fund managers. We earn commission income on the securities transactions that we process through the prime brokerage transaction and interest income from arranging financing for these hedge funds. The profitability of this division is directly related to the volume of transactions that we process and the borrowings of the funds.

In addition, SMH, through the Concept Capital division, has also entered into asset management agreements with a number of individual asset managers to manage a portion of SMH’s assets. SMH shares in the profits or losses of these accounts and receives the commissions generated in them. The accounts are designed to diversify the aggregate risks, thus limiting potential losses or gains. Most of the accounts have “first loss” deposits to insulate SMH from trading losses. We have procedures in place to monitor trading to ensure that in the event that any “first loss” deposits are depleted by a trader, trading is suspended.

In 2008, revenue from our capital markets business was $89.7 million and pre-tax loss from continuing operations was $2.1 million, accounting for 45.7% of our total revenue.

Industry Trends

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

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consolidation among firms offering financial products and services;

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

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

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increased demand by investors for unbiased advice.

Our Strengths

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

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Focus on Growing High Net Worth and Mass Affluent Markets. We offer financial products and services designed to benefit high net worth and mass affluent individuals. We believe that there is a particularly significant opportunity in providing products and services to the large and growing mass affluent market.

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Highly Regarded Distribution Network and Investment Managers. Our asset and wealth management business includes Edelman, Capital Advisors (formerly known as Cummers/Moyers Capital Advisors, Inc.), Kissinger, Rikoon, Leonetti, and Miller-Green, each of which benefits from a sound regional reputation. Moreover, our wealth advisors and asset managers include Ric Edelman, the founder of Edelman and our largest shareholder, named to Barron’s 100 Top Financial Advisors five times (2004 - 2008), Capital Advisors, a No. 1 ranked firm in 2005 and 2006 by Nelson’s World’s Best Money Managers, and Don Sanders, our Vice Chairman, who has more than 45 years of investment experience and is well-known and regarded in the Southwest.

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Regional and Industry Focus. We are a full-service regional financial services company based in Texas with 73 offices in 22 states and have achieved a strong brand recognition and sound reputation in the Southwest. Our presence in Texas allows us to focus our investment and financial advisory efforts on industries that have established markets in Texas and the Southwest, including energy, health care, environmental, technology, financial and business services, retail and consumer products, and media and communications. We believe that our focus on these industries has allowed us to develop a level of industry expertise that distinguishes us from many of our competitors.

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

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

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

Our Strategy

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

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

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

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

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

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

We have increased our client assets through the acquisitions of Edelman in 2005, Rikoon in 2007, and Leonetti and Miller-Green in 2008. At December 31, 2008, Edelman’s assets under management were $2.9 billion, Rikoon’s assets under management were $363.1 million, Leonetti’s assets under management were $326.8 million, and Miller-Green’s assets under management were $243.6 million.

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Supplement Internal Growth with Strategic Acquisitions. We plan to actively pursue opportunities to acquire all or a significant portion of other complementary asset and wealth management businesses to gain access to additional proprietary products to offer our high net worth, mass affluent, and institutional clients, to gain access to new clients, to increase our assets under management or advisement, and to expand our geographic base. We believe that attractive acquisition opportunities exist, particularly among smaller, specialized regional financial services firms that want to affiliate with a larger company while still retaining their identity and entrepreneurial culture. Since 2000, we have acquired or gained control of 14 significant firms with products and services that we believe complement or expand our client base and the services and products that we provide. In addition, we believe that the ongoing consolidation trend in the financial services industry will allow us to continue to hire proven financial professionals who prefer the culture and opportunities inherent in an innovative regional firm such as ours.

Recent Developments

In one transaction at the end of the third quarter of 2008 and two transactions in the first quarter of 2009, we entered into agreements to make significant changes in our operations.

On August 29, 2008, we entered into two agreements to dispose of our interest in Salient Partners, L.P. and Endowment Advisers, L.P. and its affiliates, which acts as investment adviser to The Endowment Registered Fund, L.P. and The Endowment TEI Fund, L.P.

On January 22, 2009, we entered into an agreement with an entity formed by a number of the managing directors of SMH’s investment banking group and a third party pursuant to which the Company and SMH agreed to contribute our investment banking, institutional trading (including equity sales and fixed income sales), New York trading, and research businesses (excluding The Juda Group and the Concept Capital divisions) to a new entity in which we will retain a 20% interest.

On January 29, 2009, we entered into an agreement with Ric Edelman pursuant to which it was agreed that Mr. Edelman would retain a 24% interest in Edelman and we would purchase an additional 66% interest in Edelman Financial Advisors, LLC.

Edelman Financial Center, LLC and Edelman Financial Advisors, LLC

On January 29, 2009, the Company, entered into an agreement with Ric Edelman and Edward Moore pursuant to which the parties agreed to make certain amendments to (a) the Reorganization and Purchase Agreement dated as of May 10, 2005 (the “Purchase Agreement”), among the Company, The Edelman Financial Center, Inc. (“EFC Inc”), The Edelman Financial Center, LLC (“Edelman”), and Mr. Edelman, pursuant to which the Company had agreed to purchase 100% of the member interests in Edelman from EFC Inc. and Mr. Edelman and (a) the Letter Loan Agreement and Letter Agreement each dated December 8, 2006, between the Company and Edelman Financial Advisors, LLC (“EFA”), pursuant to which the Company had agreed to make certain loans to EFA and acquired a 10% interest in EFA. The new agreement provides that: (i) the Company will purchase an additional 66% interest in EFA from Mr. Edelman and Mr. Moore for an aggregate consideration consisting of (a) $25.0 million in cash and (b) a subordinated promissory note in the principal amount of $10.0 million and (ii) that the Third Closing under the Purchase Agreement, scheduled for May 8, 2009, will not occur and Mr. Edelman will retain a 24% interest in Edelman.

Capital Markets Business

On January 22, 2009, the Company and SMH entered into a Contribution Agreement with Pan Asia China Commerce Corp. (“PAC3”), Siwanoy Capital, LLC (“Siwanoy”) and Siwanoy Securities, LLC (“New BD”), pursuant to which (a) PAC3 agreed to subscribe for and purchase a 40% Class A membership interest in Siwanoy in exchange for a cash payment and note and (b) SMH agreed to contribute to New BD the assets, properties, working capital, and rights related and/or pertaining to its investment banking, institutional trading (including equity sales and fixed income sales), New York trading, and research businesses (excluding The Juda Group and the Concept Capital divisions) (the “Capital Markets Business”), including a specified amount of working capital (as adjusted for any profits of losses incurred in the Capital Markets Business between January 1, 2009, and the date of closing) less (i) the value of the accounts receivable contributed to Siwanoy, (ii) the value of the certain assets in SMH’s New Orleans, Louisiana office, (iii) the value of certain money security deposits and any advance payments, and (iv) the value of certain securities to be mutually agreed upon by the parties in exchange for a 20% Class A Membership Interest in Siwanoy, cash, and a note issued by Siwanoy to the Company. Current members of management of the Capital Markets Business will retain the remaining 40% membership interest in Siwanoy. The transaction is expected to close following the filing with and approval by the Financial Industry Regulatory Authority (“FINRA”) of a new member application by the New BD, which is anticipated to be in the second quarter of 2009.

Salient Partners and Endowment Advisers

On August 29, 2008, the Company entered into an Agreement to Retire Partnership Interest and Second Amendment to the Limited Partnership Agreement of Endowment Advisers, L.P. (the “EADV Agreement”) with Endowment Advisers, L.P. (“Partnership”), The Endowment Fund GP, L.P., (“TEF GP”), and The Endowment Fund Management, LLC, the sole general partner of each of TEF GP and the Partnership (the “General Partner”), and the Partnership’s limited partners (other than the Company) (collectively with the General Partner, the “Continuing Partners”). Prior to entry into the EADV Agreement, the Company was a limited partner of the Partnership and TEF GP and a member of the General Partner with approximately a 23.15% partnership or member interest. The Partnership is the investment adviser, and TEF GP is the general partner, of The Endowment Registered Fund, L.P. and The Endowment TEI Fund, L.P., each a limited partnership registered under the Investment Company Act of 1940 as a non-diversified, closed-end management investment company.

Pursuant to the EADV Agreement, the Company agreed to sell to the Partnership, and to withdraw from the Partnership, and the Partnership agreed to purchase from the Company all of the partnership interest held by the Company and the Partnership agreed to distribute to the Company consideration consisting of an aggregate amount equal to $86.0 million, plus a 6% per annum internal rate of return (the “Redemption Consideration”). The EADV Agreement provides that the Partnership shall, to the extent funds are available for distribution as determined by the General Partner in good faith, taking into account all facts and circumstances at the time, distribute cash to the Company in each calendar quarter period equal to the greater of (i) 23.15% of the aggregate cash distributions of the Partnership, or (ii) $3.0 million (the “Minimum Quarterly Distribution”), until such time as the Company has received the entire Redemption Consideration. The Redemption Consideration is subject to reduction by a portion of the Company’s liability under the Salient Incentive Plan (as defined below) not to exceed $3.3 million.

In addition, on August 29, 2008, the Company also entered into a Purchase and Sale Agreement (the “Salient Agreement”) with Salient Partners, L.P. (“Salient Partners”), and Salient Capital Management, LLC (“SCM”), and the respective limited partners and members of Salient Partners and SCM, pursuant to which the Company agreed to sell to Salient Partners its partnership interest in Salient Partners and to SCM its member interest in SCM for aggregate consideration of $9.3 million (the “Salient Purchase Price”). The Salient Purchase Price is payable pursuant to the terms of an Unsecured Subordinated Promissory Note dated August 29, 2008 (the “Note”), in the original principal amount of $9.3 million, bearing interest at the U.S. prime rate (adjusted on a quarterly basis), payable as to principal in quarterly payments of $467,000 each (subject to applicable setoff amounts as discussed below), payable on the 1st day of March, June, September, and December of each year beginning December 1, 2008, and continuing until September 1, 2013, when the entire amount of the Note, principal and interest then remaining unpaid, is due and payable. Pursuant to the terms of the Salient Agreement, the Company remains liable for its pro rata share of the liability under the Salient Partners, L.P. Key Employee Equity Incentive Plan in the maximum amount of $5.8 million (the “SMHG Ratable Incentive Payout”). The Company’s liability for the SMHG Ratable Incentive Payout will be satisfied (i) 43.5% ($2.5 million) by offset against the Note payments as they become due pro rated based upon the amount that the principal of the payment relates to then outstanding principal amount of the Note, and (ii) 56.5% ($3.3 million) by offset against the distributions due to the Company under the EADV Agreement pro rated based upon how the amount of a quarterly distribution relates to the base amount of the Redemption Consideration.

Marketing

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

SMH markets through its 39 offices and through 34 offices of independent registered representatives who are affiliated with SMH through SMH Partners. SMH targets its client groups through financial advisor relationships, mailings, telephone calls, in-person presentations, and firm-sponsored workshops. Due to the nature of its business, its regional name recognition, and the reputation of its management, business is obtained through referrals from existing clients, corporate relationships, other investment bankers, or initiated directly by the client, as well as through senior level calling programs.

Edelman conducts its marketing efforts through media channels designed to educate individuals on the subject of personal finance. Ric Edelman hosts a nationally syndicated weekly radio program in the Washington, D.C. area and in 21 other markets. Ric Edelman is a nationally syndicated newspaper columnist, publishes a monthly newsletter, and is the author of a variety of books and video and audio educational systems that help people achieve their financial goals.

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

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

Competition

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

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expertise and quality of the professional staff;

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reputation in the marketplace;

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existing client relationships;

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ability to commit capital to client transactions;

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mix of market capabilities; and

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quality and price of our products and services.

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

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

During 2008, many of our largest competitors were materially negatively affected by the global financial crisis. Certain of our larger competitors ceased to do business, while others merged, obtained substantial government assistance, and changed their business models and regulatory status, including becoming bank holding companies. The U.S. government is continuing to explore ways to revive the financial sector and the impact of these efforts is currently impossible to assess. It is likely that the companies that survive will remain competitors and that they will continue to have resources and product offerings that will continue to have a competitive impact on us.

As we seek to expand our asset management business, we face competition in the pursuit of clients interested in our services, the recruitment and retention of asset management professionals, and the identification and acquisition of other asset management firms that can be integrated in our group.

Government Regulation

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

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

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

Additional legislation, changes in rules promulgated by the SEC and SROs, or changes in the interpretation or enforcement of existing laws and rules may directly effect the mode of our operation and profitability.

Employees

At December 31, 2008, we had 639 employees. Of these, 38 in institutional sales and trading, 40 in investment banking, 16 in securities analysis and research, 51 in prime brokerage services, 413 in investment management, 17 in systems development, 4 in sports representation and management, and 60 in accounting, administration, legal, compliance, and support operations. None of our employees are subject to collective bargaining agreements. We believe our relations with our employees generally are good.

Available Information

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

Additionally, we make available on our web site and in print upon request of any shareholder to our Chief Financial Officer, a number of our corporate governance documents. These include: the Audit Committee charter, the Nominating and Corporate Governance Committee charter, and the Business Ethics Policy for Employees. Within the time period required by the SEC and the Nasdaq Stock Market, we will post on our web site any modifications to any of the available documents. The information on our website is not incorporated by reference into this report.

Our Chief Financial Officer can be contacted at Sanders Morris Harris Group Inc., 600 Travis, Suite 5800, Houston, Texas 77002, telephone: (713) 224-3100.

Item 1A. Risk Factors

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

Risks Relating to the Nature of Our Business

Recent government actions to stabilize credit markets and financial institutions may not be effective and could adversely affect our competitive position.

The U.S. Government recently enacted legislation and created several programs to help stabilize credit markets and financial institutions and restore liquidity, including the Emergency Economic Stabilization Act of 2008, the Troubled Asset Relief Program, the Federal Reserve's Commercial Paper Funding Facility and Money Market Investor Funding Facility and the Federal Deposit Insurance Corporation (“FDIC”) Temporary Liquidity Guarantee Program. Additionally, the governments of many nations have announced similar measures for institutions in their respective countries. There is no assurance that these programs individually or collectively will have beneficial effects in the credit markets, will address credit or liquidity issues of companies that participate in the programs or will reduce volatility or uncertainty in the financial markets. The failure of these programs to have their intended effects could have a material adverse effect on the financial markets, which in turn could materially and adversely affect our business, financial condition, and results of operation.

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

The financial services industry experienced unprecedented change and volatility in 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. In the United States declines in the housing market, with falling home prices and increasing foreclosures, have adversely affected the credit performance of mortgage loans and resulted in material writedowns of asset values by financial institutions, including government-sponsored entities, banks, securities firms and insurers. These writedowns have caused many financial institutions to seek additional capital, either from the private markets at substantial discounts from previously reported stock prices or from the U.S. government sponsored “TARP” program, which also involves significant dilutive equity issues and additional regulatory oversight and restrictions. Concern about the stability of financial markets and the strength of counterparties has caused many traditional sources of credit, such as banks, securities firms, and insurers, as well as institutional and private investors, to reduce or cease providing funding to borrowers. The U.S. government has adopted and proposed numerous measures in an attempt to stabilize the financial markets and recapitalize major financial institutions. Despite substantial efforts by the U.S. and other governments to restore confidence and reopen sources of credit, it is not possible to predict the extent to which such measures will prove successful.

The continuation or worsening of current conditions may cause us to face some or all of the following risks:

• 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.

• Declines in stock prices and trading volumes could result in declines in commission income, margin interest revenues, asset management and service fees and adversely affect our profitability.

• 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.

• Our plans for expansion of our client base or the services we provide may be delayed or impaired.

• 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.

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 Advisors, LLC we will need $25.0 million in available cash in March 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.

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

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

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the experience and quality of the professional staff;

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reputation in the marketplace;

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existing client relationships;

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ability to commit capital to client transactions; and

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mix of market capabilities.

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

We are a relatively small firm with 639 employees as of December 31, 2008, and total revenue of $196.3 million in 2008. Many of our competitors have greater personnel and financial resources than we do. Larger competitors are able to advertise their products and services on a national or regional basis and may have a greater number and variety of products and distribution outlets for their products, larger customer bases, and greater name recognition. These larger and better capitalized competitors may be better able to respond to changes in the asset and wealth management and investment banking industries, to finance acquisitions, to fund internal growth, and to compete for market share generally. Also, many of our competitors have more extensive investment banking activities than we do and, therefore, may possess a relative advantage in accessing deal flow and capital. In addition to competition from firms currently in the securities business, there has been increasing competition from other firms offering financial services, including automated trading and other services based on technological innovations.

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

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

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

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

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

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the risk of trading losses;

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losses resulting from the ownership or underwriting of securities;

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counterparty failure to meet commitments;

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customer fraud;

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employee fraud;

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issuer fraud;

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errors and misconduct;

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failure in connection with the processing of securities transactions; and

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customer litigation.

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

The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. In recent weeks, the volatility and disruption have reached unprecedented levels. Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market, and a declining real estate market in the U.S. have contributed to this increased volatility and have diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil and gas prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown. Many economists are now predicting that the U.S. economy, and possibly the global economy, may enter into a prolonged recession or depression as a result of the deterioration in the credit markets and the related financial crisis, as well as a variety of other factors.

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

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

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

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

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

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

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

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

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

We have a number of investment advisor affiliates, including Edelman, Rikoon, Leonetti, and Miller-Green, which were founded by and are identified with one individual. The departure, death, or disability of that individual could result in the loss of clients and assets under management.

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

An economic downturn in the U.S. generally, or in any of our target sectors, could adversely affect our revenue.

Asset and wealth management, investment banking, and institutional services for clients based in the U.S. account for a significant portion of our revenue. An economic downturn in the U.S. generally or in the energy sector or another of our target sectors could adversely affect our existing and potential asset and wealth management clients and the emerging and middle-market companies and industries within the region we predominantly serve, which could in turn reduce our asset and wealth management, underwriting, and institutional services businesses and adversely affect our financial results and the market value of our securities.

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

Many aspects of our business involve substantial risks of liability, litigation, and arbitration, which could adversely affect us. As a normal part of our business, we are from time to time named as a defendant or co-defendant in civil litigation and arbitration proceedings and as a subject of regulatory investigations arising from our business activities as a financial services firm. Some of these proceedings involve claims for substantial amounts of damages, based on allegations such as misconduct by us or our failure to properly supervise our asset and wealth management advisors, bad investment advice, unsuitable investment recommendations or excessive trading in a client’s account by our asset and wealth management advisors, materially false or misleading statements made in connection with securities offerings and other transactions, the advice we provide to participants in corporate transactions, and disputes over the terms and conditions of complex trading arrangements. The risks of liability, litigation, and arbitration often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time. In view of the inherent difficulty of predicting the outcome of legal and regulatory proceedings, particularly where the plaintiffs or regulatory authorities seek substantial or indeterminate damages or fines or where novel legal theories or a large number of parties are involved, we cannot state with confidence what the eventual outcome of currently pending matters will be or what the timing of the ultimate resolution of these matters will be. Depending on our results for a particular period, an adverse determination could have a material effect on quarterly or annual operating results in the period in which it is resolved. See “Item 3. – Legal Proceedings”.

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

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

In 2008, our asset and wealth management revenue was $102.7 million, accounting for 52.3% of our total revenue. We derive our revenue from this business primarily from management fees that are based on committed capital, assets under management or advisement, and incentive fees, which are earned if the return of our proprietary funds exceeds certain threshold returns. Our ability to maintain or increase assets under management or advisement is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market or economic conditions, and competition from other fund managers.

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

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

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our incentive fees could decline or be eliminated entirely;

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asset-based advisory fees could decline as a result of a decrease in assets under management;

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

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

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

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

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

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

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

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levels of assets under our management;

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

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

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

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

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the realization of profits and losses on principal investments;

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

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

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changes in accounting principles.

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

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

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

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

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

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

Risks Related to the Regulation of Our Business

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

Our businesses are subject to extensive regulation under both federal and state laws. SMH is registered as a broker-dealer with the SEC and FINRA; SMH, Capital Advisors, Edelman, Rikoon, Leonetti, and Miller-Green are registered with the SEC as investment advisors. All of the professional agents employed by SSG and SSG Baseball, L.P. are registered as certified contract advisors with either the National Football League Players Association or the Major League Baseball Players Association.

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

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

•

censure, fines, or civil penalties;

•

issuance of cease-and-desist orders;

•

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

•

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

•

prohibition against engaging in certain lines of business; and

•

other adverse consequences.

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

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

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

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

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

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

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

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

Risks Relating to Owning Our Common Stock

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

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

•

our perceived prospects;

•

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

•

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

•

changes in securities analysts’ recommendations or projections;

•

our announcements of significant contracts, milestones, or acquisitions;

•

sales of substantial amounts of our common stock;

•

changes in general economic or market conditions, including conditions in the securities brokerage and investment banking markets;

•

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

•

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

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

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

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

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

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

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

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

•

the authorization of blank check preferred stock;

•

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

•

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

•

a restriction on business combinations with interested parties.

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

Our executive officers, directors, and affiliates, and entities affiliated with them, control approximately 30% of our outstanding common stock (including exercisable stock options held by them). These shareholders, if they act together, may be able to exercise substantial influence over the outcome of all corporate actions requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions, which may result in corporate action with which you do not agree. This concentration of ownership may also have the effect of delaying or preventing a change in control and might affect the market price of our common stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal executive office together with certain brokerage and investment banking operations of SMH are located at 600 Travis, Houston, Texas and comprise approximately 67,000 square feet of leased office space pursuant to lease arrangements expiring in 2018. We lease 26 other office locations including Alexandria, Virginia; Bernardsville, New Jersey; Bethesda, Maryland; Boca Raton; Chicago (two locations); Cleveland (two locations); Colorado Springs; Dallas/Fort Worth (three locations); Fairfax, Virginia; Garden City, New York; Greenwich, Connecticut; Hunt Valley, Maryland; Jackson, Mississippi; Las Vegas; Los Angeles; New Orleans; New York City (three locations); Santa Fe; The Woodlands, Texas; and Tulsa. We lease all of our office space which management believes, at the present time, is adequate for our business. We also lease communication and other office equipment.

Item 3. Legal Proceedings

Many aspects of our business involve substantial risks of liability. In the normal course of business, we have been and in the future may be named as defendant or co-defendant in lawsuits and arbitration proceedings involving primarily claims for damages. We are also involved in a number of regulatory matters arising out of the conduct of our business. There can be no assurance that these matters will not have a material adverse effect on our results of 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. In 2007, SMH wrote off a $3.0 million subordinated working capital loan that it made to Ronco in 2006.

In May 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. We expect this case to go to trial in the second quarter of 2009.

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

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

There were no matters submitted to a vote of our security holders during the fourth quarter of 2008.

PART II

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

Our common stock trades on the Global Market Security tier of The Nasdaq Stock Market under the symbol “SMHG”. The following table sets forth the quarterly high and low sales prices for our common stock during 2008 and 2007 for the calendar quarters indicated, each as reported on the Nasdaq National Market, and cash dividends declared per share of common stock:

					Cash
Calendar Period	High		Low		Dividend

2008:
First Quarter	$	10.26	$	7.92	$	0.045
Second Quarter	$	9.02	$	6.67	$	0.045
Third Quarter	$	11.07	$	5.08	$	0.045
Fourth Quarter	$	8.97	$	4.23	$	0.045

2007:
First Quarter	$	12.89	$	10.19	$	0.045
Second Quarter	$	13.97	$	10.67	$	0.045
Third Quarter	$	12.15	$	8.99	$	0.045
Fourth Quarter	$	10.82	$	8.15	$	0.045

At March 9, 2009, there were 313 holders of record of our common stock.

Dividend Policy

In 2002, our board of directors instituted a policy of paying regular quarterly dividends on our common stock. During 2005, we increased the declared quarterly dividend payment to $0.045 per share (an annual amount of $0.18 per share). In February 2009, the board of directors declared a cash dividend for the first quarter of 2009 in the amount of $0.045 per share. Our declaration and payment of future dividends is subject to the discretion of our board of directors. In exercising this discretion, the board of directors will take into account various factors, including general economic and business conditions, our strategic plans, our financial results and condition, our expansion plans, any contractual, legal and regulatory restrictions on the payment of dividends, and such other factors the board considers relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

For our equity compensation plans, the following table shows, at the end of fiscal year 2008, (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights, (b) the weighted-average exercise price of such options, warrants and rights, and (c) the number of securities remaining available for future issuance under the plans, excluding those issuable upon exercise of outstanding options, warrants and rights.

Number of securities

remaining available for

Number of securities

future issuance under

to be issued

Weighted-average

equity compensation

upon exercise of

exercise price of

plans

outstanding options,

oustanding options,

(excluding securities

Plan category

warrants and rights

reflected in column(a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

660,307

9.56

2,650,890

(1)

Equity compensation plans not approved by security holders

Total

660,307

9.56

2,650,890

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

Corporate Performance

The following chart shows a comparison of the cumulative total shareholder return on our common stock for the five-year period ended December 31, 2008, as compared to the cumulative total return of the Nasdaq Stock Market Index and the Nasdaq Financial Stocks Index, a peer group, assuming $100 was invested at market close on December 31, 2003 in our common stock and the two indices and dividends were reinvested.

	Dec-03		Dec-04		Dec-05		Dec-06		Dec-07		Dec-08
Sanders Morris Harris Group Inc.	$	100.00	$	144.89	$	135.05	$	106.57	$	87.04	$	52.14
Nasdaq Stock Market Index (U.S. & Foreign)		100.00		108.81		111.28		122.73		135.65		65.04
Nasdaq Financial Stocks Index (1)		100.00		116.70		119.48		137.37		123.49		86.09

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

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

Item 6. Selected Financial Data

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

	Year Ended December 31,
	2008			2007		2006			2005		2004
	(in thousands except per share amounts)
Statement of Operations:
Total revenue	$	196,330		$	185,812	$	166,748		$	124,475	$	119,060
Income (loss) from continuing operations	$	(25,293	)	$	5,093	$	10,308		$	10,295	$	12,043
Income (loss) from discontinued operations, net of tax		-			-		(6,902	)		379		371
Net income (loss)	$	(25,293	)	$	5,093	$	3,406		$	10,674	$	12,414

Diluted earnings (loss)
per common share:
Continuing operations	$	(0.96	)	$	0.20	$	0.49		$	0.53	$	0.66
Discontinued operations		-			-		(0.33	)		0.02		0.02
Net earnings (loss)	$	(0.96	)	$	0.20	$	0.16		$	0.55	$	0.68

Weighted average common shares outstanding and committed - diluted		26,314			25,086		20,915			19,253		18,302

	As of December 31,
	2008		2007		2006		2005		2004
	(in thousands except per share amounts)
Balance Sheet Data:
Cash and cash equivalents	$	30,224	$	46,503	$	68,861	$	17,867	$	22,262
Securities		54,559		85,657		83,929		75,541		59,929
Total assets		297,470		291,548		282,042		208,689		172,433
Total liabilities		66,111		48,265		49,982		46,223		28,419
Minority interests		8,805		20,105		12,124		7,781		5,230
Shareholders' equity		222,554		223,178		219,936		154,685		138,784
Cash dividends declared per common share	$	0.18	$	0.18	$	0.18	$	0.18	$	0.15

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

Special Cautionary Notice Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities 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”. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.

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

Overview

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

Our Asset/Wealth Management segment provides investment advisory, wealth and investment management, 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, and prime brokerage services to institutional clients, and third party management of a portion of our assets.

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

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

Prime Brokerage Services provides trade execution, clearing, bookkeeping, reporting, custodial, securities borrowing, financing, research, and fund raising to hedge fund clients. The Company maintains a number of asset management accounts on behalf of individual asset managers 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. The decline in assets under our management due to instability in the overall stock market resulted in lower management fees for us as well as lower trading volume and reduced commission rates which have had a negative impact on our commission revenue.

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

Components of Revenue and Expenses

Revenue. Our revenue is comprised primarily of (1) 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 2008, compensation and benefits represented 51.9% of total expenses and 64.6% of total revenue, compared to 64.8% of total expenses and 57.8% of total revenue during 2007. The decrease in compensation and benefits as a percentage of expenses is principally due to a $56.5 million goodwill impairment charge recognized in 2008. 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.

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

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

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Total revenue increased $10.5 million to $196.3 million in 2008 from $185.8 million in 2007, while total expenses increased $79.0 million to $244.7 million in 2008 from $165.7 million in 2007. Equity in income of limited partnerships increased to $38.6 million in 2008 from $3.8 million in 2007, primarily due to the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. Income (loss) from continuing operations was $(25.3) million, or $(0.96) per diluted common share, in 2008 compared to $5.1 million, or $0.20 per diluted common share, in 2007.

Revenue from investment advisory and related services increased from $71.3 million during 2007 to $73.9 million in 2008, primarily due to the acquisitions of Rikoon, Leonetti, and Miller-Green. Commission revenue increased to $56.1 million in 2008 from $54.8 million during 2007 primarily due to an increase in trading volume in the institutional brokerage division. Investment banking revenue decreased to $14.3 million in 2008 from $35.0 million in 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 $10.2 million in 2007 to $33.5 million in 2008, primarily as the result of an increase in gains in our assets managed by third parties to $15.0 million in 2008 from $3.3 million in 2007. Also, principal transactions revenue from the sale of fixed income products increased to $11.9 million in 2008 from $2.5 million in 2007. Interest and dividends was constant at $6.7 million in 2008 and 2007. A decrease in the amount of money in the firm’s accounts that are earning interest income and a decline in interest rates in 2008 was offset by interest earned on notes receivable received in connection with the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. Other income increased to $11.8 million in 2008 from $7.7 million in 2007 reflecting growth in hedge fund servicing revenue and third-party marketing fees.

Employee compensation and benefits increased to $126.9 million in 2008 from $107.4 million in 2007 due to revenue growth in the prime brokerage services division. Expenses increased at a disproportionate rate to increased revenue due to a shift in a portion of revenue from lower compensation components (investment banking) to higher compensation components (prime brokerage services). Floor brokerage, exchange, and clearance fees increased to $7.0 million in 2008 from $6.4 million in 2007 reflecting the increase in trading volume. Communications and data processing increased to $11.3 million in 2008 from $10.0 million in 2007 primarily due to higher clearing firm service fees resulting from the increase in trading volume. Occupancy costs increased to $13.2 million in 2008 from $11.9 million in 2007 due to the increase in the amount of rental space occupied by SMH and the addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Interest expense increased to $147,000 in 2008 from $35,000 in 2007 due to the imputed interest associated with an incentive compensation payable resulting from the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. The Company recognized a goodwill impairment charge of $56.5 million in 2008. No such charge was recognized in 2007. Amortization of intangible assets increased to $1.0 million in 2008 from $349,000 in 2007 due to the addition of Rikoon, Dickenson, Leonetti, and Miller-Green. Other general and administrative expenses decreased to $28.6 million in 2008 from $29.6 million in 2007 primarily due to a decrease in the provision for bad debts which was partially offset by an increase in outside sales commissions.

Our effective tax rate from continuing operations was 52.4% in 2008 compared to 37.2% in 2007. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of nondeductible goodwill impairment charges.

RESULTS BY SEGMENT

Asset/Wealth Management

	Year Ended December 31,
	2008		2007
	(in thousands)

Revenue	$	102,681	$	107,252

Income from continuing operations before income taxes	$	24,699	$	24,833

Revenue from asset/wealth management decreased to $102.7 million in 2008 from $107.3 million in 2007 and income from continuing operations before income taxes decreased to $24.7 million in 2008 from $24.8 million in 2007. Sales credits from investment banking transactions decreased to $1.1 million in 2008 from $7.0 million in 2007. This decrease was partially offset by an increase in investment advisory and related services revenue to $73.7 million in 2008 from $71.1 million in 2007, primarily due to the acquisitions of Rikoon, Dickenson, Leonetti, and Miller-Green. 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. Total expenses decreased to $72.6 million in 2008 from $75.1 million in 2007, primarily due to decreased employee compensation related to the lower revenue. Equity in income of limited partnerships decreased to $1.5 million in 2008 from $8.5 million in 2007, principally due to the decrease in the value of the investment portfolio of one of the limited partnerships that we manage. Minority interests in net income of consolidated companies reflect the portion of net income attributable to minority interest ownership of entities included in our consolidated financial statements. Income attributable to minority interests, which reduces our pretax income, decreased to $6.9 million in 2008 from $15.8 million in 2007, principally due to decreases in the values of the investment portfolio of one of the limited partnerships.

Capital Markets

Investment Banking

	Year Ended December 31,
	2008			2007
	(in thousands)

Revenue	$	12,220		$	23,609

Income (loss) from continuing operations before income taxes	$	(4,246	)	$	4,273

Revenue from investment banking decreased to $12.2 million in 2008 from $23.6 million in 2007 and income (loss) from continuing operations before income taxes decreased to a loss of $4.2 million in 2008 from income of $4.3 million in 2007. The revenue decrease is primarily due to a decrease in the number of banking transactions completed during 2008 caused by weakness in the financial markets. Total expenses decreased to $16.5 million in 2008 from $19.3 million in 2007. The decrease in expenses is attributable to decreased employee compensation, which is partially tied to revenue.

Institutional Brokerage

	Year Ended December 31,
	2008			2007
	(in thousands)

Revenue	$	15,845		$	15,519

Income (loss) from continuing operations before income taxes	$	(671	)	$	1,232

Revenue from institutional brokerage increased to $15.8 million in 2008 from $15.5 million in 2007 and income (loss) from continuing operations before income taxes decreased to a loss of $671,000 in 2008 from income of $1.2 million in 2007. Commission revenue increased to $12.5 million in 2008 from $9.9 million in 2007 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 sales credits from syndicate and investment banking activities to $627,000 in 2008 from $3.4 million in 2007 reflecting a lower volume of offerings sold by the institutional division. Total expenses increased to $16.5 million in 2008 from $14.3 million in 2007, primarily due to increased employee compensation related to the higher commission revenue.

Prime Brokerage Services

	Year Ended December 31,
	2008		2007
	(in thousands)

Revenue	$	61,658	$	36,583

Income from continuing operations before income taxes	$	2,851	$	2,750

Revenue from prime brokerage services increased to $61.7 million in 2008 from $36.6 million in 2007 and income from continuing operations before income taxes increased to $2.9 million in 2008 from $2.8 million in 2007. Commission revenue and third-party marketing fees increased to $29.6 million in 2008 from $25.3 million in 2007 reflecting growth in hedge fund servicing revenue. In addition, principal transactions revenue increased to $30.6 million in 2008 from $7.8 million in 2007 reflecting an increase in revenue earned from the sale of fixed income products and trading activities. Total expenses increased to $58.8 million during 2008 from $33.8 million during 2007 reflecting increased compensation and outside sales commissions related to increased revenue. Our revenue sharing arrangement for prime brokerage services provides generally that we retain $2.75 million of the first $3.25 million of income and that we do not share in additional income until book profit of the division exceeds $5.5 million.

Corporate Support and Other

	Year Ended December 31,
	2008			2007
	(in thousands)

Revenue	$	3,926		$	2,849

Loss from continuing operations before income taxes	$	(39,234	)	$	(24,972	)

Revenue from corporate support and other increased to $3.9 million in 2008 from $2.8 million in 2007 and the loss from continuing operations before income taxes decreased to a loss of $39.2 million in 2008 from a loss of $25.0 million in 2007. Interest and dividend income increased to $5.2 million in 2008 from $3.8 million in 2007. Interest earned on notes receivable received in connection with the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. was partially offset by a decrease in the amount of money in the firm’s accounts that are earning interest income and a decline in interest rates in 2008. Total expenses increased to $80.3 million in 2008 from $23.2 million in 2007 primarily due to a $56.5 million goodwill impairment charge recognized in 2008. Equity in income (loss) of limited partnerships increased to income of $37.1 million in 2008 from a loss of $4.6 million in 2007, primarily due to the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. This income was partially offset by the decrease in the value of our direct investment in one limited partnership.

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

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

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

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

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

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

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

No losses from discontinued operations were recorded in 2007.

RESULTS BY SEGMENT

Asset/Wealth Management

	Year Ended December 31,
	2007		2006
	(in thousands)

Revenue	$	107,252	$	80,452

Income from continuing operations before income taxes	$	24,833	$	12,838

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

Capital Markets

Investment Banking

	Year Ended December 31,
	2007		2006
	(in thousands)

Revenue	$	23,609	$	25,239

Income from continuing operations before income taxes	$	4,273	$	7,728

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

Institutional Brokerage

	Year Ended December 31,
	2007		2006
	(in thousands)

Revenue	$	15,519	$	21,349

Income from continuing operations before income taxes	$	1,232	$	2,819

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

Prime Brokerage Services

	Year Ended December 31,
	2007		2006
	(in thousands)

Revenue	$	36,583	$	34,788

Income from continuing operations before income taxes	$	2,750	$	2,595

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

Corporate Support and Other

	Year Ended December 31,
	2007			2006
	(in thousands)

Revenue	$	2,849		$	4,920

Loss from continuing operations before income taxes	$	(24,972	)	$	(9,562	)

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

Liquidity and Capital Resources

Cash Requirements

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

The Company had one credit facility in effect at December 31, 2008. In 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 in May 2009, unless extended. There was no outstanding balance on the line of credit at December 31, 2008. The amount of available borrowings under the line of credit, which is reduced by letters of credit issued by the Company, was $4.0 million at December 31, 2008.

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

	Payment due by period
					After 1 but		After 3 but
			Within		within		within		After
	Total		1 year		3 years		5 years		5 years
	(in thousands)

Operating lease obligations	$	60,062	$	9,562	$	18,904	$	15,871	$	15,725
Consideration for EFA acquisition		35,000		25,000		10,000		-		-
Total	$	95,062	$	34,562	$	28,904	$	15,871	$	15,725

Operating expenses consist of compensation and benefits, floor brokerage, exchange, and clearing costs, and other expenses. These expenses are primarily dependent on revenue and, with the exception of obligations for office rentals, should require a limited amount of capital in addition to that provided by revenue during 2009. Currently, obligations for non-cancelable office leases total $9.6 million during 2009. Funds required for other working capital items such as receivables, securities owned, and accounts payable, along with expenditures to repurchase stock, are expected to total between $1.0 million and $3.0 million during 2009. Capital expenditure requirements are expected to total between $2.0 million and $3.0 million during 2009, mainly consisting of leasehold improvements, furniture, and computer equipment and software. Funds needed for acquisitions will depend on the completion of transactions that may not be identifiable until such time as the acquisition is completed.

We intend to satisfy our funding needs with our own capital resources, consisting largely of internally generated earnings and liquid assets, and with borrowings from outside parties. At December 31, 2008, we had approximately $30.2 million in cash and cash equivalents, which together with liquid assets, consisting of receivables from broker-dealers, deposits with clearing organizations and marketable securities owned, totaled $53.4 million.

Receivables turnover, calculated as total revenue divided by average receivables, was three for the year ended December 31, 2008 compared to five for the year ended December 31, 2007. The allowance for doubtful accounts as a percentage of receivables was 1.3% at December 31, 2008 compared to 5.0% at December 31, 2007. The decrease in the receivables turnover and in the allowance for doubtful accounts as a percentage of receivables was the result of an increase in receivables from notes receivable issued in exchange for the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P.

Sources and Uses of Cash

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

For the year ended December 31, 2008, net cash provided by operations totaled $27.0 million compared to $24.4 million during 2007. Receivables decreased by $3.1 million during the year ended December 31, 2008, due to repayment of the loan to EFA and a decline in fees receivable caused by market declines. These decreases were partially offset by an increase in the current tax receivable related to the 2008 loss from continuing operations.

Marketable securities owned increased by $3.4 million during the year ended December 31, 2008, while securities sold, not yet purchased decreased by $2.5 million and payables to broker-dealers and clearing organizations decreased by $922,000. The change in marketable securities owned, securities sold, not yet purchased, and payables to broker-dealers and clearing organizations is primarily due to the portfolios in accounts managed by third party managers. The Company’s accounts managed by third parties carry both long and short fixed income and equity securities. These accounts are managed 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 $32.7 million at December 31, 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 year ended December 31, 2008 were $7.9 million mainly for the purchase of leasehold improvements, furniture, and computer equipment and software necessary for our growth.

At December 31, 2008, SMH, our registered broker-dealer subsidiary, was in compliance with the net capital requirements of the SEC's Uniform Net Capital Rules and had capital in excess of the required minimum.

Critical Accounting Policies/Estimates

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

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

Investments in not readily marketable securities, marketable securities with insufficient trading volumes, and restricted securities have been valued at their estimated fair value by the Company in the absence of readily ascertainable market values. These estimated values may differ significantly from the values that would have been used had a readily available market existed for these investments. Such differences could be material to the financial statements. At December 31, 2008 and 2007, the Company’s investment portfolios included investments totaling $32.7 million and $61.1 million, respectively, whose values had been estimated by the Company in the absence of readily ascertainable market values.

Goodwill. Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be tested for impairment between annual test dates if an event or changing circumstances indicate that it is more likely than not that the fair value of the reporting unit is below its carrying amount. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill and other intangible assets). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Factors considered in determining fair value in accordance with SFAS No. 142 include, among other things, the Company’s market capitalization as determined by quoted market prices for its common stock and the value of the Company’s reporting units. The Company uses several methods to value its reporting units, including discounted cash flows, comparisons with valuations of public companies in the same industry, and multiples of assets under management. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

In performing the first step of the goodwill impairment test, the estimated fair values of the reporting units were developed using the methods listed above. When performing the discounted cash flow analysis, the Company utilized observable market data to the extent available. The discount rates utilized in these analyses ranged from 11% to 16%, reflecting market based estimates of capital costs. The Company also calculates estimated fair values of the reporting units utilizing multiples of earnings, book value, and, when applicable, assets under management of the reporting unit. The estimated fair value using these techniques is compared with the carrying value of the reporting unit to determine if there is an indication of impairment.

The Company performed its annual review for goodwill impairment as of April 30, 2008. This review was updated to November 30, 2008 due to deterioration in overall macroeconomic conditions and the extended decline in the Company’s stock price. The first step of the November goodwill impairment test resulted in an indication of impairment at four of the Company’s reporting units. As such, the Company was required to perform step two of the goodwill impairment test for these reporting units. This assessment resulted in the recognition of a goodwill impairment charge of $56.5 million. A deferred tax benefit of $6.8 million was recognized as a result of this charge. In the event that the Company’s stock price continues to trade below its book value, the Company would expect to update its review for goodwill impairment quarterly. The future goodwill impairment tests may result in an additional charge to earnings.

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

Effects of Inflation

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

Recent Accounting Pronouncements

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

The following discussion relates to our market risk sensitive instruments as of December 31, 2008.

Our trading equity and debt securities are marked to market on a daily basis. At December 31, 2008, our trading equity and debt securities were recorded at a fair value of $21.9 million. These trading equity and debt securities are subject to equity price risk.

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

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

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

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

Our financial services business is affected by general economic conditions. Our revenues relating to asset-based advisory services and managed accounts are typically from fees based on the market value of assets under management or advisement. The decline in assets under our management due to the instability in the overall stock market resulted in lower management fees for us as well as lower trading volume and reduced commission rates which have had a negative impact on our commission revenue. In addition, the instability in the credit markets, which sharply widened the spreads over treasuries of certain less than investment grade bonds held primarily in our newly established high yield hedge fund, created losses in our investment portfolio during 2008.

At December 31, 2008, securities owned by the Company were recorded at a fair value of $54.6 million, including $21.9 million in marketable securities, $29.4 million representing our investments in limited partnerships, and $3.3 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.

Operational Risk

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

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

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

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

Legal and Compliance Risk

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

New Business Risk

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

Other Risks

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

Item 8. Financial Statements and Supplementary Data

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page

Report of Independent Registered Public Accounting Firm		40

Consolidated Balance Sheets as of December 31, 2008 and 2007		41

Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2008		42

Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2008		43

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008		44

Notes to Consolidated Financial Statements		45

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Sanders Morris Harris Group Inc.:

We have audited the accompanying consolidated balance sheets of Sanders Morris Harris Group Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sanders Morris Harris Group Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company changed it method of accounting for certain securities owned in 2008 due to the adoption of FASB Statement No. 157, Fair Value Measurements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sanders Morris Harris Group Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2009, expressed an unqualified opinion on management’s assessment of, and the effective operation of, the Company’s internal control over financial reporting.

/s/ KPMG LLP

KPMG LLP

Houston, Texas

March 16, 2009

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	December 31,
	2008			2007

ASSETS
Cash and cash equivalents	$	30,224		$	46,503
Receivables, net of allowance of $1,470 and $2,330, respectively
Broker-dealers and clearing organizations		254			232
Customers		16,344			25,147
Related parties		8,417			14,676
Other		89,847			4,408
Deposits with clearing organizations		1,062			1,095
Securities owned		54,559			84,898
Securities available for sale		-			759
Furniture, equipment, and leasehold improvements, net		18,859			16,613
Other assets and prepaid expenses		2,261			2,329
Goodwill, net		63,078			88,461
Other intangible assets, net		12,565			6,427
Total assets	$	297,470		$	291,548

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	36,644		$	29,523
Borrowings		-			200
Deferred tax liability, net		14,532			137
Securities sold, not yet purchased		12,884			15,432
Payable to broker-dealers and clearing organizations		2,051			2,973
Total liabilities		66,111			48,265

Commitments and contingencies

Minority interests		8,805			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; 29,207,962 and 25,765,806 shares issued, respectively		292			258
Additional paid-in capital		234,578			204,596
Retained earnings (accumulated deficit)		(5,895	)		23,422
Accumulated other comprehensive income		-			161
Treasury stock, at cost, 1,049,085 shares and 929,285 shares, respectively		(6,421	)		(5,259	)
Total shareholders' equity		222,554			223,178
Total liabilities and shareholders' equity	$	297,470		$	291,548

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

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Year Ended December 31,
	2008			2007			2006
Revenue:
Investment advisory and related services	$	73,923		$	71,322		$	41,723
Commissions		56,053			54,804			57,229
Investment banking		14,317			35,014			36,569
Principal transactions		33,470			10,238			18,708
Interest and dividends		6,719			6,746			6,637
Other income		11,848			7,688			5,882
Total revenue		196,330			185,812			166,748

Expenses:
Employee compensation and benefits		126,917			107,371			96,258
Floor brokerage, exchange, and clearance fees		7,029			6,440			7,363
Communications and data processing		11,279			10,013			7,721
Occupancy		13,174			11,870			11,011
Interest		147			35			804
Goodwill impairment charge		56,471			-			-
Amortization of intangible assets		1,004			349			-
Other general and administrative		28,645			29,621			22,687
Total expenses		244,666			165,699			145,844

Income (loss) from continuing operations before equity in income of limited partnerships, minority interests, and income taxes		(48,336	)		20,113			20,904
Equity in income of limited partnerships		38,631			3,840			2,222
Income (loss) from continuing operations before minority interests and income taxes		(9,705	)		23,953			23,126
Minority interests in net income of consolidated companies		(6,896	)		(15,837	)		(6,708	)
Income (loss) from continuing operations before income taxes		(16,601	)		8,116			16,418
Provision for income taxes		8,692			3,023			6,110
Income (loss) from continuing operations		(25,293	)		5,093			10,308
Loss from discontinued operations, net of tax of $0, $0, and $(3,965), respectively		-			-			(6,902	)
Net income (loss)	$	(25,293	)	$	5,093		$	3,406

Basic earnings (loss) per common share:
Continuing operations	$	(0.96	)	$	0.21		$	0.50
Discontinued operations		-			-			(0.33	)
Net earnings (loss)	$	(0.96	)	$	0.21		$	0.17
Diluted earnings (loss) per common share:
Continuing operations	$	(0.96	)	$	0.20		$	0.49
Discontinued operations		-			-			(0.33	)
Net earnings (loss)	$	(0.96	)	$	0.20		$	0.16

Weighted average common shares outstanding and committed:
Basic		26,314			24,777			20,475
Diluted		26,314			25,086			20,915

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

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands, except shares and per share amounts)

	Year Ended December 31,																Year Ended December 31,
	2008					2007					2006						2008			2007			2006
	Amounts																Shares
Common stock
Balance, beginning of year	$	258				$	253				$	196						25,765,806			25,273,437			19,634,260
Sale of stock		-					-					50						-			-			5,000,000
Stock issued for acquisition		28					2					2						2,859,996			242,927			189,812
Stock issued pursuant to employee benefit plan		6					3					5						582,160			249,442			449,365
Balance, end of year		292					258					253						29,207,962			25,765,806			25,273,437
Common stock committed
Balance, beginning of year		-					-					-						-			-			-
Stock committed for acquistion		-					-					-						-			-			190,431
Stock issued pursuant to commitment		-					-					-						-			-			(190,431	)
Balance, end of year		-					-					-						-			-			-
Additional paid-in capital
Balance, beginning of year		204,596					199,176					134,004
Sale of stock		-					-					58,391
Stock issued for acquisition		23,905					2,398					2,380
Stock issued pursuant to employee benefit plan; including tax benefit		3,171					599					2,001
Stock-based compensation expense		2,906					2,423					2,385
Collection of receivable for shares issued		-					-					15
Balance, end of year		234,578					204,596					199,176
Retained earnings (accumulated deficit)
Balance, beginning of year		23,422					23,902					23,936
Cumulative effect of adoption of a new accounting principle		893					-					-
Cash dividends ($0.18 per share in 2008; 2007; and 2006)		(4,917	)				(5,573	)				(3,440	)
Net income (loss)		(25,293	)	(25,293	)		5,093		5,093			3,406		3,406
Balance, end of year		(5,895	)	(25,293	)		23,422		5,093			23,902		3,406
Accumulated other comprehensive income (loss)
Balance, beginning of year		161					86					30
Net change in unrealized appreciation on securities available for sale		(267	)	(267	)		125		125			89		89
Income tax benefit (expense) on change in unrealized appreciation on securities available for sale		106		106			(50	)	(50	)		(33	)	(33	)	��
Balance, end of year		-		(161	)		161		75			86		56
Comprehensive income (loss)				(25,454	)				5,168					3,462
Treasury stock
Balance, beginning of year		(5,259	)				(3,481	)				(3,481	)					(929,285	)		(739,411	)		(739,402	)
Acquisition of treasury stock		(1,162	)				(1,778	)										(119,800	)		(189,874	)		(9	)
Balance, end of year		(6,421	)				(5,259	)				(3,481	)					(1,049,085	)		(929,285	)		(739,411	)
Total shareholders' equity and common shares outstanding and committed	$	222,554				$	223,178				$	219,936						28,158,877			24,836,521			24,534,026

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

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2008			2007			2006

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(25,293	)	$	5,093		$	3,406
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized gain on securities available for sale		(205	)		(1	)		(12	)
(Gain) loss on sales of assets		88			74			(9	)
Depreciation and amortization		3,931			3,333			2,873
Provision for bad debts		1,180			5,308			836
Stock-based compensation expense		2,906			2,423			2,385
Goodwill impairment charge		56,471			-			4,456
Amortization of intangible assets		1,004			349			-
Deferred income taxes		14,501			(2,950	)		596
Equity in income of limited partnerships		(38,631	)		(3,840	)		(2,222	)
Minority interests in net income of consolidated companies		6,896			15,837			6,708
Unrealized and realized losses on not readily marketable securities owned, net		6,180			3,358			2,740
Not readily marketable securities owned received for payment of investment banking fees		(581	)		(1,182	)		(5,189	)
Net change in:
Receivables		3,142			(20,348	)		(11,775	)
Deposits with clearing organizations		33			(11	)		(11	)
Marketable securities owned		(3,433	)		16,888			(4,614	)
Other assets and prepaid expenses		(740	)		(293	)		2
Accounts payable and accrued liabilities		3,007			2,794			3,814
Securities sold, not yet purchased		(2,548	)		(4,675	)		11,939
Payable to broker-dealers and clearing organizations		(922	)		2,240			(2,539	)
Net cash provided by operating activities		26,986			24,397			13,384
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(7,939	)		(7,737	)		(5,669	)
Acquisitions, net of cash acquired of $0, $0, and $421, respectively		(29,080	)		(8,292	)		(2,382	)
Proceeds from sales and maturities of securities available for sale		697			834			520
Purchases of not readily marketable securities owned		(1,369	)		(24,201	)		(1,152	)
Proceeds from sales of not readily marketable securities owned		12,477			6,541			1,632
Proceeds from sales of assets		289			40			155
Net cash used in investing activities		(24,925	)		(32,815	)		(6,896	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock		(1,162	)		(1,778	)		-
Proceeds from sale of stock		-			-			58,441
Proceeds from shares issued pursuant to employee benefit plan		2,795			483			1,490
Tax benefit of stock options exercised		382			119			516
Collection of receivables for shares issued		-			-			15
Proceeds from borrowings		250			145			8,119
Repayment of borrowings		(450	)		(500	)		(18,270	)
Investments by minority interests		-			80			47
Distributions to minority interests		(16,505	)		(8,037	)		(2,412	)
Payments of cash dividends		(3,650	)		(4,452	)		(3,440	)
Net cash provided by (used in) financing activities		(18,340	)		(13,940	)		44,506
Net increase (decrease) in cash and cash equivalents		(16,279	)		(22,358	)		50,994
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		46,503			68,861			17,867
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	30,224		$	46,503		$	68,861

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

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Through its operating subsidiaries, SMH Capital Inc. (formerly Sanders Morris Harris Inc.) (“SMH”), 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”), 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 serves a diverse group of institutional, corporate, and individual clients.

The Company merged with and acquired its operating subsidiaries from 1999 through 2008. The acquisitions were accounted for using the purchase method and, accordingly, results of an acquired entity are included in the Company’s consolidated financial statements from the date of acquisition. As a result, the current period results are not comparable to the prior periods.

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

Principles of Consolidation

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

Management's Estimates

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

Cash Equivalents

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

Securities Owned

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

Furniture, Equipment, and Leasehold Improvements

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

Goodwill and Other Intangible Assets

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be tested for impairment between annual test dates if an event or changing circumstances indicate that it is more likely than not that the fair value of the reporting unit is below its carrying amount. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill and other intangible assets). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

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

Other intangible assets consist primarily of customer relationships and trade names acquired in purchase business combinations. Other intangible assets acquired that have indefinite lives (trade names) are not amortized but are tested for impairment annually or if certain circumstances indicate a possible impairment may exist. Certain other intangible assets acquired (customer relationships and covenants not to compete) are amortized over their estimated useful lives and tested for impairment if certain circumstances indicate an impairment may exist. During the year ended December 31, 2008, the Company recognized a trade name impairment of $227,000.

Resale and Repurchase Agreements

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

Stock-Based Compensation

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

Income Taxes

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

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

Commissions

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

Investment Banking

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

Investment Advisory and Related Services

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

Investments in Limited Partnerships

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

Fair Values of Financial Instruments

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

Sale of Stock

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

Reclassifications

Certain reclassifications have been made to the 2006 consolidated financial statements to conform them to the 2007 and 2008 presentation. Cash flow information has been revised to reclassify the acquisitions and dispositions of not readily marketable securities owned from net cash provided by operating activities to net cash used in investing activities. The total amount thus reclassified was $480,000. Management believes that the changes in the consolidated statement of cash flows are immaterial relative to the financial statements taken as a whole. The result of this reclassification on net cash provided by 2006 operating activities was a decrease of $480,000. The result of this reclassification on net cash used in investing activities in the 2006 consolidated statement of cash flows is as follows:

	2006
	(in thousands)

Net cash used in investing activities (as reported)	$	(7,376	)
Impact of reclassification of acquisitions and dispositions of not readily marketable securities		480
Net cash used in investing activities (as reclassified)	$	(6,896	)

Recent Accounting Pronouncements

In December 2007, the FASB issued 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.

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 December 31, 2008, the Company had $8.8 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.

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 $2.9 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.

On May 8, 2009, the Company was to purchase all of the remaining issued and outstanding membership interests of Edelman for approximately $38.7 million payable in a combination of cash and the Company’s common stock (the “Third Tranche Consideration”). On January 29, 2009, the Company entered into an agreement (the “Agreement”) that made certain amendments to the May 10, 2005 purchase agreement. Under the terms of the Agreement, the Company will not be required to pay the Third Tranche Consideration provided it fulfills the requirements of the Agreement. See Note 25 – Subsequent Events.

3. ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

Balance at December 31, 2005	$	512
Additions charged to cost and expenses		836
Charge off of receivables		(1,121	)
Balance at December 31, 2006		227
Additions charged to cost and expenses		5,308
Charge off of receivables		(3,205	)
Balance at December 31, 2007		2,330
Additions charged to cost and expenses		1,180
Charge off of receivables		(2,040	)
Balance at December 31, 2008	$	1,470

4. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

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

	December 31,
	2008				2007
			Sold, Not Yet				Sold, Not Yet
	Owned		Purchased		Owned		Purchased
	(in thousands)
Marketable:
Corporate stocks and options	$	21,877	$	12,803	$	23,799	$	15,432
Corporate bond		-		81		-		-
		21,877		12,884		23,799		15,432
Not readily marketable:
Limited partnerships		29,356		-		53,012		-
Warrants		2,316		-		5,649		-
Equities and options		1,010		-		2,438		-
		32,682		-		61,099		-
	$	54,559	$	12,884	$	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 is effected under the Securities Act of 1933 or other applicable securities acts, 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 Corporate Opportunities Fund, L.P., Corporate Opportunities Fund (Institutional), L.P., Sanders Opportunity Fund, L.P., Sanders Opportunity Fund (Institutional), L.P., SMH Credit Opportunity Fund, L.P. (formerly Tactical Opportunities High Yield Fund, L.P.), Life Sciences Opportunity Fund, L.P., Life Sciences Opportunity Fund (Institutional), L.P., Life Sciences Opportunity Fund II, L.P., Life Sciences Opportunity Fund (Institutional) II, L.P., 2003 Houston Energy Partners, L.P., 2005 Houston Energy Partners, L.P., Concept Capital, LLC, Select Sports Group, Ltd., Endowment Advisors, L.P., SMH Private Equity Group I, L.P., SMH Private Equity Group II, L.P., and SMH NuPhysicia, LLC.

A summary of the results of operations and partners’ capital of the limited partnerships is as follows as of and for the years ended December 31, 2008, 2007, and 2006:

	Year Ended December 31,
	2008			2007			2006
	(in thousands)

Net investment income	$	32,107		$	30,751		$	9,853
Unrealized loss on investments		(46,949	)		(6,803	)		(6,156	)
Realized gain (loss) on investments		(4,706	)		28,308			17,784
Increase (decrease) in partners' capital resulting from operations	$	(19,548	)	$	52,256		$	21,481
Total assets	$	286,121		$	612,868		$	369,834
Total liabilities		(115,014	)		(60,764	)		(26,856	)
Partners' capital	$	171,107		$	552,104		$	342,978

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

Level 1

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

Level 2

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

Level 3

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

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

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

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

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

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

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 December 31, 2008:

	Level 1		Level 2		Level 3		Total
	(in thousands)

Securities owned	$	21,596	$	3,074	$	13,423	$	38,093
Securities sold, not yet purchased		12,794		90		-		12,884

The following table sets forth a summary of changes in the fair value of the Company’s level 3 securities owned for the year ended December 31, 2008:

	Level 3
	Securities Owned
	Year Ended
	December 31, 2008
	(in thousands)

Balance, beginning of year	$	16,620
Realized lossess		(934	)
Unrealized gains (losses) relating to securities still held at the reporting date		(296	)
Purchases, issuances, and settlements		(1,967	)
Balance, end of year	$	13,423

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

	Year Ended
	December 31, 2008
			Equity in Income
	Principal		of Limited
	Transactions		Partnerships
	(in thousands)

Unrealized gains (losses) relating to securities still held at the reporting date	$	37	$	(333	)

At December 31, 2008, the Company had $14.2 million and $2.3 million in securities owned that are valued in accordance with EITF D-46, Accounting for Limited Partnership Investments, and at cost basis, respectively.

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 23.15% 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 $76.7 million representing the net present value of the expected receipts which is included in "Other receivables" in the Consolidated Balance Sheets. The Company recognized a $50.4 million gain on this sale in 2008.

5. SECURITIES AVAILABLE FOR SALE

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

	Amortized		Gross Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
	(in thousands)
At December 31, 2007:
U.S. government and agency obligations	$	133	$	3	$	-	$	136
Marketable equity securities		359		264		-		623
Total	$	492	$	267	$	-	$	759

The Company’s available for sale portfolio is comprised of U.S. government agency obligations and large cap equity securities. No securities available for sale had unrealized losses at December 31, 2007.

Management evaluates securities available for sale to determine if a decline in value is other than temporary. Such evaluation considers the length of time and the extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Gross realized gains on sales of securities available for sale were $205,000, $1,000, and $15,000 for the years ended December 31, 2008, 2007, and 2006, respectively. No realized losses on securities available for sale were recorded for the years ended December 31, 2008 and 2007. Gross realized losses on sales of securities available for sale were $3,000 for the year ended December 31, 2006. Such gains and losses are included in revenue under the caption “Principal transactions”.

6. RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS

Receivables from broker-dealers and clearing organizations at December 31, 2008 and 2007 were as follows:

	December 31,
	2008		2007
	(in thousands)

Receivables from broker-dealers and clearing organizations	$	254	$	232

7. DEPOSITS WITH CLEARING ORGANIZATIONS

Under its clearing agreements, SMH is required to maintain a certain level of cash or securities on deposit with clearing organizations. Should the clearing organizations suffer a loss due to the failure of a customer of the Company to complete a transaction, the Company is required to indemnify the clearing organizations. The Company had $1.1 million on deposit as of December 31, 2008 and 2007 with clearing organizations to meet this requirement.

8. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

Furniture, equipment, and leasehold improvements at December 31, 2008 and 2007 were as follows:

	December 31,
	2008			2007
	(in thousands)

Furniture and fixtures	$	5,209		$	4,875
Equipment		9,539			8,911
Leasehold improvements		17,277			14,508
Accumulated depreciation and amortization		(13,166	)		(11,681	)
Furniture, equipment, and leasehold improvements, net	$	18,859		$	16,613

9. BORROWINGS

In 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 December 31, 2008, the Company was in compliance with all covenants. There was no outstanding balance on the line of credit at December 31, 2008. The amount of available borrowings under the line of credit, which is reduced by letters of credit issued by the Company, was $4.0 million at December 31, 2008.

10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 2008 and 2007 were as follows:

	December 31,
	2008		2007
	(in thousands)

Accounts payable	$	4,898	$	5,591
Compensation		19,221		18,000
Other		12,525		5,932
Total accounts payable and accrued liabilities	$	36,644	$	29,523

In conjunction with the sale of the Company's interests in Salient Partners and Endowment Advisers, the Company recorded a payable in the amount of $4.1 million representing the net present value of future incentive compensation payments. This payable is included in “Other” in the above table.

11. INCOME TAXES

The components of the income tax provision (benefit) for the years ended December 31, 2008, 2007, and 2006 were as follows:

	Year Ended December 31,
	2008			2007			2006
	(in thousands)

From continuing operations:
Current	$	(6,253	)	$	5,973		$	5,275
Deferred		14,945			(2,950	)		835
Income tax provision from continuing operations		8,692			3,023			6,110
From discontinued operations		-			-			(3,965	)
Income tax provision	$	8,692		$	3,023		$	2,145

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

	Year Ended December 31,
	2008		2007		2006
	(in thousands)

Expected federal tax at statutory rate of 34% for 2008, 2007, and 2006	$	5,644	$	2,759	$	5,582
State and other income taxes		3,048		264		528
Total	$	8,692	$	3,023	$	6,110

The effective tax rates from continuing operations for the years ended December 31, 2008, 2007, and 2006 were 52.4%, 37.2%, and 37.2%, respectively.

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

	December 31,
	2008			2007
	(in thousands)
Deferred income tax assets:
Unrealized loss on securities owned	$	733		$	-
Accumulated depreciation		294			1,321
Accrued liabilities		16			-
Allowance for doubtful accounts		558			869
Partnership income		-			233
Deferred compensation		350			830
Restricted stock compensation		1,208			196
Goodwill and other intangible amortization/impairment		5,158			-
SFAS No. 123R expense		247			95
Total deferred tax assets		8,564			3,544
Deferred income tax liabilities:
Accrued liabilities		-			(142	)
Unrealized gains on securities available for sale		(101	)		(100	)
Prepaid expenses		(136	)		(229	)
Imputed interest expense		(186	)		(183	)
Goodwill and other intangible amortization		-			(734	)
Unrealized gain on securities owned		-			(2,293	)
Gain on sale of business		(22,673	)		-
Total deferred tax liabilities		(23,096	)		(3,681	)
Net deferred tax liability	$	(14,532	)	$	(137	)

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

The current tax receivable at December 31, 2008 and 2007 was $12.1 million and $1.6 million, respectively. This receivable is a component of “Other receivables” in the Consolidated Balance Sheets.

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.

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

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

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

12. ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS

Substantially all employees are eligible to participate in the Sanders Morris Harris Group Inc. 401(k) defined contribution plan. The Company made no contributions to this plan in 2008, 2007, and 2006.

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

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

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

Stock Options

The 1998 Incentive Plan provides for the issuance to eligible employees of, among other things, incentive and non-qualified stock options that may expire up to 10 years from the date of grant. The outstanding options vest over one to five year service periods and have an exercise price equal to the closing price of the Company’s stock on the date of the grant. Unvested options on the date of termination of employment are forfeited within 90 days of termination. Typically, new shares are issued upon the exercise of stock options.

During the years ended December 31, 2008, 2007, and 2006, 246,078, 55,200, and 153,686 options were exercised for which the Company received proceeds of $1.2 million, $257,000, and $792,000, respectively, and the tax benefit realized from stock option exercises was $373,000, $119,000, and $516,000, respectively. The Company recognized pretax compensation cost of $166,000, or $100,000 net of tax, for the year ended December 31, 2008 and $144,000, or $88,000 net of tax, for the year ended December 31, 2007. The portion of stock-based compensation expense related to stock options that was unrecognized at December 31, 2008 was $105,000 and is expected to be recognized over a weighted average period of 0.96 years.

The following table sets forth information regarding the Company’s stock options for each of the three years in the period ended December 31, 2008:

						Weighted
				Weighted		Average		Aggregate
	Number			Average		Remaining		Intrinsic
	of Shares			Exercise Price		Life		Value
						(in years)		(in thousands)
Outstanding at December 31, 2005		915,271		$	6.42
Granted		150,000			15.19
Exercised		(153,686	)		5.15			$	1,483
Oustanding at December 31, 2006		911,585			8.08
Granted		-			-
Exercised		(55,200	)		4.66				340
Oustanding at December 31, 2007		856,385			8.30
Granted		50,000			8.17
Exercised		(246,078	)		4.89				1,085
Oustanding at December 31, 2008		660,307			9.56		4.50		-

Options exercisable at December 31, 2008		606,140			9.25		4.19		-

Options available for grant at December 31, 2008		2,650,890

The following table summarizes information related to stock options outstanding and exercisable at December 31, 2008:

	Options Outstanding						Options Exercisable
	Number		Wgtd. Avg.				Number
Range of	Outstanding at		Remaining		Wgtd. Avg.		Exercisable at		Wgtd. Avg.
Exercise Prices	12/31/2008		Contr. Life		Exercise Price		12/31/2008		Exercise Price
				(in years)
$4.44-$6.04		280,307		1.54	$	4.82		280,307	$	4.82
$7.91-$9.15		75,000		7.62		8.17		58,333		8.16
$12.02-$17.20		305,000		6.46		14.27		267,500		14.14
$4.44-$17.20		660,307		4.50		9.56		606,140		9.25

The fair value of options at date of grant was estimated using the Black-Scholes option pricing model. There were no stock options granted during 2007. During 2008 and 2006, stock options were granted with the following weighted-average assumptions:

	2008			2006

Expected life in years		10.00			5.00
Interest rate		3.17	%		5.02	%
Volatility		28.33	%		19.33	%
Dividend yield		2.20	%		1.24	%
Weighted average fair value of options granted during the period	$	2.47		$	3.65

Restricted Stock

The 1998 Incentive Plan permits the Company to grant restricted common stock to its employees. Additionally, eligible employees and consultants are allowed to purchase, in lieu of salary, commission, or bonus, shares of the Company’s restricted common stock at a price equal to 66.66% of the 20-day average of the closing sales price of the Company’s common stock, ending on the day prior to the date the shares are issued. All shares are valued at the closing price on the date the shares are issued. The value of restricted shares granted, less consideration paid, if any, is amortized to compensation expense over a one to five-year vesting period.

Employees deferred compensation of $151,000, $225,000, and $698,000 during the years ended December 31, 2008, 2007, and 2006, respectively, that was used to purchase restricted common stock. The Company recognized pretax compensation expense of $2.7 million, $2.3 million, and $2.4 million, or $1.6 million, $1.4 million, and $1.5 million net of tax, during the years ended December 31, 2008, 2007, and 2006, respectively, related to its restricted common stock plan.

The following table summarizes certain information related to restricted common stock grants at December 31, 2008:

	Number of		Weighted Average
	Shares		Grant Date Fair Value

Nonvested at January 1, 2008		526,741	$	13.39

Nonvested at December 31, 2008		683,116		11.06

For the year ended December 31, 2008:

Granted		345,352		8.65

Vested		179,707		13.24

Forfeited		9,270		11.47

At December 31, 2008, total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock totaled $4.5 million and is expected to be recognized over the next 4.25 years. The fair value of restricted stock vested during the years ended December 31, 2008, 2007, and 2006 was $1.5 million, $2.2 million, and $2.2 million, respectively.

13. PREFERRED STOCK

The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.10 per share. Shares of preferred stock may be issued from time to time by the board of directors, without action by the shareholders, in one or more series with such designations, preferences, special rights, qualifications, limitations, and restrictions as may be designated by the board of directors prior to the issuance of such series. No shares of preferred stock have been issued as of December 31, 2008.

14. 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 and 189,874 shares of its common stock during the years ended December 31, 2008 and 2007, respectively, related to this program.

15. EARNINGS (LOSS) PER COMMON SHARE

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

	Year Ended December 31,
	2008			2007		2006
	(in thousands, except per share amounts)

Income (loss) from continuing operations	$	(25,293	)	$	5,093	$	10,308
Loss from discontinued operations, net of tax		-			-		(6,902	)
Net income (loss)	$	(25,293	)	$	5,093	$	3,406

Basic earning (loss) per common share:
Continuing operations	$	(0.96	)	$	0.21	$	0.50
Discontinued operations		-			-		(0.33	)
Net earnings (loss)	$	(0.96	)	$	0.21	$	0.17

Diluted earnings (loss) per common share:
Continuing operations	$	(0.96	)	$	0.20	$	0.49
Discontinued operations		-			-		(0.33	)
Net earnings (loss)	$	(0.96	)	$	0.20	$	0.16

Weighted average number of common shares outstanding:
Basic		26,314			24,777		20,475
Incremental common shares issuable under stock option plan, net		-			309		440
Diluted		26,314			25,086		20,915

Outstanding stock options of 511,000, 305,000, and 172,500 at December 31, 2008, 2007, and 2006, respectively, have not been included in diluted earnings per common share because to do so would have been antidilutive for the years presented.

16. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of the Company’s goodwill and other intangible assets for the years ended December 31, 2008 and 2007 were as follows:

	Year Ended December 31, 2008
							Amortizable Intangible Assets:									Total Other
							Covenants Not			Customer						Intangible
	Goodwill			Trade Names			To Compete			Relationships			Subtotal			Assets
	(in thousands)
Balance, beginning of year	$	88,461		$	2,246		$	527		$	3,654		$	4,181		$	6,427
Edelman Second Tranche Consideration		44,367			-			-			-			-			-
Acquisition of Miller-Green		-			1,104			57			1,862			1,919			3,023
Acquisition of Leonetti		2,057			1,403			64			2,652			2,716			4,119
Sale of Salient and Endowment Advisers		(15,336	)		-			-			-			-			-
Goodwill impairment charge		(56,471	)		-			-			-			-			-
Amortization/impairment of other intangible assets		-			(227	)		(198	)		(579	)		(777	)		(1,004	)
Balance, end of year	$	63,078		$	4,526		$	450		$	7,589		$	8,039		$	12,565

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

As of December 31, 2008, the remaining weighted-average amortization period is 4.88 years for covenants not to compete and 12.16 years for customer relationships included in the table above.

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


2009	$	798
2010		690
2011		690
2012		679
2013		675
Thereafter		4,507

17. COMMITMENTS AND CONTINGENCIES

The Company has issued letters of credit in the amounts of $420,000, $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 December 31, 2008. On January 29, 2009, the Company entered into an agreement (the “Agreement”) whereby the Company will purchase an additional 66% of EFA for an aggregate consideration of $25.0 million in cash and a subordinated promissory note in the principal amount of $10.0 million. Under the terms of the Agreement, the Company will not be required to loan EFA the remaining $10.0 million provided it fulfills the requirements of the Agreement. See Note 25 – Subsequent Events.

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

In the normal course of business, the Company enters into underwriting commitments. There were no firm underwriting commitments open at December 31, 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 operation in any future period and a significant judgment could have a material adverse impact on our consolidated financial position, results of operations, and cash flows. In addition to claims for damages and monetary sanctions that may be made against us, we incur substantial costs in investigating and defending claims and regulatory matters.

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.

Total rental expense for operating leases was $7.3 million, $6.5 million, and $6.4 million for the years ended December 31, 2008, 2007, and 2006, respectively. Rent expense on operating leases is recognized on a straight line basis over the life of the respective leases. The Company and its subsidiaries have obligations under operating leases that expire by 2018 with initial noncancelable terms in excess of one year. Aggregate annual rentals for office space and computer and office equipment are as follows (in thousands):

2009	$	9,562
2010		9,625
2011		9,279
2012		8,417
2013		7,454
Thereafter		15,725
Total minimum rental payments		60,062
Minimum sublease rentals		(1,252	)
Net minimum rental payments	$	58,810

18. CONCENTRATIONS OF RISK

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

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

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

19. NET CAPITAL REQUIREMENTS OF SUBSIDIARY

SMH is subject to the Securities and Exchange Commission Uniform Net Capital Rule (SEC rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 (and the rule of the “applicable” exchange also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1). At December 31, 2008, SMH had net capital, as defined, of $8.8 million, which was $7.7 million in excess of its required net capital of $1.1 million.

20. 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.

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.

The following summarizes certain financial information of each reportable business segment for the years ended December 31, 2008, 2007, and 2006. SMHG does not analyze asset information in all business segments.

	Year Ended December 31,
	2008			2007			2006
				(in thousands)
Revenue:
Asset/Wealth Management	$	102,681		$	107,252		$	80,452
Capital Markets:
Investment banking		12,220			23,609			25,239
Institutional brokerage		15,845			15,519			21,349
Prime brokerage services		61,658			36,583			34,788
Capital Markets Total		89,723			75,711			81,376
Corporate Support and Other		3,926			2,849			4,920
Total	$	196,330		$	185,812		$	166,748

Income (loss) from continuing operations before equity in income (loss) of limited partnerships, minority interests, and income taxes:
Asset/Wealth Management	$	30,079		$	32,191		$	18,052
Capital Markets:
Investment banking		(4,246	)		4,273			7,728
Institutional brokerage		(671	)		1,232			2,819
Prime brokerage services		2,851			2,750			2,595
Capital Markets Total		(2,066	)		8,255			13,142
Corporate Support and Other		(76,349	)		(20,333	)		(10,290	)
Total	$	(48,336	)	$	20,113		$	20,904

Equity in income (loss) of limited partnerships:
Asset/Wealth Management	$	1,516		$	8,479		$	1,494
Capital Markets:
Investment banking		-			-			-
Institutional brokerage		-			-			-
Prime brokerage services		-			-			-
Capital Markets Total		-			-			-
Corporate Support and Other		37,115			(4,639	)		728
Total	$	38,631		$	3,840		$	2,222

Minority interests in net income of consolidated companies:
Asset/Wealth Management	$	(6,896	)	$	(15,837	)	$	(6,708	)
Capital Markets:
Investment banking		-			-			-
Institutional brokerage		-			-			-
Prime brokerage services		-			-			-
Capital Markets Total		-			-			-
Corporate Support and Other		-			-			-
Total	$	(6,896	)	$	(15,837	)	$	(6,708	)

Income (loss) from continuing operations before income taxes:
Asset/Wealth Management	$	24,699		$	24,833		$	12,838
Capital Markets:
Investment banking		(4,246	)		4,273			7,728
Institutional brokerage		(671	)		1,232			2,819
Prime brokerage services		2,851			2,750			2,595
Capital Markets Total		(2,066	)		8,255			13,142
Corporate Support and Other		(39,234	)		(24,972	)		(9,562	)
Total	$	(16,601	)	$	8,116		$	16,418

21. SUPPLEMENTAL CASH FLOW INFORMATION

	Year Ended December 31,
	2008			2007			2006
	(in thousands)

Cash paid for income taxes, net	$	2,320		$	5,742		$	1,072
Cash paid for interest		9			23			842
Non-cash investing activities:
Acquisitions:
Receivables		10			-			-
Goodwill		24,136			2,400			2,449
Accounts payable and accrued liabilities		(290	)		-			(67	)
Minority interests		77			-			-
Common stock		(23,933	)		(2,400	)		(2,382	)
Sale of nonmarketable securities:
Receivables		76,727			-			-
Sale of limited partnerships		(72,583	)		-			-
Accounts payable and accrued liabilities		(4,144	)		-			-
Non-cash financing activities:
Dividends declared not yet paid		1,267			1,121			-

22. RELATED PARTY TRANSACTIONS

The Company had receivables from related parties totaling $8.4 million and $14.7 million at December 31, 2008 and 2007, respectively, primarily consisting of $4.4 million and $3.0 million, respectively, of advances to unconsolidated related entities to fund operating expenses and $3.3 million and $2.7 million, respectively, of notes receivable from employees and consultants representing loans made to induce the employees and consultants to affiliate with the Company. The notes receivable from employees and consultants typically are forgiven over a one to five-year period and have tiered maturities from 2009 through 2013. In addition, at December 31, 2007, the Company had an $8.0 million notes receivable from EFA that was repaid in full in 2008.

SMH earned fees of $2.6 million, $3.4 million, and $2.4 million in 2008, 2007, and 2006, respectively, through the sale of annuity products from HWG Insurance Agency, Inc. (“HWG”). The sole shareholder of HWG is an employee of SMH.

In December 2006, Ric Edelman organized a new entity, EFA to expand the Edelman financial platform into additional markets outside the Washington, D.C. metropolitan area. The Company owns a 10% membership interest in EFA. We committed to initially loan EFA up to $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 December 31, 2008. On January 29, 2009, the Company entered into an agreement (the “Agreement”) whereby the Company will purchase an additional 66% of EFA. Under the terms of the Agreement, the Company will not be required to loan EFA the remaining $10.0 million provided it fulfills the requirements of the Agreement. See Note 25 – Subsequent Events.

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

During 2001, the Company formed PTC – Houston Management, L.P. (“PTC”) to secure financing for a new proton beam therapy cancer treatment center to be constructed in Houston. A former advisory director of SMHG and his family are the principal owners of an entity that is a 50% owner of PTC. Net operating income recognized by PTC totaled $1.4 million, $248,000, and $593,000 in 2008, 2007, and 2006, respectively, of which $643,000, $118,000, and $296,000, respectively, was attributable to the Company and $716,000, $124,000, and $297,000, respectively, was attributable to the advisory director-owned entity. During 2007, the Company granted a 5% ownership interest in PTC to an employee who serves as a manager of PTC. The Company owned 50% of PTC through September 30, 2007 and 45% of PTC thereafter.

23. UNAUDITED QUARTERLY FINANCIAL INFORMATION

	Three Months Ended,
	March 31,			June 30,		Sept. 30,		Dec. 31,
	2008			2008		2008		2008
	(in thousands, except per share amounts)

Total revenue	$	41,426		$	53,300	$	46,960	$	54,644

Net income (loss)	$	(2,107	)	$	6,192	$	28,960	$	(58,338	)

Basic earnings (loss) per common share	$	(0.08	)	$	0.23	$	1.03	$	(2.13	)

Diluted earnings (loss) per common share	$	(0.08	)	$	0.23	$	1.03	$	(2.13	)

Weighted average common shares oustanding - basic		24,940			26,760		28,033		27,436

Weighted average common shares outstanding - diluted		25,165			26,918		28,192		27,436

	Three Months Ended,
	March 31,		June 30,		Sept. 30,		Dec. 31,
	2007		2007		2007		2007
	(in thousands, except per share amounts)

Total revenue	$	45,483	$	46,197	$	46,150	$	47,982

Net income (loss)	$	2,741	$	1,105	$	1,843	$	(596	)

Basic earnings (loss) per common share	$	0.11	$	0.04	$	0.07	$	(0.02	)

Diluted earnings (loss) per common share	$	0.11	$	0.04	$	0.07	$	(0.02	)

Weighted average common shares oustanding - basic		24,611		24,731		24,801		24,959

Weighted average common shares outstanding - diluted		24,939		25,075		25,095		25,224

24. DISCONTINUED OPERATIONS

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

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

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

	Year Ended
	December 31,
	2006
	(in thousands)
Operating activities:
Revenue	$	3,034
Expenses		9,304
Goodwill impairment charge		4,456
Loss from discontinued operations before
minority interests and income taxes		(10,726	)
Minority interests in net loss of consolidated companies		203
Loss from discontinued operations before income taxes		(10,523	)
Benefit for income taxes		(3,839	)
Net loss from operations, net of tax		(6,684	)
Costs related to exit of business, net of tax		(218	)
Loss from discontinued operations	$	(6,902	)

Major classes of assets and liabilities of the Fixed Income National division and Charlotte Capital accounted for as discontinued operations in the accompanying consolidated balance sheets at December 31, 2008 and 2007 were as follows:

	December 31,
	2008		2007
	(in thousands)
Accounts payable and accrued liabilities	$	42	$	65
Total liabilities of discontinued operations	$	42	$	65
Minority interest	$	676	$	676

25. SUBSEQUENT EVENTS

On January 22, 2009, the Company and its wholly-owned subsidiary SMH, entered into a Contribution Agreement with Pan Asia China Commerce Corp., a Delaware corporation (“PAC3”), Siwanoy Capital, LLC, a New York limited liability company (“Siwanoy”) and Siwanoy Securities, LLC, a New York limited liability company (“New BD”), and a wholly-owned subsidiary of Siwanoy.

Pursuant to the Contribution Agreement (a) PAC3 agreed to subscribe for and purchase a 40% Class A membership interest in Siwanoy in exchange for a cash payment and note and (b) SMH agreed to contribute to New BD the assets, properties, working capital, and rights related and/or pertaining to its investment banking, institutional trading (including equity sales and fixed income sales), New York trading, and research businesses (excluding The Juda Group and the Concept Capital divisions) (the “Capital Markets Business”), including a specified amount of working capital (as adjusted for any profits or losses incurred in the Capital Markets Business between January 1, 2009, and the date of closing) less (i) the value of the accounts receivable contributed to Siwanoy, (ii) the value of certain assets in SMH’s New Orleans, Louisiana office, (iii) the value of certain money security deposits and any advance payments, and (iv) the value of certain securities to be mutually agreed upon by the parties in exchange for a 20% Class A Membership Interest in Siwanoy, cash, and a note issued by Siwanoy to the Company. Current members of management of the Capital Markets Business will retain the remaining 40% membership interest in Siwanoy.

The transaction is expected to close following the filing with and approval by the Financial Industry Regulatory Authority of a new member application by the New BD.

On January 29, 2009, the Company entered into an agreement (the “Agreement”) whereby the parties agreed to make certain amendments to the Edelman purchase agreement dated May 10, 2005 and to the EFA agreements dated December 8, 2006. The Agreement, as amended, provides that the Company will purchase an additional 66% membership interest in EFA on or before March 31, 2009 for an aggregate consideration consisting of $25.0 million in cash and a subordinated promissory note in the principal amount of $10.0 million. If the terms of the Agreement are met, the Company will not be required to pay the Third Tranche Consideration under the Edelman purchase agreement and the EFA agreements are terminated. See Note 2 – Acquisitions and Note 17 – Commitments and Contingencies.

On February 19, 2009, the Company’s board of directors declared a cash dividend for the first quarter of 2009 in the amount of $0.045 per share of common stock. The cash dividend will be payable on April 16, 2009, to holders of record as of the close of business on April 2, 2009.

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

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

Item 9A. Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act), as of December 31, 2008, the end of the fiscal period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

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

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

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

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2008, the Company’s internal control over financial reporting is effective based on those criteria.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Sanders Morris Harris Group Inc.:

We have audited that Sanders Morris Harris Group Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of the internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Sanders Morris Harris Group Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sanders Morris Harris Group Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated March 16, 2009 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

KPMG LLP

Houston, Texas

March 16, 2009

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

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

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

Item 11. Executive Compensation

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

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

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

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

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

Item 14. Principal Accountant Fees and Services

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

PART IV

Item 15. Exhibits, Financial Statement Schedules

1. Financial Statements

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

		Page
Sanders Morris Harris Group Inc.
Report of Independent Registered Public Accounting Firm		40
Consolidated Balance Sheets as of December 31, 2008 and 2007		41
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2008		42
Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2008		43
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008		44
Notes to Consolidated Financial Statements		45

2. Financial Statement Schedules

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

3. Exhibits

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 2009.

SANDERS MORRIS HARRIS GROUP INC.

By:	/s/ BEN T. MORRIS
	Ben T. Morris Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 16th day of March 2009.

Signature		Title

/s/ BEN T. MORRIS		Chief Executive Officer and Director
Ben T. Morris		(Principal Executive Officer)

/s/ RIC EDELMAN		President and Director
Ric Edelman

/s/ GEORGE L. BALL		Chairman of the Board
George L. Ball

/s/ DON A. SANDERS		Vice Chairman
Don A. Sanders

/s/ RICHARD E. BEAN		Director
Richard E. Bean

/s/ CHARLES W. DUNCAN, III		Director
Charles W. Duncan, III

/s/ SCOTT MCCLELLAND		Director
Scott McClelland

/s/ ALBERT W. NIEMI, JR., PH.D.		Director
Albert W. Niemi, Jr., Ph.D.

/s/ W. BLAIR WALTRIP		Director
W. Blair Waltrip

/s/ RICK BERRY		Chief Financial Officer
Rick Berry		(Principal Financial and Accounting Officer)

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. (Filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File No. 000-30066), and incorporated herein by reference).
10.09		Reorganization and Purchase Agreement dated as of May 10, 2005, among Sanders Morris Harris Group Inc., The Edelman Financial Center, Inc., The Edelman Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated May 10, 2005 (File No. 000-30066), and incorporated herein by reference).
10.10		Contribution Agreement dated as of April 28, 2003, by and between Salient Partners, L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas limited partnership, Salient Capital, L.P., a Texas limited partnership, Salient Partners GP, LLC, a Texas limited liability company, John A. Blaisdell, Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc. (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).
10.12		Letter agreement dated as of January 1, 2009, among Sanders Morris Harris Group, Inc., Frederic M. Edelman, and Edward Moore. (Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated January 29, 2009 (File No. 000-30066), and incorporated herein by reference).

*21.1		List of Subsidiaries.
*23.1		Consent of KPMG LLP.
*31.1		Rule 13a-14(a)/15d - 14(a) Certification of Chief Executive Officer.
*31.2		Rule 13a-14(a)/15d - 14(a) Certification of Chief Financial Officer.
*32.1		Certification Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

_______________

* Filed herewith.

† Management contract or compensation plan or arrangement.

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Pinnacle Summer Investments Inactive 10-K2008 FY Annual report

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