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.

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