UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number
000-29235

TEJAS INCORPORATED

2700 Via Fortuna, Suite 400, Austin, Texas 78746

(512) 306-8222

Indicate by check mark ü 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. Yes þ      No o

Indicate by check mark ü whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2005, the Registrant had the following number of shares of common stock, $0.001 par value per share, outstanding 4,700,713.

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

TEJAS INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Financial Condition

See accompanying notes to consolidated financial statements.

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TEJAS INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

See accompanying notes to consolidated financial statements.

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TEJAS INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to consolidated financial statements.

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TEJAS INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

(1) General

Tejas Incorporated, a Delaware corporation (“Tejas”), is a holding company whose primary operating subsidiary is Tejas Securities Group, Inc., a Texas corporation (“TSG”). TSG is engaged in the business of providing brokerage and related financial services to institutional and retail customers nationwide. References to the “Company” within the Form 10-Q are to Tejas and its subsidiaries.

Tejas was incorporated as a shell corporation in New York on July 18, 1990, and made an initial public offering in November 1991. On August 27, 1999, Tejas was acquired by TSG in a reverse merger. On August 29, 2001, Tejas acquired all of the outstanding minority interest in TSG.

On November 8, 2004, Tejas’ board of directors declared a 100% stock dividend payable on November 22, 2004 to holders of record as of November 21, 2004. The stock dividend was paid on November 22, 2004, resulting in the issuance of 1,513,024 shares of Tejas’ common stock. As a result of this stock dividend, earnings per share amounts and all share amounts for prior periods as disclosed on the consolidated statements of financial condition, consolidated statements of operations and notes to the unaudited consolidated financial statements have been restated to reflect the shares outstanding as though the stock dividend had taken effect in the earliest period presented.

On February 3, 2005, Tejas issued 1,600,000 shares of its common stock through a secondary public offering. On February 25, 2005, the underwriter for the secondary public offering exercised their option to purchase an additional 60,000 shares of Tejas’ common stock.

Tejas’ business is conducted from its headquarters at 2700 Via Fortuna, Suite 400, Austin, Texas, with a branch office in Clayton, Missouri. Tejas is a registered broker-dealer and investment advisor offering: (i) brokerage services to retail and institutional customers; (ii) high quality investment research to institutional and retail customers; (iii) market-making activities in stocks traded on the Nasdaq National Market System and other national exchanges; and (iv) investment banking services.

On October 15, 2004, Tejas entered into a purchase agreement with Mr. Charles Mayer, a director and former employee of Tejas’, and Seton Securities Group, Inc. (“Seton”), a company controlled by Mr. Mayer, whereby Mr. Mayer and Seton would purchase the assets and operations of TSG’s New Jersey branch office by December 31, 2004. In the event the transaction was not completed by December 31, 2004, Mr. Mayer had the option of extending the closing date through June 30, 2005 in exchange for consideration of $10,000 to be paid to TSG. Mr. Mayer exercised his option to extend the closing date, and TSG completed the sale of its New Jersey branch office effective March 31, 2005.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions for Form 10-Q and, therefore should be read in conjunction with the Company’s 2004 Form 10-K. All adjustments (consisting of only normal recurring adjustments) that are necessary in the opinion of management for a fair presentation of the interim consolidated financial statements have been included. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results for the year ending December 31, 2005.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148 (“SFAS 148”), Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS 148 amends Financial Accounting Standards Board Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirement of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation for those companies that have elected to continue to apply Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. The Company has elected to continue to apply the provisions of APB 25 to its fixed-plan stock options. The adoption of SFAS 148 did not have an impact on the Company’s consolidated financial position or results of operations.

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TEJAS INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

The pro forma disclosures below use the fair value method of SFAS No. 123 to measure compensation expense for stock-based employee compensation plans. There were no stock based employee compensation costs included in the determination of net income as reported for the three months ended March 31, 2005 and 2004, respectively.

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model. This model was developed for use in estimating fair value of publicly traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

(2) Net Capital

TSG is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or Dealers (the “Rule”), which establishes minimum net capital requirements for broker-dealers. The Rule is designed to measure financial integrity and liquidity in order to assure the broker-dealer’s financial stability within the securities market. The net capital required under the Rule depends in part upon the activities engaged in by the broker-dealer.

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TEJAS INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

TSG elects to use the basic method of the Rule, which requires it to maintain minimum net capital equal to the greater of $250,000 or 6-2/3% of aggregate indebtedness. Minimum net capital requirements may be as great as $1,000,000 depending upon the number and value of securities in which TSG makes markets. As of March 31, 2005, TSG’s net capital of $8,275,376 was $7,944,605 in excess of the minimum required. TSG’s ratio of aggregate indebtedness to net capital was 0.60 to 1 at March 31, 2005.

(3) Securities Owned And Securities Sold, Not Yet Purchased

At March 31, 2005 and December 31, 2004, securities owned and sold, not yet purchased consisted of the following:

For the three months ended March 31, 2005, the unrealized gain associated with securities owned and securities sold, not yet purchased was $258,712. Approximately 13% of the value of total assets as of March 31, 2005 related to a single equity security.

(4) Notes Payable

On February 17, 2004, the Company entered into an agreement with First United Bank to borrow $2,500,000 for operating and financing purposes. The loan was due on demand or by February 15, 2007 if no demand was made. The loan accrued interest at prime plus 2% and was to be repaid in equal monthly payments of $70,000, plus accrued interest, commencing on March 15, 2004. On February 10, 2005, the loan was paid in full with proceeds from the Company’s February 3, 2005 secondary public offering.

On July 7, 2004, the Company entered into a subordinated convertible promissory note agreement with Salter Family Partners, Ltd., a family limited partnership controlled by Mark M. Salter, the Company’s Chief Executive Officer, to borrow $1,000,000 for operating purposes. Under the terms of the promissory note, the Company will make quarterly interest payments at a rate of 10% per annum. The promissory note is unsecured. The maturity date of the note is December 1, 2005, at which time all remaining unpaid principal and interest is due. If (i) the closing price of the Company’s common stock is less than $1.00 per share for ten consecutive trading days, (ii) Mr. Salter is no longer employed by us (other than by death or disability), or (iii) the net liquidating equity of TSG held at its clearing organization as of the last business day of a calendar month is less than $2,000,000, then an event of default will exist under the promissory note and Mr. Salter is entitled to declare the amounts outstanding under the promissory note immediately due and payable. The promissory note is convertible at any time into the Company’s common stock in an amount equal to the unpaid principal divided by the conversion price of $5.00 per share. At such time as the Company is authorized to issue preferred stock, Mr. Salter may convert the promissory note into the Company’s preferred stock in an amount equal to the unpaid principal divided by the conversion price of $5.00 per share. The promissory note is convertible until the note is repaid. Although the Company’s certificate of incorporation does not authorize the issuance of preferred stock, the Company has agreed to take certain actions to amend its certificate of incorporation to authorize the issuance of shares of preferred stock. The Company has also granted Mr. Salter, through Salter Family Partners, Ltd., certain piggyback registration rights for the shares into which the note may be converted. The balance of the promissory note was $1,000,000 at March 31, 2005.

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TEJAS INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

On February 22, 2005, the Company borrowed $2.2 million from Commercial Credit Union, or CCU, to finance in part the purchase price of an office building. The borrowing accrues interest at a rate of 5.75% per annum, with monthly payments of $13,840 through February 2011, at which time the outstanding principal and accrued interest shall be due and payable. The building and real property on which it sits secures the repayment of such borrowing. In connection with this acquisition, John J. Gorman, the Company’s Chairman, agreed to (1) indemnify CCU against any losses incurred by CCU as a result of any violations of environmental laws or certain building laws related to such real property and (2) provide a limited guarantee of the Company’s performance under certain provisions of the deed of trust entered into in connection with such financing. The balance of the promissory note was $2,200,000 at March 31, 2005.

On May 10, 2005, the Company borrowed $1,760,000 from First United Bank to finance in part the purchase price of an office building. Pursuant to the terms of a promissory note, the borrowing accrues interest at a rate of 6.75% per annum, with monthly installments of $13,388 through May 2010, at which time the outstanding principal and accrued interest on the note shall be due and payable.

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TEJAS INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

(5) Earnings Per Share

Basic earnings per share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares, including options issued during the three month periods ended March 31, 2005 and 2004. Contingently issuable shares are not included in the weighted average number of shares when the inclusion would increase net income per share or decrease the net loss per share.

Earnings per share are calculated as follows.

Options to purchase 1,800,000 shares of the Company’s common stock for the three months ended March 31, 2005 were included in the computation of diluted earnings per share. Of the 1,800,000 options issued by the Company, 794,285 shares were included as dilutive securities on a weighted average basis for the three months ended March 31, 2005, as calculated under the Treasury Stock method. Options to purchase 200,000 shares of the Company’s common stock under the convertible notes payable for the three months ended March 31, 2005 were included in the computation of diluted earnings per share. Options to purchase 644,126 shares of the Company’s common stock for the three months ended March 31, 2004 were included in the computation of diluted earnings per share. Of the 644,126 options issued by the Company, 348,312 shares were included as dilutive securities on a weighted average basis for the three months ended March 31, 2004, as calculated under the Treasury Stock method.

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TEJAS INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements

(6) Industry Segment Data

The Company has two reportable segments: brokerage services and investment banking. The primary operating segment, brokerage services, includes sales, trading and market-making activities of the Company and encompasses both retail and institutional customer accounts. The investment-banking segment participates in underwriting of corporate securities as a managing underwriter and a syndicate member, and provides advisory services to companies. These segments require the commitment of significant human capital and financial resources, as well as industry specific skills.

The following table presents segment revenues, income before income tax expense, and assets for the three months ended March 31, 2005.

The following table presents segment revenues, income before income tax expense, and assets for the three months ended March 31, 2004:

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

Forward Looking Statements and Risk Factors

From time to time, we make statements (including some contained in this report) which predict or forecast future events or results, which depend on future events for their accuracy, which embody projections or that otherwise contain “forward-looking information.” These statements may relate to, among other things, anticipated revenues or earnings per share, the adequacy of our capital and liquidity or the adequacy of our reserves for contingencies, including litigation.

We caution you that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially as a result of various factors, many of which are outside of our control, including the rapidly changing business environment and our limited administrative, operational, financial and other resources; our dependence on third party vendors to provide critical services; unanticipated changes in economic or political trends impacting business and finance, particularly those resulting in downward changes in volumes and price levels of securities transactions; customer defaults on indebtedness to us; our potential failure to comply with various regulatory requirements or to maintain net capital levels; and other factors discussed under the heading “Quantitative and Qualitative Disclosures About Market Risk,” and those discussed in our annual report on Form 10-K and other reports filed with and available from the Securities and Exchange Commission.

All forward-looking statements speak only as of the date on which they are made and we undertake no obligation to update them.

Company Overview

We are a full service brokerage and investment banking firm that focuses on the following:

	•	proprietary research on distressed debt and special situation securities;
	•	trading and other brokerage services to value-based institutional and retail investors active in fixed income and equity instruments; and
	•	corporate finance and strategic advisory services to middle-market companies within our target industries.

The cornerstone of our business is our research coverage. Currently, our research department consists of analysts with expertise in distressed debt and special situation securities. The analyst group has a background in analyzing many industries, but primarily focuses on wireless and wire-line telecommunications, cable, satellite, transportation, energy, and municipal securities. We anticipate that we will continue to devote a substantial portion of our resources to support and grow our research department.

We conduct our business through two operating segments: our full service brokerage segment and our investment banking segment. Our brokerage segment, which includes all trading for our clients and for our own proprietary account as well as our inventory positions and market making activities, is categorized as a separate business segment from investment banking because these aforementioned activities are all interrelated and service a different client base. Investment banking requires a different skill set and knowledge base and engagements are with the issuers, not the investors. Each segment reports to a different individual on the management team in order to maintain the necessary regulatory separation.

Brokerage Services

We provide brokerage services to approximately 500 institutional clients and a network of retail clients. The majority of our brokerage revenues are derived from research driven recommendations. We offer clients the ability to buy and sell fixed income products, equity securities, security options, mutual funds and other investment securities. Our fixed income products include distressed corporate bonds, bank notes

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issued by distressed companies, mortgage-backed derivative products, municipal bonds, and government and government-backed securities. Through our Austin operations, we are a market maker for approximately 45 public companies whose stocks are traded on the Nasdaq Stock Market. We are also a dealer in New York Stock Exchange listed securities and other non-listed securities.

Investment Banking

In 2004, we began to focus more attention on our investment banking efforts, particularly in assisting public companies raise capital. We have also provided bankruptcy and restructuring advisory services in order to enhance returns for our clients, though this activity has not generated any advisory fees to date. We believe, however, that providing these services will help build client relationships and, in the future, we will generate revenues from these and other types of advisory services.

Critical Accounting Policies

Our critical accounting policies are described in the Company’s 2004 Form 10-K.

Results of Operations

The revenues and operating expenses of our operating subsidiary, TSG, are influenced by fluctuations in the equity and debt markets, general economic and market conditions, as well as TSG’s ability to identify investment opportunities for its trading accounts and its customer accounts. Currently, TSG’s revenue is derived primarily from principal debt and equity transactions, which generate both commission revenue and investment income. Our revenues may fluctuate from quarter to quarter due to some seasonality of our revenue cycle.

Our total revenues were $12,754,747 for the three months ended March 31, 2005, which was an increase of $6,721,364 or 111% from $6,033,383 for the three months ended March 31, 2004. The reasons for the changes are set forth below.

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Commission revenues from agency and principal transactions were $6,538,263 for the three months ended March 31, 2005, which was an increase of $1,039,707 from $5,498,556 for the three months ended March 31, 2004. The overall increase in commission revenue is primarily the result of an increase in equity securities commissions and government agency securities from the same period in the prior year. Commission revenues decreased to 51.3% of total revenues for the three months ended March 31, 2005 from 91.1% of total revenues for the three months ended March 31, 2004.

Underwriting and investment banking revenues were $4,109,296 for the three months ended March 31, 2005, which was an increase of $4,083,404 from $25,892 for the three months ended March 31, 2004. The increase in investment banking revenues for the three months ended March 31, 2005 is due to the completion of one private placement during the first quarter of 2005. No significant investment banking activity occurred during the first quarter of 2004. Underwriting and investment banking revenues increased to 32.2% of total revenues for the three months ended March 31, 2005 from 0.4% of total revenues for the three months ended March 31, 2004.

Net dealer inventory and investment income was $1,980,448 for the three months ended March 31, 2005, which was an increase of $1,490,125 from $490,323 for the three months ended March 31, 2004. The increase in inventory and investment income for the three months ended March 31, 2005 resulted from realized trading gains. Net unrealized trading gains for the three months ended March 31, 2005 were $258,712. Net realized trading gains for the three months ended March 31, 2005 were $1,721,736. Net dealer inventory and investment income increased to 15.5% of total revenues for the three months ended March 31, 2005 from 8.1% of total revenues for the three months ended March 31, 2004.

Other income was $126,740 for the three months ended March 31, 2005, which was an increase of $108,128 from $18,612 for the three months ended March 31, 2004. The increase was due to fees earned in the first quarter of 2005 relating to our research department. Other income increased to 1.0% of total revenues for the three months ended March 31, 2005 from 0.3% of total revenues for the three months ended March 31, 2004.

Total expenses were $9,030,511 for the three months ended March 31, 2005, which was an increase of $3,256,252 or 56% from $5,774,259 for the three months ended March 31, 2004. The explanations for the changes are set forth below.

Commissions, employee compensation and benefits were $6,606,059 for the three months ended March 31, 2005, which was an increase of $2,251,312 from $4,354,747 for the three months ended March 31, 2004. Commission expense was $4,121,672 for the three months ended March 31, 2005, which was an increase of $1,500,994 from $2,620,678 for the three months ended March 31, 2004. The increase in commission expense for the period is due to the increase in commission revenues and investment banking revenues from the comparable period in the prior year. General and administrative salaries and other employee benefits for the three months ended March 31, 2005 increased $750,318 over the same period in 2004 as a result of increased employee benefits. Commissions, employee compensation and benefits decreased to 51.8% of total revenues for the three months ended March 31, 2005 from 72.2% of total revenues for the three months ended March 31, 2004.

Clearing and floor brokerage costs were $244,389 for the three months ended March 31, 2005, which was an increase of $88,909 from $155,480 for the three months ended March 31, 2004. The overall increase in clearing and floor brokerage costs for the three months ended March 31, 2005 resulted from an increase in trading activity in the over-the-counter equity markets and on the national exchanges. Clearing and floor brokerage costs decreased to 1.9% of total revenues for the three months ended March 31, 2005 from 2.6% of total revenues for the three months ended March 31, 2004.

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Communications and occupancy charges were $567,587 for the three months ended March 31, 2005, which was an increase of $66,866 from $500,718 for the three months ended March 31, 2004. The increase in communications and occupancy charges resulted from additional usage of news and quote services to support sales and trading activities. Communications and occupancy charges decreased to 4.4% of total revenues for the three months ended March 31, 2005 from 8.3% of total revenues for the three months ended March 31, 2004.

Professional fees were $403,574 for the three months ended March 31, 2005, which was an increase of $219,795 from $183,779 for the three months ended March 31, 2004. The increase is primarily due to additional professional fees associated with investment banking opportunities and fees associated with Sarbanes-Oxley compliance. Professional fees increased to 3.2% of total revenues for the three months ended March 31, 2005 from 3.0% of total revenues for the three months ended March 31, 2004.

Other expenses were $1,208,905 for the three months ended March 31, 2005, which was an increase of $629,370 from $579,535 for the three months ended March 31, 2004. The overall increase in other expenses during the three months ended March 31, 2005 is the result of corporate charitable contributions and travel related expenses for sales and investment banking personnel. Other expenses decreased to 9.5% of total revenues for the three months ended March 31, 2005 from 9.6% of total revenues for the three months ended March 31, 2004.

Income tax expense was $1,381,659 for the three months ended March 31, 2005, which was an increase of $1,266,871 from $114,788 for the three months ended March 31, 2004. The overall increase in income tax expense for the three months ended March 31, 2005 is due to the increase in taxable income. Our effective tax rate was 37% and 44% for the three months ended March 31, 2005 and 2004, respectively. Our effective tax rate differs from the federal statutory tax rate as a result of estimated state income taxes and non-deductible expenses.

Net income was $2,342,577 for the three months ended March 31, 2005, which was an increase of $2,198,241 or 1523% from $144,336 for the three months ended March 31, 2004.

Liquidity and Capital Resources

As a broker-dealer, we are required to maintain a certain level of liquidity or net capital in accordance with NASD regulations. Factors affecting our liquidity include the value of securities held in trading accounts, the value of non-current assets, the amount of unsecured receivables, and the amount of general business liabilities, excluding amounts payable to our clearing organization and NASD approved subordinated debt.

Our inventory balance fluctuates daily based on the current market value and types of securities held. We typically invest in securities in which we provide research coverage. The types of securities may include publicly traded debt, equity, options and private security issuances. As a market maker, we provide bid and ask quotes on certain equity securities on the NASDAQ market. Our ability to generate revenues from market making activities may depend upon the level and value of securities held in inventory.

Market values for some of the securities we hold may not be easily determinable depending upon the volume of securities traded on open markets, the operating status of the companies or the types of securities issued by companies. If the underlying securities of a company become illiquid, our liquidity may be affected depending on the value of the securities involved. During times of general market declines, we may experience market value losses, which ultimately affects our liquidity through our broker-dealer net capital requirements. In addition, we may decide not to liquidate our security holdings to increase cash availability if our management believes a market turnaround is likely in the near term or if our management believes the securities are undervalued in the current market.

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We utilize the equity in securities owned at our clearing organization to fund operating and investing activities. The value of the equity at the clearing organization is also used to secure temporary financing for the purchase of investments in our trading accounts. The value of our equity balance held at the clearing organization may fluctuate depending on factors such as the market valuation of securities held in our trading accounts, realized trading profits, commission revenue, cash withdrawals and clearing costs charged to us for conducting our trading activities. As a result of the aforementioned factors, we may report either a receivable or payable balance to our clearing organization.

On February 17, 2004, we entered into an agreement with First United Bank to borrow $2,500,000 for operating and financing purposes. The loan was due on demand or by February 15, 2007 if no demand was made. The loan accrued interest at prime plus 2% and was to be paid in equal monthly payments of $70,000, plus accrued interest, commencing on March 15, 2004. On February 10, 2005, we repaid the remaining balance of $1,730,000, plus interest, from the loan with First United Bank with proceeds from our February 3, 2005 public offering.

On July 7, 2004, we entered into a subordinated convertible promissory note agreement with Salter Family Partners, Ltd., a family limited partnership controlled by Mark M. Salter, our Chief Executive Officer, to borrow $1,000,000 for operating purposes. Under the terms of the promissory note, we will make quarterly interest payments at a rate of 10% per annum. The promissory note is unsecured. The maturity date of the note is December 1, 2005, at which time all remaining unpaid principal and interest is due. If (i) the closing price of our common stock is less than $1.00 per share for ten consecutive trading days, (ii) Mr. Salter is no longer employed by us (other than by death or disability), or (iii) the net liquidating equity of TSG held at its clearing organization as of the last business day of a calendar month is less than $2,000,000, then an event of default will exist under the promissory note and Mr. Salter is entitled to declare the amounts outstanding under the promissory note immediately due and payable. The promissory note is convertible at any time into our common stock in an amount equal to the unpaid principal divided by the conversion price of $5.00 per share. At such time as we are authorized to issue preferred stock, Mr. Salter may convert the promissory note into our preferred stock in an amount equal to the unpaid principal divided by the conversion price of $5.00 per share. The promissory note is convertible until the note is repaid. Although our certificate of incorporation does not authorize the issuance of preferred stock, we have agreed to take certain actions to amend our certificate of incorporation to authorize the issuance of shares of preferred stock. We have also granted Mr. Salter, through Salter Family Partners, Ltd., certain piggyback registration rights for the shares into which the note may be converted.

On February 3, 2005, we issued 1,600,000 shares of our common stock through a public offering. As a result of this offering, we received approximately $23,629,000 in net proceeds. On February 25, 2005, the underwriter for the offering, C.E. Unterberg, Towbin, exercised their option to purchase an additional 60,000 shares of our common stock. As a result of the option exercise, we received approximately $888,000 in additional net proceeds.

On February 22, 2005, we purchased an office building through our newly formed wholly-owned subsidiary, TI Building Partnership, Ltd. We plan on relocating our Austin, Texas headquarters during 2005 to the new Austin location. The office building was purchased at a price of approximately $3,470,000, with $2,200,000 being financed through Community Credit Union, or CCU. Pursuant to the terms of a promissory note, this borrowing accrues interest at a rate of 5.75% per annum, with monthly installments of $13,840 through February 2011, at which time the outstanding principal and accrued interest on the note shall be due and payable. In connection with this acquisition, John J. Gorman, our Chairman, agreed to (1) indemnify CCU against any losses incurred by CCU as a result of any violations of environmental laws or certain building laws related to such real property and (2) provide a limited guarantee of our performance under certain provisions of the deed of trust entered into in connection with such financing.

We may seek additional debt or equity financing from time to time from either external or internal sources to provide funds for our operating purposes. Based upon the current level of our operations and anticipated cost savings and revenue growth, we believe that cash flows from our operations and available cash, together with additional debt or equity financing from either external or internal sources, will be adequate

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to meet our future liquidity needs both for the short term and for at least the next several years. However, there can be no assurance that our business will generate sufficient cash flows from operations, that we will realize our anticipated revenue growth and operating improvements or that future borrowings will be available in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our principal business activities are, by their nature, risky and volatile and are directly affected by economic and political conditions and broad trends in business and finance in the national and international markets. Any one of these factors may cause a substantial decline in the securities markets, which could materially affect our business. Managing risk is critical to our profitability and to reducing the likelihood of earnings volatility. Our risk management policies and procedures have been established to continually identify, monitor and manage risk. The major types of risk that we face include credit risk, operating risk and market risk.

Credit risk is the potential for loss due to a client or counterparty failing to perform its contractual obligation. We clear our securities transactions through a clearing organization. Under the terms of the clearing agreement, the clearing organization has the right to charge us for losses that result from our clients’ failure to fulfill their contractual obligations. In order to mitigate risk, our policy is to monitor the credit standing of our clients and maintain collateral to support client margin balances. Further, significant portions of our assets are held at our clearing organization. Therefore, we could incur substantial losses if our clearing organization were to become insolvent or otherwise unable to meet its financial obligations. Our clearing organization has historically met all of its obligations to us.

Operating risk arises from the daily conduct of our business and relates to the potential for deficiencies in control processes and systems, mismanagement of our activities or mismanagement of client accounts by our employees. We rely heavily on computer and communication systems in order to conduct our brokerage activities. Third party vendors, such as the clearing organization and news and quote providers, provide many of the systems critical to our business. Our business could be adversely impacted if any of these systems were disrupted. We mitigate the risk associated with systems by hiring experienced personnel, and providing employees with alternate means of acquiring or processing information. In order to mitigate the risk associated with mismanagement of our activities or client accounts, we utilize compliance and operations personnel to review the activities of administrative and sales personnel. In addition, the activities of management are actively reviewed by other members of management on a regular basis and by the board of directors.

Our primary market risk exposure is to market price changes and the resulting risk of loss that may occur from the potential change in the value of a financial instrument as a result of price volatility or changes in liquidity for which we have no control. Securities owned by us are either related to daily trading activity or our principal investing activities. Market price risk related to trading securities is managed primarily through the daily monitoring of funds committed to the various types of securities owned by us and by limiting exposure to any one investment or type of investment. However, we will on occasion concentrate our securities holdings to one or two positions based upon our research and potential for market appreciation.

Our trading securities were $40,876,038 in long positions and $2,610,411 in short positions as of March 31, 2005. These trading securities may be exchange listed, listed on the Nasdaq Stock Market, warrants or over-the-counter securities, or with limited market activity on both long and short positions. The potential loss in fair value, using a hypothetical 10% decline in prices, is estimated to be $4,349,000 as of March 31, 2005. A 10% hypothetical decline was used to represent a significant and plausible market change.

Our investment securities are typically those reported on by our research analysts. These positions often consist of high-yield debt securities and the related equity securities. We monitor this risk by maintaining current operating and financial data on the companies involved, and projecting future valuations based upon the occurrence of critical future events. Any transactions involving the investment securities are typically based upon the recommendations of our research analysts versus current market performance.

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Item 4. Controls and Procedures

At March 31, 2005, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no liabilities arising from pending claims or legal actions that management believes would have a material adverse effect on the consolidated financial position or results of operations of the Company.

Item 5. Other Information

On May 9, 2005, we entered into a binding Letter of Intent (“LOI”) to acquire Capital & Technology Advisors Inc. (“CTA”), a full-service advisory and consulting firm based in Albany, New York. Under the terms of the LOI, we would acquire CTA for approximately $65 million, consisting of approximately $60 million in restricted common stock and $5 million in cash. As part of the LOI, we agreed to fund an Option Payment (“Option”) in the amount of $2,000,000 on May 10, 2005. The Option is refundable if CTA terminates this LOI and enters into an alternative purchase agreement with another company. In that event, we will be entitled to receive our Option in full, plus a break-up fee that shall not exceed $4,000,000. Upon closing of the acquisition, CTA would become a wholly-owned subsidiary of ours.

On May 10, 2005, we purchased an office building through our wholly-owned subsidiary, TI Building Partnership, Ltd. The office building was purchased at a price of approximately $2,100,000, with $1,760,000 being financed through First United Bank. Pursuant to the terms of a promissory note, this borrowing accrues interest at a rate of 6.75% per annum, with monthly installments of $13,388 through May 2010, at which time the outstanding principal and accrued interest on the note shall be due and payable.

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Item 6. Exhibits

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SIGNATURES

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

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