UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


FORM
      10-K





ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      Fiscal Year Ended


September
      30, 2007


Commission
      File No: 001-12629





**NATIONAL
      HOLDINGS CORPORATION**


(Exact
      Name of Registrant as specified in its charter)





**Delaware**
            **36-4128138**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)





**120
      Broadway, 27th Floor, New York, NY 10271**


(Address,
      including zip code, of principal executive offices)


Registrant's
      telephone number, including area code: (212) 417-8000





Securities
      registered pursuant to Section 12(b) of the Act: None


Securities
      registered pursuant to Section 12(g) of the Act: Common
      Stock, $.02 par value


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. YES  o NO  x





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




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. YES  xNO  o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
      one): Large Accelerated Filer  o Accelerated
      Filer  o Non-Accelerated
      Filer x





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 or any amendment to this Form 10-K. YES  oNO  x




Indicate
      by check mark whether the registrant is a shell company (as defined in Exchange
      Act Rule 12b-2). YES  oNO  x




As
      of
      March 31, 2007, the aggregate market value of voting and non-voting common
      equity held by non-affiliates of the registrant, based on the closing sales
      price for the registrant's common stock, as quoted on the Over-the-Counter
      Bulletin Board was approximately $6,600,000 (calculated by excluding shares
      owned beneficially by directors, officers and 10% shareholders). As
      of
      December 6, 2007 there were 8,602,628 shares of the registrant's common stock
      outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Company’s Proxy Statement filed with the Securities and Exchange
      Commission (the “SEC”) in connection with the Company’s Annual Meeting of
      Shareholders to be held on or about March 12, 2008 (the “Company’s 2008 Proxy
      Statement”) are incorporated by reference into Part III hereof.







**PART
      I**





**Item
      1. BUSINESS**





*Statements
      made in this report that relate to future plans, events, financial results
      or
      performance are forward-looking statements as defined under the Private
      Securities Litigation Reform Act of 1995. These statements are based upon
      current information and expectations. Actual results may differ materially
      from
      those anticipated as a result of certain risks and uncertainties. For details
      concerning these and other risks and uncertainties, see Part I,
      Item 1A, “Risk Factors” of this report, as well as the Company’s other
      reports on Forms 10-K, 10-Q and 8-K subsequently filed with the SEC from
      time to time. Readers are cautioned not to place undue reliance on these
      forward-looking statements, which speak only as of the date hereof. The Company
      undertakes no obligation to republish revised forward-looking statements to
      reflect events or circumstances after the date hereof or to reflect the
      occurrence of unanticipated events.*





**General**





National
      Holdings Corporation, a Delaware corporation organized in 1996 (“National
      Holdings” or **** the
      “Company”), **** is
      a
      financial services organization operating through its wholly owned subsidiary,
      National Securities Corporation, a Washington corporation organized in 1947
      (“National Securities”). National Securities conducts a national securities
      brokerage business through its main offices in Seattle, Washington and New
      York,
      New York, as well as 64 other locations throughout the country, and one office
      outside the country. National Securities’ business includes securities brokerage
      for individual and institutional clients, market-making trading activities,
      asset management and corporate finance services. On
      March
      15, 2006, the Company changed its name from “Olympic Cascade Financial
      Corporation” to “National Holdings Corporation.”





National
      Securities provides a broad range of securities brokerage and investment
      services to a diverse retail and institutional clientele, as well as corporate
      finance and investment banking services to corporations and businesses. National
      Securities’ brokers operate as independent contractors. A registered
      representative who becomes an affiliate of National Securities establishes
      his
      own office and is responsible for the payment of expenses associated with the
      operation of such office, including rent, utilities, furniture, equipment,
      stock
      quotation machines and general office supplies. In return, the registered
      representative is entitled to retain a higher percentage of the commissions
      generated by his sales than a registered representative at a traditional
      employee-based brokerage firm. This arrangement allows National Securities
      to
      operate with a reduced amount of fixed costs and lowers the risk of operational
      losses for non-production.





In
      the
      third quarter of fiscal year 2006, the Company formed a wholly owned subsidiary,
      National Insurance Corporation, a
      Washington corporation (“National Insurance”) .
      National Insurance provides fixed insurance products to its clients, including
      life insurance, disability insurance, long term care insurance and fixed
      annuities. National Insurance has finalized certain requisite state
      registrations, and commenced business operations during the second quarter
      of
      fiscal year 2007, that have been diminimus.





In
      the
      first quarter of fiscal year 2007, the Company formed a wholly owned subsidiary,
      National Holdings Mortgage Corporation (“National Mortgage”) in order to operate
      a mortgage broker business. National Mortgage is currently
      inactive.





In
      the
      first quarter of fiscal year 2007, the Company formed a wholly owned subsidiary,
      National Group Benefits Corporation (“National Group Benefits”) in order to
      provide independent contractors the ability to purchase insurance benefits as part
      of a
      group .
      National Group Benefits is currently inactive.





In
      the
      fourth quarter of fiscal year 2007, the Company formed a wholly owned
      subsidiary, National Securities Futures Corporation (“National Futures”) that
      will provide futures and derivates products to its clients. National Futures
      is
      in the process of obtaining the necessary approvals from the National Futures
      Association, and has not yet commenced business operations.




-2-





**Merger
      Agreement with** **vFinance,
      Inc** **.**





In
      November 2007, the Company entered into a definitive merger agreement vFinance,
      Inc., a
      publicly traded company who’s wholly owned subsidiary is also a registered
      broker-dealer with a similar business to National Securities. The
      merger agreement is subject to numerous conditions, including: execution of
      definitive transaction documents, compliance with state and federal securities
      laws and regulations, the
      completion of an equity financing with gross proceeds of at least $3.0
      million, and
      corporate, shareholder and regulatory approvals. However, no
      assurance can be given that the Company will consummate
      the  merger
      with vFinance,
      Inc.





**Clearing
      Relationships**





In
      March
      2005, National Financial Services LLC (“NFS”) acquired the clearing business of
      Fiserv  Securities,
      Inc. (“Fiserv”), the Company’s former clearing firm. In April 2005, National
      Securities entered into a clearing agreement with NFS that became effective
      in
      June 2005. In June 2005, National Securities entered into a clearing agreement
      with Penson Financial Services, Inc. (“Penson”) for the purpose of providing
      clearing services that are not provided by NFS. Additionally, in June 2007,
      National Securities entered into a clearing agreement with Legent Clearing
      LLC
      (“Legent”) for the purpose of providing clearing services that are not provided
      by NFS and to maintain a pre-existing clearing relationship for brokers newly
      associated with National Securities. The Company believes that the overall
      effect of its clearing relationships has been beneficial to the Company’s cost
      structure, liquidity and capital resources. ****





**Financial
      Information about Industry Segments**





The
      Company realized approximately 88% of its total revenues in fiscal year 2007
      from brokerage services, principal and agency transactions, and investment
      banking. During fiscal year 2007, brokerage services that consist of retail
      brokerage commissions represent 54% of total revenues, principal and agency
      transactions that consist of net dealer inventory gains represent 22% of total
      revenues, and investment banking, that consist of corporate finance commissions
      and fees, represent 12% of total revenues. For a more detailed analysis of
      our
      results by segment, see Item 7, “Management Discussion and Analysis of Financial
      Condition and Results of Operation.”





**Brokerage
      Services**





National
      Securities is registered as a broker-dealer with the SEC and is licensed in
      all
      50 states, the District of Columbia and Puerto Rico. National Securities is
      also
      a member of the Financial Industry Regulatory Authority (“FINRA”, formerly the
      NASD), the Municipal Securities Rulemaking Board ("MSRB") and the Securities
      Investor Protection Corporation ("SIPC"). Brokerage
      services to retail clients are provided through the Company's sales force of
      investment executives at National Securities.





National
      Securities’ goal is to meet the needs of its investment executives and their
      clients. To foster individual service, flexibility and efficiency and to reduce
      fixed costs, investment executives at National Securities act as independent
      contractors responsible for providing their own office facilities, sales
      assistants, telephone and quote service, supplies and other items of overhead.
      Investment executives are given broad discretion to structure their own
      practices and to specialize in different areas of the securities market subject
      to supervisory procedures. In addition, investment executives have direct access
      to research materials, management, traders, and all levels of support
      personnel.




-3-





The
      brokerage services provided by the investment executives at National Securities
      include execution of purchases and sales of stocks, bonds, mutual funds,
      annuities and various other securities for individual and institutional
      customers. In fiscal year 2007, stocks represent approximately 78% of the
      Company’s business, bonds represent approximately 12% of the Company’s business,
      and mutual funds and annuities make up the remaining 10% of the Company’s
      business. The percentage of each type of business varies over time as the
      investment preferences of the Company’s customers change based on market
      conditions.





Typically,
      National Securities does not recommend particular securities to customers.
      Recommendations to customers are determined by individual investment executives
      based upon their own research and analysis, subject to applicable FINRA customer
      suitability standards. Most investment executives perform fundamental (as
      opposed to technical) analysis. Solicitations may be by telephone, seminars
      or
      newsletters. Investment executives may request trading to acquire an inventory
      position to facilitate sales to customers (subject to the investment executive's
      own risk). Supervisory personnel review trading activity from inventory
      positions to ensure compliance with applicable standards of
      conduct.





The
      Company generally acts as an agent in executing customer orders to buy or sell
      listed and over-the-counter securities in which it does not make a market,
      and
      charges commissions based on the services the Company provides to its customers.
      In executing customer orders to buy or sell a security in which the Company
      makes a market, the Company may sell to, or purchase from, customers at a price
      that is substantially equal to the current inter-dealer market price plus or
      minus a mark-up or mark-down. The Company may also act as agent and execute
      a
      customer's purchase or sale order with another broker-dealer market-maker at
      the
      best inter-dealer market price available and charge a commission. The Company
      believes its mark-ups, mark-downs and commissions are competitive based on
      the
      services it provides to its customers. In each instance the commission charges,
      mark-ups or mark-downs, are in compliance with guidelines established by the
      FINRA. In order to increase revenues generated from these activities, the
      Company continuously seeks to hire additional registered representatives, and
      works with its current registered representatives to increase their
      productivity.





The
      Company’s registered representatives are independent contractors, not salaried
      employees. As such, payments to these persons are based on commissions
      generated, and represent a variable cost rather than a fixed cost of operating
      our business. Commission expense represents a significant majority of the
      Company’s total expenses. The Company works to control its fixed costs in order
      to achieve profitability based upon its expectation of market conditions and
      the
      related level of revenues. Additionally, the Company requires
      most of its registered
      representatives to
      absorb
      their own overhead and expenses, thereby reducing the Company’s share of the
      fixed costs.





Investment
      executives in the brokerage industry are traditionally compensated on the basis
      of set percentages of total commissions and mark-ups generated. Most brokerage
      firms bear substantially all of the costs of maintaining their sales forces,
      including providing office space, sales assistants, telephone service and
      supplies. The average commission paid to investment executives in the brokerage
      industry generally ranges from 30% to 50% of total commissions
      generated.





Since
      National Securities requires most of its investment executives to absorb their
      own overhead and expenses, it pays a higher percentage of the net commissions
      and mark-ups generated by its investment executives, as compared to traditional
      investment executives in the brokerage industry. This arrangement also reduces
      fixed costs and lowers the risk of operational losses for non-production.
      National Securities’ operations include execution of orders, processing of
      transactions, internal financial controls and compliance with regulatory and
      legal requirements.





As
      of
      September 30, 2007, the Company had 108 employees and 394 independent
      contractors. Of these totals, 459 were registered representatives. Persons
      who
      have entered into independent contractor agreements are not considered employees
      for purposes of determining the Company’s obligations for federal and state
      withholding, unemployment and social security taxes. The Company’s independent
      contractor arrangements conform to accepted industry practice, and therefore,
      the Company does not believe there is a material risk of an adverse
      determination from the tax authorities that would have a significant effect
      on
      the Company's ability to recruit and retain investment executives or on the
      Company's current operations and financial results of operations. No employees
      are covered by collective bargaining agreements, and the Company believes its
      relations are good with both its employees and independent
      contractors.




-4-





The
      Company’s business plan includes the growth of its retail and institutional
      brokerage business, while recognizing the volatility of the financial markets.
      In response to historical market fluctuations, the Company has periodically
      adjusted certain business activities, including, proprietary trading and
      market-making trading. The Company believes that consolidation within the
      industry is inevitable. Concerns attributable to the volatile market, and
      increased competition, result in a number of acquisition opportunities being
      introduced to the Company. The Company is focused on maximizing the
      profitability of its existing operations, while it continues to seek selective
      strategic acquisitions.





Periodic
      reviews of controls are conducted and administrative and operations personnel
      meet frequently with management to review operating conditions. Compliance
      and
      operations personnel monitor compliance with applicable laws, rules and
      regulations.





**Principal
      and Agency Transactions**





The
      Company buys and maintains inventories in equity securities as a "market-maker"
      for sale of those securities to other dealers and to customers through National
      Securities. The Company may also maintain inventories in corporate, government
      and municipal debt securities for sale to customers. The level of National
      Securities’ market-making trading activities will increase or decrease depending
      on the relative strength or weakness of the broader markets. As of September
      30,
      2007, National Securities made markets in approximately 40 securities. National
      Securities anticipates that it will engage in some market-making trading
      activity in the future, which may include companies for which National
      Securities managed or co-managed a public offering.





The
      Company's trading departments require a commitment of capital. Most principal
      transactions place the Company's capital at risk. Profits and losses are
      dependent upon the skill of the traders, price movements, trading activity
      and
      the size of inventories. Since the Company's trading activities occasionally
      may
      involve speculative and thinly capitalized stocks, including stabilizing the
      market for securities which it has underwritten, the Company imposes position
      limits to reduce its potential for loss.





In
      executing customer orders to buy or sell a security in which the Company makes
      a
      market, the Company may sell to, or purchase from, customers at a price that
      is
      substantially equal to the current inter-dealer market price plus or minus
      a
      mark-up or mark-down. The Company may also act as agent and execute a customer's
      purchase or sale order with another broker-dealer market-maker at the best
      inter-dealer market price available and charge a commission. The Company
      believes its mark-ups, mark-downs and commissions are competitive based on
      the
      services it provides to its customers.


In
      executing customer orders to buy or sell listed and over-the-counter securities
      in which it does not make a market, the Company generally acts as an agent
      and
      charges commissions that the Company believes are competitive, based on the
      services the Company provides to its customers.





**Investment
      Banking**





National
      Securities provides corporate finance and investment banking services, including
      underwriting the sale of securities to the public and arranging for the private
      placement of securities with investors. National Securities’ corporate finance
      operations provide a broad range of financial and corporate advisory services,
      including mergers and acquisitions, project financing, capital structure and
      specific financing opportunities. National Securities also acts as an
      underwriter of equity securities in both initial and secondary public offerings. Corporate
      finance revenues will vary depending on the number of private and public
      offerings completed by National Securities during a particular fiscal
      year.




-5-





**Competition**





The
      Company is engaged in a highly competitive business. With respect to one or
      more
      aspects of its business, its competitors include member organizations of the
      New
      York Stock Exchange and other registered securities exchanges in the United
      States and Canada, and members of the FINRA. Many of these organizations have
      substantially greater personnel and financial resources and more sales offices
      than the Company. Discount brokerage firms affiliated with commercial banks
      provide additional competition, as well as companies that provide electronic
      on-line trading. In many instances, the Company is also competing directly
      for
      customer funds with investment opportunities offered by real estate, insurance,
      banking, and savings and loans industries.




The
      securities industry has become considerably more concentrated and more
      competitive since we were founded, as numerous securities firms have either
      ceased operations or have been acquired by or merged into other firms. In
      addition, companies not engaged primarily in the securities business, but with
      substantial financial resources, have acquired leading securities firms. These
      developments have increased competition from firms with greater capital
      resources than ours.




Since
      the
      adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
      institutions have been able to engage in traditional brokerage and investment
      banking services, thus increasing competition in the securities industry and
      potentially increasing the rate of consolidation in the securities
      industry.





We
      also
      compete with other securities firms for successful sales representatives,
      securities traders and investment bankers. Competition for qualified employees
      in the financial services industry is intense. Our continued ability to compete
      effectively depends on our ability to attract new employees and to retain and
      motivate our existing employees. For
      a
      further discussion of risks facing the Company, please see “Risk
      Factors.”





**Government
      Regulation and Supervision**





The
      securities industry and National Securities’ business is subject to extensive
      regulation by the SEC, FINRA, state securities regulators and other governmental
      regulatory authorities. The principal purpose of these regulations is the
      protection of customers and the securities markets. The SEC is the federal
      agency charged with the administration of the federal securities laws. Much
      of
      the regulation of broker-dealers, however, has been delegated to self-regulatory
      organizations, such as the FINRA, that adopt rules, subject to approval by
      the
      SEC, which govern their members and conduct periodic examinations of member
      firms' operations. Securities firms are also subject to regulation by state
      securities commissions in the states in which they are registered. National
      Securities is a registered broker-dealer with the SEC and a member of the FINRA.
      It is licensed to conduct activities as a broker-dealer in all 50 states, the
      District of Columbia and Puerto Rico.





In
      addition, as a registered broker-dealer and member of the FINRA, National
      Securities is subject to the SEC's Uniform
      Net Capital Rule 15c3-1 ,
      which
      is designed to measure the general financial integrity and liquidity of a
      broker-dealer and requires
      the maintenance of minimum net capital .
      Net
      capital is defined as the net worth of a broker-dealer subject to certain
      adjustments. In computing net capital, various adjustments are made to net
      worth
      that exclude assets not readily convertible into cash. Additionally, the
      regulations require that certain assets, such as a broker-dealer's position
      in
      securities, be valued in a conservative manner so as to avoid over-inflation
      of
      the broker-dealer's net capital.  National
      Securities has elected to use the alternative standard method permitted by
      the
      rule. This requires that National Securities maintain minimum net capital equal
      to the greater of $250,000 or a specified amount per security based on the
      bid
      price of each security for which National Securities is a market maker. At
      September 30, 2007, National Securities’ net capital exceeded the requirement by
      $2,134,000.




-6-





The
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the FINRA
      Conduct Rules require National Securities to supervise the activities of its
      investment executives. As part of providing such supervision, National
      Securities maintains Written Supervisory Procedures and a Compliance Manual.
      Compliance personnel and outside auditors conduct inspections of branch offices
      periodically to review compliance with the Company's procedures. A registered
      principal provides onsite supervision at each of the Company's larger offices.
      The other offices (averaging two investment executives per office) are not
      required by FINRA rules to have a registered principal on site and are therefore
      supervised by registered principals of National Securities. Designated
      principals review customer trades to ensure compliance with the FINRA Conduct
      Rules including mark-up guidelines.





In
      November 2006, without admitting or denying the alleged violations, National
      Securities accepted and consented to the entry of the following findings by
      NASD
      Regulation: Pursuant to NASD Rules 2110, 3010, 6230(A), MSRB Rules G-14, G-17,
      the firm failed to report to trace, transactions in trace eligible securities
      executed on a business day during trace system hours within 30 minutes of the
      time of execution; the firm’s supervisory system did not provide for supervision
      reasonably designed to achieve compliance with applicable securities laws,
      regulations and NASD rules concerning trace reporting; and failed to report
      to
      the MSRB customer transaction in municipal securities within 15 minutes of the
      time of execution. The firm was censured and fined $30,000 in a settlement
      dated
      November 21, 2006.





In
      July
      2007, without admitting or denying the alleged violations, National Securities
      accepted and consented to the entry of the following findings by NASD
      Regulation: Pursuant to NASD
      Rules 2110, 3010(A) AND (B), the firm ignored red flags that a representative
      was circumventing his heightened supervision plan. The
      firm
      was censured and fined $20,000 in a settlement dated July 19, 2007.





**Venture
      Capital**





In
      2001,
      the Company formed Robotic Ventures Fund I, L.P. (the “Fund”), a venture capital
      fund dedicated to investing in companies engaged in the business of robotics
      and
      artificial intelligence. The Company has a 24.5% interest in, and serves as
      the
      managing member of, Robotic Ventures Group LLC (“LLC”), the general partner of
      the Fund. The LLC has a 0.02% ownership interest in the Fund. The Fund has
      twenty limited partners. Under the terms of the LLC agreement the managing
      member may be removed under certain circumstances. As the managing member,
      the
      Company has no ongoing monetary responsibility to support operations or provide
      for Fund losses. The carrying amount of the Company’s investment in the Fund was
      $0 at September 30, 2007 and 2006. The Company’s investment is accounted for
      under the equity method of accounting. The Company recognized income on this
      investment of $192,000 in fiscal year 2006, and no income or loss on this
      investment in fiscal years 2007 and 2005, respectively. During the formation
      of
      the Fund, the Company incurred various start-up expenses that were subsequently
      reimbursed by the Fund **.**





**Item
      1A. RISK FACTORS**





*The
      financial statements contained in this report and the related discussions
      describe and analyze the Company’s financial performance and condition for the
      periods indicated. For the most part, this information is historical. The
      Company’s prior results, however, are not necessarily indicative of the
      Company’s future performance or financial condition. The Company, therefore, has
      included the following discussion of certain factors that could affect the
      Company’s future performance or financial condition. These factors could cause
      the Company’s future performance or financial condition to differ materially
      from its prior performance or financial condition or from management’s
      expectations or estimates of the Company’s future performance or financial
      condition. These factors, among others, should be considered in assessing the
      Company’s future prospects and prior to making an investment decision with
      respect to the Company’s stock. The risks described below are not the only ones
      facing us. Additional risks not presently known to us or that we currently
      believe are immaterial may also impair our business
      operations.*




-7-





**The
      Company’s operations have generated reporting losses during certain fiscal
      years.**





Although
      the Company was profitable in fiscal years 2007, 2006 and 2004, it reported
      losses of approximately $1,183,000, $843,000, $3.4 million and $7.9 million
      in
      fiscal years 2005, 2003, 2002 and 2001, respectively. There is no assurance
      that
      the Company will be profitable in the future. The Company’s losses were
      primarily attributable to the market slowdowns and reduced trading activity
      and
      volatility, and the cessation of its market making activities. If
      we are
      unable to achieve or sustain profitability, we may need to curtail, suspend
      or
      terminate certain operations.





**The
      Company may require additional financing.**





In
      order
      for the Company to have the opportunity for future success and profitability,
      it
      periodically may need to obtain additional financing, either through borrowings,
      public offerings, private offerings, or some type of business combination (e.g.,
      merger, buyout, etc.). The Company has actively pursued a variety of funding
      sources, and has consummated certain transactions in
      order
      to address its capital requirements. The
      Company may need to seek to raise additional capital through other available
      sources, including borrowing additional funds from third parties and
      there can be no assurance that it will be successful in such pursuits.
      Additionally, the issuance of new securities to raise capital will cause the
      dilution of shares held by current stockholders. Accordingly,
      if we are unable to generate adequate cash from operations, and if we are unable
      to find sources of funding, it would have an adverse impact on our liquidity
      and
      operations.




**If
      the Company is unable to pay its outstanding debt obligations when due, the
      Company’s operations may be materially adversely affected.** ****





At
      September 30, 2007, we had total indebtedness of $1,500,000, of which $500,000
      matures during fiscal year 2008. The Company cannot assure you that our
      operations will generate funds sufficient to repay our existing debt obligations
      as they come due. The Company’s failure to repay its indebtedness and make
      interest payments as required by our debt obligations could have a material
      adverse affect on the Company’s operations.





**Because
      the common stock may be subject to "penny stock" rules, the market for the
      common stock may be limited.**





If
      the
      common stock becomes subject to the Securities and Exchange Commission’s (the
“SEC”) penny stock rules, broker-dealers may experience difficulty in completing
      customer transactions and trading activity in the Company’s securities may be
      adversely affected. If at any time the common stock has a market price per
      share
      of less than $5.00, and the Company does not have net tangible assets of at
      least $2,000,000 or average revenue of at least $6,000,000 for the preceding
      three years, transactions in the common stock may be subject to the “penny
      stock” rules promulgated under the Exchange Act. Under these rules,
      broker-dealers who recommend such securities to persons other than institutional
      accredited investors:





·
            must
                make a special written suitability determination for the
                purchaser;


·
            receive
                the purchaser’s written agreement to a transaction prior to
                sale;


·
            provide
                the purchaser with risk disclosure documents which identify certain
                risks
                associated with investing in “penny stocks” and which describe the market
                for these “penny stocks” as well as a purchaser’s legal remedies;
                and


·
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in a “penny stock” can be
                completed.




If
      the
      common stock becomes subject to these rules, broker-dealers may find it
      difficult to effectuate customer transactions and trading activity in the
      Company’s securities may be adversely affected. As a result, the market price of
      the Company’s securities may be depressed, and stockholders may find it more
      difficult to sell the Company’s securities.




-8-





**National
      Securities is subject to various risk associated with the securities
      industry.**





As
      a
      securities broker-dealer, National Securities is subject to uncertainties that
      are common in the securities industry. These uncertainties include:





·
            the
                volatility of domestic and international financial, bond and stock
                markets;


·
            extensive
                governmental regulation;


·
            litigation;


·
            intense
                competition;


·
            substantial
                fluctuations in the volume and price level of securities; and


·
            dependence
                on the solvency of various third parties.





As
      a
      result, revenues and earnings may vary significantly from quarter to quarter
      and
      from year to year. In periods of low volume, profitability is impaired because
      certain expenses remain relatively fixed. In the event of a market downturn,
      our
      business could be adversely affected in many ways. Our revenues are likely
      to
      decline in such circumstances and, if we were unable to reduce expenses at
      the
      same pace, our profit margins would erode.





**Failure
      to comply with net capital requirements could subject us to sanctions imposed
      by
      the SEC or the** **FINRA.**





National
      Securities is subject to the SEC's net capital rule which requires the
      maintenance of minimum net capital. We compute net capital under the alternate
      method permitted by the net capital rule. National Securities is required to
      maintain net capital equal to the
      greater of $250,000 or a specified amount per security based on the bid price
      of
      each security for which National Securities is a market maker. The
      net
      capital rule is designed to measure the general financial integrity and
      liquidity of a broker-dealer. Compliance with the net capital rule limits those
      operations of broker-dealers that require the intensive use of their capital,
      such as underwriting commitments and principal trading activities. The rule
      also
      limits the ability of securities firms to pay dividends or make payments on
      certain indebtedness, such as subordinated debt, as it matures. The FINRA may
      enter the offices of a broker-dealer at any time, without notice, and calculate
      the firm's net capital. If the calculation reveals a deficiency in net capital,
      the FINRA may immediately restrict or suspend certain or all of the activities
      of a broker-dealer. National Securities may not be able to maintain adequate
      net
      capital, or its net capital may fall below requirements established by the
      SEC,
      and subject us to disciplinary action in the form of fines, censure, suspension,
      expulsion or the termination of business altogether.  In
      addition, if these net capital rules are changed or expanded, or if there is
      an
      unusually large charge against net capital, operations that require the
      intensive use of capital would be limited. A large operating loss or charge
      against net capital could adversely affect our ability to expand or even
      maintain our present levels of business  ,
      which
      could have a material adverse effect on our business. In addition, we may become
      subject to net capital requirements in other foreign jurisdictions in which
      we
      currently operate or which we may enter. We cannot predict our future capital
      needs or our ability to obtain additional financing.





**The
      Company is exposed to risks associated with its underwriting
      activities.**





Participation
      in an underwriting syndicate or a selling group involves both economic and
      regulatory risks. An underwriter may incur losses if it is unable to resell
      the
      securities it is committed to purchase, or if it is forced to liquidate its
      commitment at less than the purchase price. In addition, under federal
      securities laws, other laws and court decisions with respect to underwriters'
      liabilities and limitations on the indemnification of underwriters by issuers,
      an underwriter is subject to substantial potential liability for misstatements
      or omissions of material facts in prospectuses and other communications with
      respect to such offerings. Acting as a managing underwriter increases these
      risks. Underwriting commitments constitute a charge against net capital and
      our
      ability to make underwriting commitments may be limited by the requirement
      that
      we must at all times be in compliance with the net capital rule.




-9-





**The
      Company’s business could be adversely affected by a breakdown in the financial
      markets.**





As
      a
      securities broker-dealer, National Securities’ business is materially affected
      by conditions in the financial markets and economic conditions generally, both
      in the United States and elsewhere around the world. Many factors or events
      could lead to a breakdown in the financial markets including war, terrorism,
      natural catastrophes and other types of disasters. These types of events could
      cause people to begin to lose confidence in the financial markets and their
      ability to function effectively. If the financial markets are unable to
      effectively prepare for these types of events and ease public concern over
      their
      ability to function, the Company’s revenues are likely to decline and adversely
      affect its operations.





**Market
      fluctuations may reduce the Company’s revenues and
      profitability.**





The
      Company’s revenue and profitability may be adversely affected by declines in the
      volume of securities transactions and in market liquidity. Additionally, the
      Company’s profitability may be adversely affected by losses from the trading or
      underwriting of securities or failure of third parties to meet commitments.
      National Securities acts as a market maker in publicly traded common stocks.
      In
      market making transactions, the Company undertakes the risk of price changes
      or
      being unable to resell the common stock it holds or being unable to purchase
      the
      common stock it has sold. These risks are heightened by the illiquidity of
      many
      of the common stocks that the Company trades and/or makes a market. Any losses
      from the Company trading activities, including as a result of unauthorized
      trading by the Company’s employees, could have a material adverse effect on the
      Company’s business, financial condition, results of operations or cash flows.





Lower
      securities price levels may also result in a reduced volume of transactions,
      as
      well as losses from declines in the market value of common stocks held for
      trading purposes. During periods of declining volume and revenue, the Company’s
      profitability would be adversely affected. Declines in market values of common
      stocks and the failure of issuers and third parties to perform their obligations
      can result in illiquid markets.





**Competition
      with other financial firms may have a negative effect on the Company’s
      business.**





The
      Company competes directly with national and regional full-service broker-dealers
      and a broad range of other financial service firms, including banks and
      insurance companies. Competition has increased as smaller securities firms
      have
      either ceased doing business or have been acquired by or merged into other
      firms. Mergers and acquisitions have increased competition from these firms,
      many of which have significantly greater financial, technical, marketing and
      other resources than the Company. Many of these firms offer their customers
      more
      products and research than currently offered by the Company. These competitors
      may be able to respond more quickly to new or changing opportunities,
      technologies and client requirements. The Company also faces competition from
      companies offering discount and/or electronic brokerage services, including
      brokerage services provided over the Internet, which the Company is currently
      not offering and does not intend to offer in the foreseeable future. These
      competitors may have lower costs or provide more services, and may offer their
      customers more favorable commissions, fees or other terms than those offered
      by
      the Company. To the extent that issuers and purchasers of securities transact
      business without the assistance of the Company, the Company’s operating results
      could be adversely affected.




**There
      are risks associated with our stock trading on the OTCBB rather than on a
      national exchange.**




There
      may
      be significant consequences associated with our stock trading on the OTCBB
      rather than a national exchange. The effects of not being able to list our
      securities on a national exchange include:




·
            limited
                release of the market price of our securities;


·
            limited
                news coverage;






-10-




·
            limited
                interest by investors in our securities;


·
            volatility
                of our stock price due to low trading volume;


·
            increased
                difficulty in selling our securities in certain states due to “blue sky”
                restrictions; and


·
            limited
                ability to issue additional securities or to secure additional
                financing.





**The
      Company is currently subject to extensive securities regulation and the failure
      to comply with these regulations could subject the Company to penalties or
      sanctions.**





The
      securities industry and the Company’s business are subject to extensive
      regulation by the SEC, state securities regulators and other governmental
      regulatory authorities. The Company is also regulated by industry
      self-regulatory organizations, including the FINRA and the MSRB. National
      Securities is a registered broker-dealer with the SEC and a member firm of
      the
      FINRA. Broker-dealers are subject to regulations which cover all aspects of
      the
      securities business, including sales methods and supervision, trading 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. Changes in laws or regulations or in
      governmental policies could cause us to change the way we conduct our business,
      which could adversely affect us.





Compliance
      with many of the regulations applicable to the Company involves a number of
      risks, particularly in areas where applicable regulations may be subject to
      varying interpretation. These regulations often serve to limit the Company’s
      activities, including through net capital, customer protection and market
      conduct requirements. If the Company is found to have violated an applicable
      regulation, administrative or judicial proceedings may be initiated against
      the
      Company that may result in a censure, fine, civil penalties, issuance of
      cease-and-desist orders, the deregistration or suspension of the Company’s
      broker-dealer activities, the suspension or disqualification of the Company’s
      officers or employees, or other adverse consequences. The imposition of any
      of
      these or other penalties could have a material adverse effect on the Company’s
      operating results and financial condition.





**The
      Company relies on clearing brokers and unilateral termination of the agreements
      with these clearing brokers could disrupt the Company’s
      business.**





The
      Company is an introducing brokerage firm, using third party clearing brokers
      to
      process its securities transactions and maintain customer accounts on a fee
      basis. The clearing brokers also provide billing services, extend credit and
      provide for control and receipt, custody and delivery of securities. The
      Company’s broker-dealer depends on the operational capacity and ability of the
      clearing brokers for the orderly processing of transactions. In addition, by
      engaging the processing services of a clearing firm, the Company is exempt
      from
      some capital reserve requirements and other regulatory requirements imposed
      by
      federal and state securities laws. If the clearing agreements are unilaterally
      terminated for any reason, the Company would be forced to find alternative
      clearing firms without adequate time to negotiate the terms of a new clearing
      agreement and without adequate time to plan for such change. There can be no
      assurance that if there were a unilateral termination of its clearing agreement
      that the Company would be able to find an alternative clearing firm on
      acceptable terms to them or at all.




In
      April
      2005, National Securities entered into a clearing agreement with NFS that became
      effective in June 2005. In June 2005, National Securities entered into a
      clearing agreement with Penson for the purpose of providing clearing services
      that are not provided by NFS. Additionally, in June 2007, National Securities
      entered into a clearing agreement with Legent for the purpose of providing
      clearing services that are not provided by NFS and to maintain a pre-existing
      clearing relationship for brokers newly associated with National
      Securities




-11-





The
      Company permits its clients to purchase securities on a margin basis or sell
      securities short, which means that the clearing firm extends credit to the
      client secured by cash and securities in the client’s account. During periods of
      volatile markets, the value of the collateral held by the clearing brokers
      could
      fall below the amount borrowed by the client. If margin requirements are not
      sufficient to cover losses, the clearing brokers sell or buy securities at
      prevailing market prices, and may incur losses to satisfy client obligations.
      The Company’s has agreed to indemnify the clearing brokers for losses they incur
      while extending credit to its clients.





**Credit
      risk exposes the Company to losses caused by financial or other problems
      experienced by third parties** *.*





The
      Company is exposed to the risk that third parties that owe it money, securities
      or other assets will not perform their obligations. These parties include
      trading counterparts, customers, clearing agents, exchanges, clearing houses,
      and other financial intermediaries as well as issuers whose securities the
      Company holds. These parties may default on their obligations owed to the
      Company due to bankruptcy, lack of liquidity, operational failure or other
      reasons. This risk may arise, for example, from holding securities of third
      parties, executing securities trades that fail to settle at the required time
      due to non-delivery by the counterparty or systems failure by clearing agents,
      exchanges, clearing houses or other financial intermediaries, and extending
      credit to clients through bridge or margin loans or other arrangements.
      Significant failures by third parties to perform their obligations owed to
      the
      Company could adversely affect the Company’s revenues and perhaps the Company’s
      ability to borrow in the credit markets.





**Our
      risk management policies and procedures may leave us exposed to unidentified
      risks or an unanticipated level of risk.**




The
      policies and procedures we employ to identify, monitor and manage risks may
      not
      be fully effective. Some methods of risk management are based on the use of
      observed historical market behavior. As a result, these methods may not
      accurately predict future risk exposures, which could be significantly greater
      than the historical measures indicate. Other risk management methods depend
      on
      evaluation of information regarding markets, clients or other matters that
      are
      publicly available or otherwise accessible by us. This information may not
      be
      accurate, complete, up-to-date or properly evaluated. Management of operational,
      legal and regulatory risks requires, among other things, policies and procedures
      to properly record and verify a large number of transactions and events. We
      cannot assure that our policies and procedures will effectively and accurately
      record and verify this information.




We
      seek
      to monitor and control our risk exposure through a variety of separate but
      complementary financial, credit, operational and legal reporting systems. We
      believe that we are able to evaluate and manage the market, credit and other
      risks to which we are exposed. Nonetheless, our ability to manage risk exposure
      can never be completely or accurately predicted or fully assured. For example,
      unexpectedly large or rapid movements or disruptions in one or more markets
      or
      other unforeseen developments could have a material adverse effect on our
      results of operations and financial condition. The consequences of these
      developments can include losses due to adverse changes in inventory values,
      decreases in the liquidity of trading positions, higher volatility in earnings,
      increases in our credit risk to customers as well as to third parties and
      increases in general systemic risk.




-12-




**Adverse
      results of current litigation and potential securities law liability would
      result in financial losses and divert management’s attention to
      business.**





Many
      aspects of National Securities’ business involve substantial risks of liability.
      There has been an increase in litigation and arbitration within the securities
      industry in recent years, including class action suits seeking substantial
      damages. National Securities is subject to potential claims by dissatisfied
      customers, including claims alleging they were damaged by improper sales
      practices such as unauthorized trading, sale of unsuitable securities, use
      of
      false or misleading statements in the sale of securities, mismanagement and
      breach of fiduciary duty. National Securities may be liable for the unauthorized
      acts of its retail brokers if it fails to adequately supervise their conduct.
      As
      an underwriter, National Securities may be subject to substantial potential
      liability under federal and state law and court decisions, including liability
      for material misstatements and omissions in securities offerings. National
      Securities may be required to contribute to a settlement, defense costs or
      a
      final judgment in legal proceedings or arbitrations involving a past
      underwriting and in actions that may arise in the future. National Securities
      carries “Errors and Omissions” insurance to protect against arbitrations;
      however, the policy is limited in items and amounts covered and there can be
      no
      assurance that it will cover a particular complaint. The adverse resolution
      of
      any legal proceedings involving the Company and/or National Securities could
      have a material adverse effect on the Company’s business, financial condition,
      results of operations or cash flows.





**The
      Company depends on** **senior
      employees and the loss of their services could harm our
      business** **.**





The
      Company depends on the continued services of its management team, particularly
      Mark Goldwasser, the Company’s Chairman, President and Chief Executive Officer,
      as well as its ability to hire additional members of management, and to retain
      and motivate its other officers and key employees. We may not be able to find
      an
      appropriate replacement for Mr. Goldwasser or any other executive officer if
      the
      need should arise. The Company maintains a $2.0 million life insurance policy
      on
      Mr. Goldwasser. Due to the regulated nature of some of our businesses, some
      of
      our executive officers, or other key personnel could become subject to
      suspensions or other limitations on the scope of their services to us from
      time
      to time. If we lose the services of any executive officers or other key
      personnel, we may not be able to manage and grow our operations effectively,
      enter new brokerage markets or develop new products.




**The
      Company faces significant competition for registered representatives.**





We
      are
      dependent upon the independent contractor model for our retail brokerage
      business. We are exposed to the risk that a large group of independent
      contractors could leave the firm or decide to affiliate with another firm and
      that we are unable to recruit suitable replacements. A loss of a large group
      of
      our independent contractors could have a material adverse impact on our ability
      to generate revenue in the retail brokerage business.





**The
      price of our common stock is volatile.**





The
      price
      of our common stock has fluctuated substantially (See Part II, Item 5). The
      market price of our common stock may be highly volatile as a result of factors
      specific to the Company and the securities markets in general. Factors affecting
      volatility may include: variations in the Company’s annual or quarterly
      financial results or those of its competitors; economic conditions in general;
      and changes in applicable laws or regulations, or their judicial or
      administrative interpretations affecting the Company or its subsidiary or the
      securities industry. In addition, volatility of the market price of our common
      stock is further affected by its thinly traded nature.




**We
      have restricted shares outstanding that may depress the price of the common
      stock.**




As
      of
      September 30, 2007, of the 8,602,628 outstanding
      shares of our common stock, approximately 3,350,000 shares may be deemed
      restricted shares and, in the future, may be sold in compliance with Rule 144
      under the Securities Act. On November 15, 2007, the SEC adopted changes to
      Rule
      144 which will take effect 60 days after publication of the changes. Rule 144,
      as amended, will provide that a person who is not affiliated with us holding
      restricted securities for six months may sell such shares without restriction.
      A
      person who is affiliated with us and who has held restricted securities for
      six
      months may sell such shares in brokerage transactions, subject to limitations
      based on the number of shares outstanding and trading volume. Currently,
      restricted securities may be sold in brokerage transactions by both affiliates
      and non-affiliates after a one-year holding period, subject to trading
      limitations and other requirements, and without restriction by non-affiliates
      after a two-year holding period. Such sales may have a depressive effect on
      the
      price of our common stock in the open market.




-13-





**Our
      Board of Directors can issue shares of "blank check" preferred stock without
      further action by our stockholders.**





Our
      Board
      of Directors has the authority, without further action by the stockholders,
      to
      issue up to 200,000 shares of preferred stock in one or more series and to
      fix
      the rights, preferences, privileges and restrictions in each series of the
      preferred stock, including:





·
            dividend
                rights;


·
            conversion
                rights;


·
            voting
                rights, which may be greater or lesser than the voting rights of
                the
                common stock;


·
            rights
                and terms of redemption;


·
            liquidation
                preferences; and


·
            sinking
                fund terms.




There
      are
      currently 50,000 shares of Series A preferred stock authorized, with 37,550
      of
      such shares issued and outstanding. The issuance of shares of preferred stock
      could adversely affect the voting power of holders of our common stock, and
      the
      likelihood that these holders will receive dividends and payments upon our
      liquidation, and could have the effect of delaying, deferring or preventing
      a
      change in control of the Company. We have no current plans to issue any
      additional preferred stock in the next twelve months, although the issuance
      of
      preferred stock may be necessary in order to raise additional
      capital.





**The
      Company’s principal shareholders including our directors and officers control a
      large percentage of our shares of common stock and can significantly influence
      our corporate actions.**





At
      the
      present time, the Company’s executive officers, directors and/or entities that
      these individuals are affiliated with, and certain more than 5% shareholders,
      own approximately 65% of our common stock, including shares of common stock issuable
      upon conversion of our Series A preferred stock, and excluding stock options
      and
      warrants. Accordingly,
      these individuals and entities will be able to significantly influence most,
      if
      not all, of our corporate actions, including the election of directors, the
      appointment of officers, and potential merger or acquisition
      transactions .





**We
      will be subject to new requirements that we evaluate our internal controls
      over
      financial reporting under Section 404 of the Sarbanes-Oxley Act and other
      corporate governance initiatives that may expose us to certain
      risks.**





Currently,
      for the year ending September 30, 2008, we will be subject to the requirements
      of Section 404 of the Sarbanes-Oxley Act and the SEC rules and
      regulations that require an annual management report on our internal controls
      over financial reporting, including, among other matters, management’s
      assessment of the effectiveness of our internal control over financial
      reporting. For the year ending September 30, 2009, an attestation report by
      our
      independent registered public accounting firm regarding our internal controls
      will also be required.





We
      cannot
      be certain as to the timing of the completion of our evaluation, testing and
      remediation actions or the impact of the same on our operations. If we are
      not
      able to implement the requirements of Section 404 in a timely manner or
      with adequate compliance, we may be subject to sanctions or investigation by
      regulatory authorities, including the SEC. Moreover, if we are unable to assert
      that our internal control over financial reporting is effective in any future
      period (or if our auditors are unable to express an opinion on the effectiveness
      of our internal controls), we could lose investor confidence in the accuracy
      and
      completeness of our financial reports, which may have an a material adverse
      effect on our Company.




-14-




Our
      compliance with the Sarbanes-Oxley Act may require significant expenses and
      management resources that would need to be diverted from our other operations
      and could require a restructuring of our internal controls over financial
      reporting. Any such expenses, time reallocations or restructuring could have
      a
      material adverse effect on our operations. The applicability of the
      Sarbanes-Oxley Act to us could make it more difficult and more expensive for
      us
      to obtain director and officer liability insurance, and also make it more
      difficult for us to attract and retain qualified individuals to serve on our
      boards of directors, or to serve as executive officers.





**We
      do not expect to pay any dividends on our common stock in the foreseeable
      future.**




We
      do not
      anticipate that we will pay any dividends to holders of our common stock in
      the
      foreseeable future. Other than dividends paid on our Series A preferred stock,
      we expect to retain all future earnings, if any, for investment in our business.
      In addition, our Certificates of Designation setting forth the relative rights
      and preferences of our Series A preferred stock limit our ability to pay
      dividends to the holders of our common stock.





**Item
      1B. UNRESOLVED STAFF COMMENTS**





None.





**Item
      2. PROPERTIES**





The
      Company owns no real property. Its corporate headquarters are shared with
      National Securities in leased space in Chicago, Illinois and New York, New
      York.
      The Company leases office space in Boca Raton, Florida, and through its
      subsidiary, the Company leases office space in Chicago, New York, Seattle,
      Washington and Tinton Falls, New Jersey. Independent contractors individually
      lease the branch offices that are operated by those independent contractors.





Leases
      expire at various times through September 2012. The Company believes the rent
      at
      each of its locations is reasonable based on current market rates and
      conditions.





**Item
      3. LEGAL PROCEEDINGS**





In
      September 2006, the former
      chairman and chief executive officer of the Company, Steven A. Rothstein,
      commenced an arbitration against the current chairman and chief executive
      officer of the Company, Mark Goldwasser, in the matter *Rothstein
      et al. vs. Goldwasser* ,
      FINRA
      No. 06-04000.  Rothstein is alleging fraud and inequitable conduct relating
      to his attempts to sell his investment in the Company in calendar year
      2001, and is seeking approximately $5,750,000 in damages.  The
      Company is indemnifying Mr. Goldwasser in this action.  The Company
      and Mr. Goldwasser believe this action is without merit, and intend to
      vigorously defend this action. As of September 30, 2007, the outcome of this
      arbitration is undeterminable and accordingly the Company has not established
      a
      provision for this matter.





The
      Company is also a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims seeking
      in the aggregate damages of approximately $1,000,000. The Company believes
      such claims are substantially without merit, and estimates that its liability,
      primarily for attorney representation, will approximate $200,000 (exclusive
      of
      unspecified punitive damages related to certain claims and inclusive of expected
      insurance coverage). These matters arise in the normal course of business.
      The
      Company intends to vigorously defend itself in these actions, and believes
      that
      the eventual outcome of these matters will not have a material adverse effect
      on
      the Company. However,
      the ultimate outcome of these matters cannot be determined at this time. The
      amounts related to such matters that are reasonably estimable and which have
      been accrued at September 30, 2007 and 2006, is $62,000 and $241,000 (primarily
      legal fees), respectively, and have
      been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
      the accompanying consolidated statements of financial condition . The
      Company has included in “Professional fees” litigation and other FINRA related
      expenses of $1,444,000, $799,000 and $790,000 for the fiscal years ended
      September 30, 2007, 2006 and 2005, respectively.




-15-





**Item
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





There
      were no matters submitted to a vote of security holders in the fourth quarter
      of
      fiscal year ended September 30, 2007.





**PART
      II**





**Item
      5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED** **STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**





**Market
      Information**





On
      March
      20, 2006, our common stock commenced trading under the symbol “NHLD” on the
      OTCBB reflecting the Company’s name change. Quotations
      on the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down
      or
      commission and may not necessarily represent actual transactions. From
      October 1, 2005 to March 17, 2006, our common stock traded on the OTCBB under
      the symbol “OLYD”.





The
      following table sets forth the high
      and low closing sales prices for the common stock as
      reported on the OTCBB for the period from October 1, 2005 to September 30,
      2007.





**Period**
            
            High
            
            LowOctober
                1, 2005/December 31, 2005
            
            $
            1.20
            
            $
            0.53January
                1, 2006/March 31, 2006
            
            $
            1.60
            
            $
            0.75April
                1, 2006/June 30, 2006
            
            $
            1.55
            
            $
            1.05July
                1, 2006/September 30, 2006
            
            $
            1.60
            
            $
            1.20October
                1, 2006/December 31, 2006
            
            $
            1.65
            
            $
            1.10January
                1, 2007/March 31, 2007
            
            $
            1.80
            
            $
            1.40April
                1, 2007/June 30, 2007
            
            $
            3.30
            
            $
            1.56July
                1, 2007/September 30, 2007
            
            $
            2.85
            
            $
            1.85




The
      closing price of the common stock on December 6, 2007, as quoted on the OTCBB,
      was $1.60 per share.




**Shareholders**





As
      of
      September 30, 2007, the Company had approximately 1,000 shareholders, including
      those shareholders holding stock in street name and trust accounts.




-16-





**Dividends**





Delaware
      law authorizes the Company’s Board of Directors to declare and pay dividends
      with respect to the common stock either out of its surplus (as defined in the
      Delaware Corporation Law) or, in case there is no such surplus, out of its
      net
      profits for the fiscal year in which the dividend is declared and/or the
      preceding fiscal
      year; provided, however, that no dividend may be paid out of net profits unless
      the Company’s capital exceeds the aggregate amount represented by the issued and
      outstanding stock of all classes having a preference in the distribution of
      assets. T he
      Company’s ability
      to pay dividends in the future also may be restricted by its operating
      subsidiary's obligation to comply with the net capital requirements imposed
      on
      broker-dealers by the SEC and the FINRA.  Prior to
      the issuance of the Series A and Series B preferred stock, no shareholder held
      preferential rights in liquidation. We do not anticipate that we will pay any
      dividends to holders of our common stock in the foreseeable future.





The
      holders of the Series A Convertible preferred stock are entitled to receive
      dividends on a quarterly basis at a rate of 9% per annum, per share. Such
      dividends are cumulative and accumulate whether or not declared by the Company’s
      Board of Directors, but are payable only when and if declared by the Company’s
      Board of Directors. In the years ended September 30, 2007, 2006 and 2005, the
      Company’s Board of Directors declared in-kind dividends in the aggregate of
      2,537, 1,996 and 2,143 shares of Series A preferred stock, in payment of
      approximately $317,000, $300,000 and $322,000, respectively, for dividends
      accumulated through March 31 of each year. In March 2006, the Company’s
      shareholders approved an amendment to decrease the conversion price of the
      Series A preferred stock to $1.25 per share from $1.50 per share. As of
      September 30, 2007 and 2006, the amount of accumulated dividends for the
      Company’s 37,550 and 35,516 issued and outstanding shares of Series A preferred
      stock was approximately $169,000 and $159,000, respectively.





The
      holders of the Company’s Series B Convertible preferred stock, convertible into
      the Company’s common stock at $.75 per share, were entitled to receive dividends
      on a quarterly basis at a rate of 10% per annum per share. Such dividends were
      cumulative and were payable only when declared by the Company’s Board of
      Directors. The Company declared and paid cash dividends on its Series B
      preferred stock in fiscal years 2007 and 2006. In the fourth quarter of fiscal
      year 2007, the
      Company exercised the conversion option contained in its Series B preferred
      stock, and is no longer obligated to pay dividends on its  Series
      B
      preferred stock.





The
      holders of the Company’s Series A convertible preferred stock have voting rights
      equal to the number of shares of common stock into which such shares of
      preferred stock could be converted at a particular record date.





**Securities
      Authorized for Issuance under Equity Compensation Plans**





Item
      12
      of Part III contains information concerning securities authorized for issuance
      under our equity compensation plans.





**Issuer
      Purchases of Equity Securities**




We
      have
      not announced any currently effective authorization to repurchase shares of
      our
      common stock.




**Item
      6. SELECTED FINANCIAL DATA**





Set
      forth
      below is the historical financial data with respect to the Company for the
      fiscal years ended 2007, 2006, 2005, 2004 and 2003. This information has been
      derived from, and should be read in conjunction with, the audited financial
      statements, which appear elsewhere in this report. All information is expressed
      in thousands of dollars except for per share information.




-17-





Fiscal
                Year2007
            
            2006
            
            2005
            
            2004
            
            2003Net
                revenues
            
            $
            72,819
            
            $
            58,727
            
            $
            45,730
            
            $
            62,460
            
            $
            50,158Net
                income (loss)
            
            
            1,372
            
            
            595
            
            
            (1,183
            )
            
            566
            
            
            (843
            )Preferred
                stock dividends
            
            
            (409
            )
            
            (381
            )
            
            (290
            )
            
            (266
            )
            
            (250
            )Net
                income (loss) per common shareBasic
            
            
            0.16
            
            
            0.04
            
            
            (0.29
            )
            
            0.08
            
            
            (0.34
            )Diluted
            
            
            0.13
            
            
            0.04
            
            
            (0.29
            )
            
            0.07
            
            
            (0.34
            )Weighted
                average number of shares used
                in computing income (loss)per
                shareBasic
            
            
            6,042,646
            
            
            5,146,422
            
            
            5,024,643
            
            
            3,580,446
            
            
            3,175,315Diluted
            
            
            9,669,531
            
            
            5,278,299
            
            
            5,024,643
            
            
            4,106,742
            
            
            3,175,315Total
                assets
            
            
            17,283
            
            
            9,707
            
            
            7,960
            
            
            9,722
            
            
            8,735Total
                liabilities
            
            
            10,461
            
            
            6,864
            
            
            7,030
            
            
            7,793
            
            
            9,064Stockholders’
                equity (deficit)
            
            
            6,822
            
            
            2,843
            
            
            930
            
            
            1,929
            
            
            (329
            )Cash
                dividends
            
            
            82
            
            
            46
            
            
            -
            
            
            -
            
            
            -




**Item
      7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**





*The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. This Report may contain certain statements of a
      forward-looking nature relating to future events or future business performance.
      Any such statements that refer to the Company’s estimated or anticipated future
      results or other non-historical facts are forward-looking and reflect the
      Company’s current perspective of existing trends and information. These
      statements involve risks and uncertainties that cannot be predicted or
      quantified and, consequently, actual results may differ materially from those
      expressed or implied by such forward-looking statements. Such risks and
      uncertainties include, among others, risks and uncertainties detailed in Item
      1
      above. Any forward-looking statements contained in or incorporated into this
      Report speak only as of the date of this Report. The Company undertakes no
      obligation to update publicly any forward-looking statement, whether as a result
      of new information, future events or otherwise.*





**Critical
      Accounting Policies and Estimates**




The
      SEC
      recently issued proposed guidance for disclosure of critical accounting policies
      and estimates. The Company’s most critical accounting policies relate to income
      recognition, income taxes, and stock-based compensation. The SEC defines
“critical accounting estimates” as those that require application of
      management’s most difficult, subjective or complex judgments, often as a result
      of the need to make estimates about the effects of matters that are inherently
      uncertain and may change in subsequent periods.





The
      Company’s critical accounting policies are as follows:





Revenue
      Recognition -
      Customer security transactions and the related commission income and expense
      are
      recorded as of the trade date. Investment banking revenues include gains,
      losses, and fees, net of syndicate expenses, arising from securities offerings
      in which the Company acts as an underwriter or agent. Investment banking
      revenues also include fees earned from providing financial advisory services.
      Investment banking management fees are recorded on the offering date, sales
      concessions on the settlement date, and underwriting fees at the time the
      underwriting is completed and the income is reasonably determinable. Customers
      who are financing their transaction on margin are charged interest. The
      Company’s margin requirements are in accordance with the terms and conditions
      mandated by its clearing firms, NFS, Penson and Legent. The interest is billed
      on the average daily balance of the margin account.




-18-





Net
      dealer inventory gains result from securities transactions entered into for
      the
      account and risk of the Company. Net dealer inventory gains are recorded on
      a
      trade date basis. Transfer fees are charged for each customer’s security
      transaction, and are recognized as of the trade date. Investment advisory fees
      are account management fees for high net worth clients based on the amount
      of
      the assets under management. These fees are billed quarterly and recognized
      at
      such time that the service is performed and collection is probable.





The
      Company generally acts as an agent in executing customer orders to buy or sell
      listed and over-the-counter securities in which it does not make a market,
      and
      charges commissions based on the services the Company provides to its customers.
      In executing customer orders to buy or sell a security in which the Company
      makes a market, the Company may sell to, or purchase from, customers at a price
      that is substantially equal to the current inter-dealer market price plus or
      minus a mark-up or mark-down. The Company may also act as agent and execute
      a
      customer's purchase or sale order with another broker-dealer market-maker at
      the
      best inter-dealer market price available and charge a commission. Mark-ups,
      mark-downs and commissions are generally priced competitively based on the
      services it provides to its customers. In each instance the commission charges,
      mark-ups or mark-downs, are in compliance with guidelines established by the
      FINRA.





Common
      Stock Purchase Warrants - The
      Company accounts for the issuance of common stock purchase warrants issued
      in
      connection with capital financing transactions in accordance with the provisions
      of Emerging Issues Task Force Issue No. 00-19 “Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
      Stock” (“EITF 00-19”). Based on the provisions of EITF 00-19, the Company
      classifies as equity any contracts that (i) require physical settlement or
      net-share settlement or (ii) gives the Company a choice of net-cash settlement
      or settlement in its own shares (physical settlement or net-share settlement).
      The Company classifies as assets or liabilities any contracts that (i) require
      net-cash settlement (including a requirement to net-cash settle the contract
      if
      an event occurs and if that event is outside the control of the Company) or
      (ii)
      gives the counterparty a choice of net-cash settlement or settlement in shares
      (physical settlement or net-share settlement).





The
      Company assessed the classification of its derivative financial instruments
      as
      of September 30, 2007, which consist of common stock purchase warrants, and
      determined that such derivatives meet the criteria for equity classification
      under EITF 00-19.





Convertible
      Instruments - The
      Company evaluates and accounts for conversion options embedded in its
      convertible instruments in accordance with SFAS No. 133 “Accounting
      for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF
      00-19.





SFAS 133
      generally provides three criteria that, if met, require companies to bifurcate
      conversion options from their host instruments and account for them as free
      standing derivative financial instruments in accordance with EITF 00-19. These
      three criteria include circumstances in which (a) the economic
      characteristics and risks of the embedded derivative instrument are not clearly
      and closely related to the economic characteristics and risks of the host
      contract, (b) the hybrid instrument that embodies both the embedded
      derivative instrument and the host contract is not remeasured at fair value
      under otherwise applicable generally accepted accounting principles with changes
      in fair value reported in earnings as they occur and (c) a separate
      instrument with the same terms as the embedded derivative instrument would
      be
      considered a derivative instrument subject to the requirements of SFAS 133.
      SFAS 133 and EITF 00-19 also provide an exception to this rule when the
      host instrument is deemed to be conventional (as that term is described in
      the
      implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The
      Meaning of “Conventional Convertible Debt Instrument” in
      EITF 00-19).




-19-





The
      Company accounts for convertible instruments (when it has determined that the
      embedded conversion options should not be bifurcated from their host
      instruments) in accordance with the provisions of EITF 98-5 “Accounting for
      Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
      EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible
      notes
      for the intrinsic value of conversion options embedded in debt instruments
      based
      upon the differences between the fair value of the underlying common stock
      at
      the commitment date of the note transaction and the effective conversion price
      embedded in the note. Debt discounts under these arrangements are amortized
      over
      the term of the related debt to their earliest date of redemption. The Company
      also records when necessary deemed dividends for the intrinsic value of
      conversion options embedded in preferred shares based upon the differences
      between the fair value of the underlying common stock at the commitment date
      of
      the note transaction and the effective conversion price embedded in the
      note.





The
      Company evaluated the conversion option embedded in the convertible preferred
      stock and determined, in accordance with the provisions of these statements,
      that such conversion option does not meet the criteria requiring bifurcation
      of
      these instruments. The characteristics of the common stock that is issuable
      upon
      a holder’s exercise of the conversion option embedded in the convertible
      preferred stock are deemed to be clearly and closely related to the
      characteristics of the preferred shares (as that term is clarified in
      paragraph 61.l. of the implementation guidance included in Appendix A
      of SFAS 133). Additionally, the Company’s conversion options, if free
      standing, would not be considered derivatives subject to the accounting
      guidelines prescribed under SFAS 133.





Other
      Receivables - The
      Company extends unsecured credit in the normal course of business to its
      registered representatives. The determination of the amount of uncollectible
      accounts is based on the amount of credit extended and the length of time each
      receivable has been outstanding, as it relates to each individual registered
      representative. The allowance for doubtful accounts reflects the amount of
      loss
      that can be reasonably estimated by management, and is included in other
      expenses in the accompanying consolidated statements of operations.





Stock-Based
      Compensation - Prior
      to October 1, 2005, the Company accounted for employee stock transactions
      in accordance with Accounting Principle Board, APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” The Company had adopted the pro
      forma disclosure requirements of Statement of Financial Accounting Standards
      No. 123, “Accounting For Stock-Based Compensation.”





Effective
      October 1, 2005, the Company adopted FASB Statement of Financial Accounting
      Standard (“SFAS”) No. 123R “Share Based Payment.”  This statement is a
      revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
      and its related implementation guidance. SFAS 123R addresses all forms of share
      based payment (“SBP”) awards including shares issued under employee stock
      purchase plans, stock options, restricted stock and stock appreciation rights.
      Under SFAS 123R, SBP awards will result in a charge to operations that will
      be
      measured at fair value on the awards grant date, based on the estimated number
      of awards expected to vest over the service period.





The
      Black-Scholes option valuation model was used to estimate the fair value of
      the
      options granted during the fiscal years ended September 30, 2007, 2006 and
      2005.
      The model includes subjective input assumptions that can materially affect
      the
      fair value estimates. The model was developed for use in estimating the fair
      value of traded options that have no vesting restrictions and that are fully
      transferable. For example, the expected volatility is estimated based on the
      most recent historical period of time equal to the weighted average life of
      the
      options granted. Options issued under the Company's option plans have
      characteristics that differ from traded options. In the Company's opinion,
      this
      valuation model does not necessarily provide a reliable single measure of the
      fair value of its employee stock options




-20-








**Results
      of Operations**





**Fiscal
      Year 2007 Compared with Fiscal Year 2006**





The
      Company’s fiscal year 2007 resulted in an increase in revenues, and a
      slightly lesser increase in expenses, compared with fiscal year 2006. As
      a
      result, the Company reported net income of $1,372,000 compared with net income
      of $595,000 for the fiscal years 2007 and 2006, respectively. This represents
      an
      improvement of $777,000 from the prior year.





Fiscal Year
            
            Increase (Decrease)2007
            
            2006
            
            Amount
            
            PercentCommissions
            
            $
            39,237,000
            
            $
            32,140,000
            
            $
            7,097,000
            
            
            22
            %Proprietary
                trading
            
            
            14,550,000
            
            
            7,391,000
            
            
            7,159,000
            
            
            97
            %Market
                making
            
            
            873,000
            
            
            323,000
            
            
            550,000
            
            
            170
            %Mark-ups
                and mark-downs
            
            
            306,000
            
            
            124,000
            
            
            182,000
            
            
            147
            %Net
                dealer inventory gains
            
            
            15,729,000
            
            
            7,838,000
            
            
            7,891,000
            
            
            101
            %Investment
                banking
            
            
            9,097,000
            
            
            11,323,000
            
            
            (2,226,000
            )
            
            (20)
            %Interest
                and dividends
            
            
            2,824,000
            
            
            2,891,000
            
            
            (67,000
            )
            
            (2
            )%Transfer
                fees and clearance services
            
            
            4,075,000
            
            
            3,336,000
            
            
            739,000
            
            
            22
            %Other
            
            
            1,857,000
            
            
            1,199,000
            
            
            658,000
            
            
            55
            %$
            72,819,000
            
            $
            58,727,000
            
            $
            14,092,000
            
            
            24
            %





Total
      revenues increased $14,092,000, or 24%, in fiscal year 2007 to $72,819,000
      from
      $58,727,000 in fiscal year 2006. The increase in revenues is primarily due
      to
      greater commissions and net dealer inventory gains, partially offset by a
      decline in investment banking revenues. During fiscal year 2007, total trading
      volume increased 4%, compared to fiscal year 2006. The lesser increase in
      trading volume compared to revenues reflects an increase in the average revenue
      per trade. Commission revenue increased $7,097,000, or 22%, to $39,237,000
      from
      $32,140,000 during fiscal year 2007 compared with fiscal year 2006. Net dealer
      inventory gains, which includes profits on proprietary trading, market making
      activities and customer mark-ups and mark-downs, increased $7,891,000, or 101%,
      to $15,729,000 from $7,838,000 during fiscal year 2007 compared with fiscal
      year
      2006. The increase is primarily due to an increase in proprietary trading in
      the
      foreign bond market, and reflects the Company’s re-entry into market making
      activities. During fiscal year 2007, revenues from proprietary trading increased
      $7,159,000, or 97%, to $14,550,000 from $7,391,000 in fiscal year 2006, revenues
      from market making activities increased $550,000, or 170%, to $873,000 from
      $323,000 in fiscal year 2006, and revenues from customer mark-ups and mark-downs
      increased $182,000, or 147%, to $306,000 from $124,000 in fiscal year
      2006.





Investment
      banking revenue decreased $2,226,000, or 20%, to $9,097,000 from $11,323,000
      in
      fiscal year 2007 compared with fiscal year 2006. The
      decrease in investment banking revenues is attributable to the Company having
      completed fewer investment banking transactions for private
      companies in
      fiscal year 2007 than in fiscal year 2006. Interest and dividend income
      decreased $67,000, or 2%, to $2,824,000 from $2,891,000 in fiscal year 2007
      compared with fiscal year 2006. The
      decrease in interest income is attributable to a decrease in the amount of
      debit
      balances in National Securities’ customer accounts in
      fiscal
      year 2007 compared to fiscal year 2006. Transfer fees increased $739,000, or
      22%, to $4,075,000 in fiscal year 2007 from $3,336,000 in fiscal year 2006.
      The
      increase reflects higher transfer fees for trades generated from the retail
      brokerage business of brokers recently associated with the Company.




Other
      revenue, consisting of asset management fees, miscellaneous transaction fees
      and
      trading fees, and other investment income, increased $658,000, or 55%, to
      $1,857,000 from $1,199,000 during fiscal year 2007 compared to fiscal year
      2006.
      The increase is due to an increase in fee based assets under management,
      partially offset by investment income realized in the Company’s venture capital
      fund in fiscal year 2006.




-21-




Fiscal Year
            
            Increase (Decrease)2007
            
            2006
            
            Amount
            
            PercentCommission
                expense related to:Commission
                revenue
            
            $
            35,779,000
            
            $
            28,451,000
            
            $
            7,328,000
            
            
            26
            %Net
                dealer inventory gains
            
            
            12,507,000
            
            
            5,617,000
            
            
            6,890,000
            
            
            123
            %Investment
                banking
            
            
            3,985,000
            
            
            8,208,000
            
            
            (4,223,000
            )
            
            (51)
            %Commissions
            
            
            52,271,000
            
            
            42,276,000
            
            
            9,995,000
            
            
            24
            %Employee
                compensation
            
            
            7,464,000
            
            
            5,835,000
            
            
            1,629,000
            
            
            28
            %Clearing
                fees
            
            
            1,745,000
            
            
            1,538,000
            
            
            207,000
            
            
            13
            %Communications
            
            
            1,719,000
            
            
            1,748,000
            
            
            (29,000
            )
            
            (2)
            %Occupancy
                and equipment costs
            
            
            2,996,000
            
            
            2,805,000
            
            
            191,000
            
            
            7
            %Professional
                fees
            
            
            2,266,000
            
            
            1,213,000
            
            
            1,053,000
            
            
            87
            %Interest
            
            
            531,000
            
            
            494,000
            
            
            37,000
            
            
            7
            %Taxes,
                licenses and registration
            
            
            666,000
            
            
            617,000
            
            
            49,000
            
            
            8
            %Other
                administrative expenses
            
            
            1,789,000
            
            
            1,606,000
            
            
            183,000
            
            
            11
            %$
            71,447,000
            
            $
            58,132,000
            
            $
            13,315,000
            
            
            23
            %




In
      comparison with the 24% increase in total revenues, total expenses increased
      23%, or $13,315,000, to $71,447,000 for fiscal year 2007 compared to $58,132,000
      in fiscal year 2006. The increase in total expenses is primarily the result
      of
      greater commission expense directly associated with commission revenues and
      net
      dealer inventory gain, and increases in employee compensation and legal fees,
      partially offset by a decline in commission expense directly associated with
      investment banking.





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $9,995,000, or 24%, to
      $52,271,000 in fiscal year 2007 from $42,276,000 in fiscal year 2006. Commission
      expense related to commission revenue increased $7,328,000, or 26%, to
      $35,779,000 in fiscal year 2007 from $28,451,000 in fiscal year 2006; commission
      expense related to net dealer inventory gains increased $6,890,000, or 123%,
      to
      $12,507,000 in fiscal year 2007 from $5,617,000 in fiscal year 2006; and
      commission expense related to investment banking decreased $4,223,000, or 51%,
      to $3,985,000 in fiscal year 2007 from $8,208,000 in fiscal year 2006.
      Commission expense as a percentage of commission revenues increased to 91%
      in
      fiscal year 2007 from 89% in fiscal year 2006. This increase is attributable
      to
      changes in the production of particular brokers, not all of who are paid at
      the
      same commission rate and an increase in the amortization of advances to
      registered representatives. Commission expense as a percentage of net dealer
      inventory gains increased to 80% in fiscal year 2007 from 72% in fiscal year
      2006. This increase is attributable to changes in the production of particular
      brokers and traders, not all of who are paid at the same commission rate.
      Commission expense as a percentage of investment banking revenues decreased
      to
      44% in fiscal year 2007 from 72% in fiscal year 2006. This decrease is
      attributable to the type and size of the particular investment banking
      transactions completed in the current fiscal year. Commission expense includes
      the amortization of advances to registered representatives of $1,406,000 and
      $1,281,000 for fiscal years 2007 and 2006, respectively. These amounts fluctuate
      based upon the amounts of advances outstanding and the time period for which
      the
      registered representatives have agreed to be affiliated with National
      Securities.





Employee
      compensation expense increased $1,629,000, or 28%, to $7,464,000 in fiscal
      year
      2007 from $5,835,000 in fiscal year 2006. The increase is attributable to new
      employees hired during fiscal years 2007 and 2006, bonuses based on the current
      year’s profits, year-end bonuses that were paid to certain staff employees in
      the first quarter of fiscal year 2007 and an increase in the amortization of
      the
      fair value associated with stock based compensation. The amortization of stock
      based compensation is $171,000 and $19,000 for fiscal years 2007 and 2006,
      respectively. Overall, combined commission and employee compensation expense,
      as
      a percentage of revenue remained relatively constant at approximately 82% in
      fiscal years 2007 and 2006.




-22-




Clearing
      fees increased $207,000, or 13%, to $1,745,000 in fiscal year 2007 from
      $1,538,000 in fiscal year 2006. The increase in clearing fees is attributable
      to
      the increase in commission revenue in fiscal year 2007 compared to fiscal year
      2006, partially offset by the amortization of credits received from one of
      the
      Company’s clearing firms.





Communication
      expenses decreased $29,000, or 2%, to $1,719,000 from $1,748,000 in fiscal
      year
      2007 compared to fiscal year 2006. The decrease is primarily due to the
      Company’s ability to acquire certain of these services at a lower price.
      Occupancy costs increased $191,000, or 7%, to $2,996,000 from $2,805,000 in
      fiscal year 2007 compared to fiscal year 2006. The increase in occupancy expense
      is due to costs incurred to transfer certain of the Company’s paper files to a
      digital system and annual rent increases contained in the Company’s office
      leases, partially offset by the settlement of a lawsuit by the Company against
      a
      former subtenant in the third quarter of fiscal year 2007. Professional fees
      increased $1,053,000, or 87%, to $2,266,000 from $1,213,000 in fiscal year
      2007
      compared to fiscal year 2006. The increase in professional fees is primarily
      a
      result of legal fees and costs incurred to settle certain
      arbitrations.





Interest
      expense increased $37,000, or 7%, to $531,000 from $494,000 in fiscal year
      2007
      compared to fiscal year 2006. The increase in interest expense is attributable
      to the acceleration of amortization on the Company’s convertible notes that were
      converted to common stock in fiscal year 2007, partially offset by an overall
      decrease in the Company’s debt. Included in interest expense is the amortization
      of $291,000 and $193,000 for fiscal years 2007 and 2006, respectively. Taxes,
      licenses and registration increased $49,000, or 8%, to $666,000 from $617,000
      in
      fiscal year 2007 compared fiscal year 2006. The increase is due to registration
      incentives provided to certain brokers who became affiliated with the Company
      in
      the fourth quarter of fiscal year 2007. Other administrative expenses increased
      $183,000, or 11%, to $1,789,000 from $1,606,000 in fiscal year 2007 compared
      to
      fiscal year 2006. The increase in other expenses is due to costs incurred
      relating to the recruitment of new registered representatives and the expansion
      of investment banking operations in fiscal year 2007.




The
      Company reported net income of $1,372,000 in fiscal year 2007 compared to net
      income of $595,000 in fiscal
      year 2006 .
      The net
      income attributable to common stockholders in fiscal year 2007 was $963,000,
      or
      diluted earnings of $.13 per common share, as compared net income attributable
      to common of $214,000, or diluted earnings of $.04 per common share in fiscal
      year 2006. The net income attributable to common stockholders for fiscal years
      2007 and 2006 reflects $409,000 and $381,000, respectively, of cumulative
      Preferred Stock dividends on the Company’s Preferred Stock.





**Fiscal
      Year 2006 Compared with Fiscal Year 2005**





The
      Company’s fiscal year 2006 resulted in an increase in revenues, and a
      comparatively lesser increase in expenses compared with fiscal year 2005. The
      increase in revenues is primarily due to the completion of investment banking
      transactions in fiscal
      year 2006 . As
      a
      result, the Company reported net income of $595,000 compared with a net loss
      of
      $1,183,000 for the fiscal years 2006 and 2005, respectively. This represents
      an
      improvement of $1,778,000 from the prior year.




-23-




Fiscal Year
            
            Increase (Decrease)2006
            
            2005
            
            Amount
            
            PercentCommissions
            
            $
            32,140,000
            
            $
            33,134,000
            
            $
            (994,000
            )
            
            (3)
            %Proprietary
                trading
            
            
            7,391,000
            
            
            5,646,000
            
            
            1,745,000
            
            
            31
            %Market
                making
            
            
            323,000
            
            
            -
            
            
            323,000
            
            
            n/aMark-ups
                and mark-downs
            
            
            124,000
            
            
            64,000
            
            
            60,000
            
            
            94
            %Net
                dealer inventory gains
            
            
            7,838,000
            
            
            5,710,000
            
            
            2,128,000
            
            
            37
            %Investment
                banking
            
            
            11,323,000
            
            
            528,000
            
            
            10,795,000
            
            
            2045
            %Interest
                and dividends
            
            
            2,891,000
            
            
            2,739,000
            
            
            152,000
            
            
            6
            %Transfer
                fees and clearance services
            
            
            3,336,000
            
            
            3,097,000
            
            
            239,000
            
            
            8
            %Other
            
            
            1,199,000
            
            
            522,000
            
            
            677,000
            
            
            130
            %$
            58,727,000
            
            $
            45,730,000
            
            $
            12,997,000
            
            
            28
            %





Total
      revenues increased $12,997,000, or 28%, in fiscal year 2006 to $58,727,000
      from
      $45,753,000 in fiscal year 2005. This increase is mainly due to the completion
      of investment banking transactions. During fiscal year 2006, total trading
      volume increased 2%, compared to fiscal year 2005. The lesser increase in
      trading volume compared to revenues reflects an increase in the average revenue
      per trade, partially offset by the Company’s re-entry into market making
      activities. Commission revenue decreased $994,000, or 3%, to $32,140,000 from
      $33,134,000 during fiscal year 2006 compared with fiscal year 2005. Net dealer
      inventory gains, which includes profits on proprietary trading, market making
      activities and customer mark-ups and mark-downs, increased $2,128,000, or 37%,
      to $7,838,000 from $5,710,000 during fiscal year 2006 compared with fiscal
      year
      2005. The increase is primarily due to an increase in proprietary trading in
      the
      foreign bond market, and reflects the Company’s re-entry into market making
      activities. During fiscal year 2006, revenues from proprietary trading increased
      $1,745,000, or 31%, to $7,391,000 from $5,646,000 in fiscal year 2005, revenues
      from market making activities increased to $323,000 from $0 in fiscal year
      2005,
      and revenues from customer mark-ups and mark-downs increased $60,000, or 94%,
      to
      $124,000 from $64,000 in fiscal year 2005.





Investment
      banking revenue increased $10,795,000, or 2,045%, to $11,323,000 from $528,000
      in fiscal year 2006 compared with fiscal year 2005. The
      increase in investment banking revenues is attributable to the Company having
      completed significantly more investment banking transactions in
      fiscal year 2006 than in fiscal year 2005. Interest and dividend income
      increased $152,000, or 6%, to $2,891,000 from $2,739,000 in fiscal year 2006
      compared with fiscal year 2005. The
      increase in interest income is attributable to an increase in the interest
      rate
      charged for debit balances in National Securities’ customer accounts from the
      same period last year. Transfer fees increased $239,000, or 8%, to $3,336,000
      in
      fiscal year 2006 from $3,097,000 in fiscal year 2005. The increase is due to
      higher transfer fees for trades generated from the retail brokerage business
      of
      brokers recently associated with the Company.





Other
      revenue, consisting of asset management fees, miscellaneous transaction fees
      and
      trading fees, and other investment income, increased $677,000, or 130%, to
      $1,199,000 from $522,000 during fiscal year 2006 compared to fiscal year 2005.
      The increase is due to an increase in fee based assets under management and
      investment income realized in the Company’s venture capital fund in fiscal year
      2006.




-24-





Fiscal Year
            
            Increase (Decrease)2006
            
            2005
            
            Amount
            
            PercentCommission
                expense related to:Commission
                revenue
            
            $
            28,451,000
            
            $
            28,504,000
            
            $
            (53,000
            )
            
            0
            %Net
                dealer inventory gains
            
            
            5,617,000
            
            
            3,919,000
            
            
            1,698,000
            
            
            43
            %Investment
                banking
            
            
            8,208,000
            
            
            415,000
            
            
            7,793,000
            
            
            1878
            %Commissions
            
            
            42,276,000
            
            
            32,838,000
            
            
            9,438,000
            
            
            29
            %Employee
                compensation
            
            
            5,835,000
            
            
            5,010,000
            
            
            825,000
            
            
            16
            %Clearing
                fees
            
            
            1,538,000
            
            
            432,000
            
            
            1,106,000
            
            
            256
            %Communications
            
            
            1,748,000
            
            
            1,670,000
            
            
            78,000
            
            
            5
            %Occupancy
                and equipment costs
            
            
            2,805,000
            
            
            2,886,000
            
            
            (81,000
            )
            
            (3)
            %Professional
                fees
            
            
            1,213,000
            
            
            1,520,000
            
            
            (307,000
            )
            
            (20)
            %Interest
            
            
            494,000
            
            
            448,000
            
            
            46,000
            
            
            10
            %Taxes,
                licenses and registration
            
            
            617,000
            
            
            344,000
            
            
            273,000
            
            
            79
            %Other
                administrative expenses
            
            
            1,606,000
            
            
            1,765,000
            
            
            (159,000
            )
            
            (9
            )%$
            58,132,000
            
            $
            46,913,000
            
            $
            11,219,000
            
            
            24
            %





In
      comparison with the 28% increase in total revenues, total expenses increased
      24%, or $11,219,000, to $58,132,000 for fiscal year 2006 compared to $46,913,000
      in fiscal year 2005. The increase in total expenses is primarily the result
      of
      higher commission expenses directly associated with commission revenues,
      particularly investment banking revenues.





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $9,438,000, or 29%, to
      $42,276,000 in fiscal year 2006 from $32,838,000 in fiscal year 2005. Commission
      expense related to commission revenue decreased $53,000, or less than 1%, to
      $28,451,000 in fiscal year 2006 from $28,504,000 in fiscal year 2005; commission
      expense related to net dealer inventory gains increased $1,698,000, or 43%,
      to
      $5,617,000 in fiscal year 2006 from $3,919,000 in fiscal year 2005; and
      commission expense related to investment banking increased $7,793,000, or
      1,878%, to $8,208,000 in fiscal year 2006 from $415,000 in fiscal year 2005.
      Commission expense as a percentage of commission revenues increased to 89%
      in
      fiscal year 2006 from 86% in fiscal year 2005. This increase is attributable
      to
      changes in the production of particular brokers, not all of who are paid at
      the
      same commission rate and an increase in the amortization of advances to
      registered representatives. Commission expense as a percentage of net dealer
      inventory gains increased to 72% in fiscal year 2006 from 69% in fiscal year
      2005. This increase is attributable to changes in the production of particular
      brokers and traders, not all of who are paid at the same commission rate.
      Commission expense as a percentage of investment banking revenues decreased
      to
      72% in fiscal year 2006 from 79% in fiscal year 2005. This decrease is
      attributable to the type and size of the particular investment banking
      transactions completed in the current fiscal year. Commission expense includes
      the amortization of advances to registered representatives of $1,281,000 and
      $1,206,000 for fiscal years 2006 and 2005, respectively. These amounts fluctuate
      based upon the amounts of advances outstanding and the time period for which
      the
      registered representatives have agreed to be affiliated with National
      Securities.





Employee
      compensation expense increased $825,000, or 16%, to $5,835,000 in fiscal year
      2006 from $5,010,000 in fiscal year 2005. The increase is attributable to new
      hires, bonuses based on current year’s profits and year-end bonuses that were
      paid to certain staff employees in the first quarter of fiscal year 2006.
      Overall, combined commission and employee compensation expense, as a percentage
      of revenue remained relatively constant at approximately 82% and 83% in fiscal
      years 2006 and 2005, respectively.


Clearing
      fees increased $1,106,000, or 256%, to $1,538,000 in fiscal year 2006 from
      $432,000 in fiscal year 2005. The increase in clearing fees is attributable
      to a
      different pricing structure for certain products with different clearing firms,
      and the receipt in fiscal year 2005 of a $1.0 million conversion fee credit
      from
      the Company’s clearing firm.




-25-




Communication
      expenses increased $78,000, or 5%, to $1,748,000 from $1,670,000 in fiscal
      year
      2006 compared to fiscal year 2005. The increase is primarily due to
      telecommunication incentives provided to certain brokers who recently became
      affiliated with the Company, and additional quotation machines for the Company’s
      market making activities, offset by the receipt of a refund of prior periods’
charges from a service provider. Occupancy costs decreased $81,000, or 3%,
      to
      $2,805,000 from $2,886,000 in fiscal year 2006 compared to fiscal year 2005.
      The
      decrease in occupancy expense is due to an overall reduction in leased office
      space. Professional fees decreased $307,000, or 20%, to $1,213,000 from
      $1,520,000 in fiscal year 2006 compared to fiscal year 2005. The decrease in
      professional fees is due to the Company having expensed approximately $320,000
      of professional fees relating to the proposed merger with First Montauk in
      fiscal year 2005.





Interest
      expense increased $46,000, or 10%, to $494,000 from $448,000 in fiscal year
      2006
      compared to fiscal year 2005. The increase is primarily attributable to the
      acceleration of amortization on notes that were paid prior to maturity and
      amortization related to new notes issued by the Company in the third quarter
      of
      fiscal year 2006. Included in interest expense is the amortization of $193,000
      and $163,000 for fiscal years 2006 and 2005, respectively. Taxes, licenses
      and
      registration increased $273,000, or 79%, to $617,000 from $344,000 in fiscal
      year 2006 compared fiscal year 2005. The increase is due to registration
      incentives provided to certain brokers who became affiliated with the Company
      in
      fiscal year 2006, and the receipt of a refund of prior years’ state business
      taxes in fiscal year 2005. Other administrative expenses decreased $159,000,
      or
      9%, to $1,606,000 from $1,765,000 in fiscal year 2006 compared to fiscal year
      2005. The decrease in other expenses is due to costs incurred in fiscal year
      2005 relating to the Company’s change of clearing firms.




The
      Company reported net income of $595,000 in fiscal year 2006 compared to a net
      loss of $1,183,000 in fiscal
      year 2005 .
      The net
      income attributable to common stockholders in fiscal year 2006 was $214,000,
      or
      diluted earnings of $.04 per common share, as compared to a net loss
      attributable to common stockholders of $1,473,000, or $.29 per common share
      in
      fiscal year 2005. The net income attributable to common stockholders for fiscal
      year 2006 and the net loss attributable to common stockholders for fiscal year
      2005 reflects $381,000 and $290,000 of cumulative Preferred Stock dividends
      on
      the Company’s Preferred Stock for
      fiscal years 2006 and 2005, respectively .





**Liquidity
      and Capital Resources**





National
      Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
      Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
      National Securities has elected to use the alternative standard method permitted
      by the rule. This requires that National Securities maintain minimum net capital
      equal to the greater of $250,000 or a specified amount per security based on
      the
      bid price of each security for which National Securities is a market maker. At
      September 30, 2007, National Securities’ net capital exceeded the requirement by
      $2,134,000.





Advances,
      dividend payments and other equity withdrawals from the Company’s subsidiary are
      restricted by the regulations of the SEC and other regulatory agencies. These
      regulatory restrictions may limit the amounts that a subsidiary may dividend
      or
      advance to the Company. During the fiscal year ended September
      30, 2007
      the
      Company did not have any equity withdrawals.





The
      Company extends unsecured credit in the normal course of business to its
      brokers. The determination of the appropriate amount of the reserve for
      uncollectible accounts is based upon a review of the amount of credit extended,
      the length of time each receivable has been outstanding, and the specific
      individual brokers from whom the receivables are due.





The
      objective of liquidity management is to ensure that the Company has ready access
      to sufficient funds to meet commitments, fund deposit withdrawals and
      efficiently provide for the credit needs of customers.




-26-




In
      August
      2005, upon the maturity of previously issued notes, the Company and two note
      holders entered into new note agreements providing for $1.0
      million of notes
      with a maturity date of July 31, 2007, together with warrants having an
      expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
      of common stock at a price of $1.25 per share. The notes had an interest rate
      of
      9%. These
      notes were repaid in full in January 2006, and the warrants to purchase 200,000
      shares of common stock were exercised in July 2007 .





National
      Securities entered into a secured demand note collateral agreement with an
      employee of National Securities and a former Director of the Company to borrow
      securities that can be used by the Company for collateral agreements. In
      February 2007, upon the maturity of the previously issued note, National
      Securities and the holder entered into a new $1.0 million secured demand note collateral
      agreement with
      a
      maturity date of March 1, 2008. In
      May
      2007, the Company paid $500,000 of this secured demand note, and the balance
      is
      due at maturity. The
      holder also entered into a warrant agreement to
      purchase 150,000 shares of common stock at a price of $1.25 per share, with
      an  expiration
      date of July 31, 2008.





In
      January 2006, the Company completed
      a private placement of its securities to a limited number of accredited
      investors in a transaction exempt from registration under Section 4(2) of the
      Securities Act. The investors made a $2.0 million investment in the Company
      by
      purchasing an aggregate of the following: (i) $1 .0
      million for
      10,000 shares of the Company’s newly created Series B Preferred Stock, which had
      a 10% dividend rate and was convertible into Common Stock at a price of $.75
      per
      share, and (ii) 11 %
      convertible promissory notes in the principal amount of $1 .0
      million , which
      were convertible into Common Stock at a price of $1.00 per share, with warrants
      to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
      of $1.00 per share. The convertible promissory notes were to mature in January
      2011. The fair value of the warrants was calculated using the Black-Scholes
      Option Valuation Model. The Company recorded a debt discount of approximately
      $187,000 that was charged to interest expense over the life of the
      debt.





The
      investment included $1.7 million by St. Cloud Capital Partners, L.P. (“St.
      Cloud”), and an aggregate of $300,000 by two unrelated investors. Marshall S.
      Geller, the Co-Founder and Senior Managing Member of
      SCGP,
      LLC, the General Partner of St. Cloud, became a
      member of the Board of Directors of the Company
      simultaneous with the closing of the transaction. The
      Company incurred legal fees and other costs related to this capital transaction,
      in the amount of $56,000. The Company capitalized one-half of the fees to
      deferred financing costs that were amortized to interest expense over the life
      of the convertible promissory notes and one-half of the fees were charged to
      paid-in capital.





In
      January 2006, t he
      Company used $1.0 million of the proceeds from the above private placement
      to
      pay in full $1.0 million of promissory notes held by two unrelated note holders
      that had a maturity date of July 31, 2007.





In
      June
      2007, the Company exercised the conversion option contained in its 11%
      convertible promissory notes. The Company issued 1,024,413 shares of its common
      stock in full payment of the $1,000,000 convertible promissory notes, plus
      accrued interest. The remaining unamortized debt discount of approximately
      $150,000 was expensed as “Interest” in the quarter ended June 30, 2007. In July
      2007, the Company exercised the conversion option contained in its Series
      B
      Preferred Stock, and issued
      1,333,333 shares of its common stock for the retirement of the Series B
      preferred stock. Accordingly, the Company is no
      longer
      obligated to pay dividends on the Series B preferred stock.





In
      March
      2006, the Company sold and issued 159,090 shares of the Company’s common stock
      to an unaffiliated party for $175,000 in a
      private placement exempt from registration under Section 4(2) of the Securities
      Act .
      The
      proceeds from the private placement were used to retire $175,000 of the
      Company’s promissory notes that were due to mature in January 2007.




-27-




In
      May
      2006, the Company filed a Registration Statement on Form S-1 under the
      Securities Act of 1933 for the resale of certain shares of Common Stock, shares
      of Common Stock issuable upon the conversion of preferred stock and notes,
      and
      exercise of certain warrants previously issued in connection with private
      placement transactions. The Registration Statement became effective on November
      6, 2006. The Company will receive proceeds from the exercise of warrants that
      were included in the registration statement. The Registration Statement was
      suspended in November 2007 as a result of the proposed merger transaction with
      vFinance, Inc.





In
      February 2007, the Company completed a
      financing transaction under which certain investors purchased 10 %
      promissory notes in the principal amount of $1 .0
      million ,
      with warrants
      to purchase an aggregate of 250,000 shares of common stock at an exercise price
      of $1.40 per share. The promissory notes mature in February 2009, and have
      a
      stated interest rate of 10% per annum. The fair value of the warrants was
      calculated using the Black-Scholes Option Valuation Model. The Company recorded
      a debt discount of approximately $195,000 that is being charged to interest
      expense over the life of the debt.





The
      Company and the investors entered into a registration rights agreement, wherein
      the investors received unlimited piggyback registration rights and one demand
      registration right for the shares of common stock issuable upon exercise of
      the
      warrants. The investors can make such demand one year after the date of issuance
      of the warrants, and the Company has agreed to file the registration statement
      within 90 days of such demand. The Company has agreed to use commercially
      reasonable efforts to have the registration statement declared effective. There
      are no penalties for failure to have the registration statement declared
      effective. As of September 30, 2007, the Company has not registered the
      securities covered by the warrants.





The
      investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud.
      Mr. Dewey, and Mr. Geller, the Senior Managing Partner of St. Cloud, are each
      members of the Company’s board of directors. The
      Company incurred legal fees and other costs related to this capital transaction
      in the amount of $22,000 that were capitalized and will be amortized to interest
      expense over the life of the promissory notes.





In
      March
      2005, NFS acquired the clearing business of Fiserv. In April 2005, National
      Securities entered into a clearing agreement with NFS that became effective
      in
      June 2005. As part of this transaction, NFS provided National Securities with
      a
      $1.0 million conversion fee credit to reimburse the Company for the
      transitional, incremental costs incurred by National Securities relating to
      the
      conversion of its clearing business to NFS. National Securities was paid
      $250,000 in May 2005, and the remaining $750,000 was paid in July 2005.





In
      the
      first quarter of fiscal year 2007, NFS paid National Securities a $750,000
      business credit that is being amortized over an eight year period ending
      November 2014, corresponding with the expiration date of the clearing agreement.
      In the second quarter of fiscal year 2007, NFS provided National Securities
      a
      $250,000 clearing fee waiver that is being amortized over a two year period
      ending December 2008, corresponding with the time period that certain
      performance standards were to be achieved. The clearing agreement includes
      a
      termination fee if National Securities terminates the agreement without cause
      that is initially $2.0 million and reduces to $125,000 over the eight-year
      term
      of the agreement. Additionally, in June 2005 National Securities entered into
      a
      clearing agreement with Penson for the purpose of providing clearing services
      that are not provided by NFS. The Company believes that the overall effect
      of
      its clearing relationships has been beneficial to the Company’s cost structure,
      liquidity and capital resources. ****





As
      of
      September 30, 2007, advances to registered representatives increased $2,454,000
      to $4,010,000 from $1,556,000 as of September 30, 2006. This increase is
      attributable to advances made to registered representatives who became
      affiliated with National Securities during fiscal year 2007 and advances to
      registered representatives already affiliated with National Securities who
      agreed to renew their affiliation, offset in part by the amortization of
      advances in fiscal year 2007 and prior years.





In
      fiscal
      year 2007 and 2006, the Company received proceeds of approximately $1,326,000
      and $0, respectively, from the exercise of outstanding employee stock options
      and warrants.




-28-




The
      Company has historically satisfied its capital needs with cash generated from
      operations or from financing activities. The Company believes that it will
      have
      sufficient funds to maintain its current level of business activities during
      fiscal year 2008. If market conditions should weaken, the Company would need
      to
      consider curtailing certain of its business activities, reducing its fixed
      overhead costs and/or seek additional sources of financing.





The
      following table shows the contractual obligations of the Company as of September
      30, 2007:





Fiscal Year Ending
            
            Notes
              Payable
            
            Secured
              Demand Note
            
            Leases
            
            Total2008
            
            $
            -
            
            $
            500,000
            
            $
            1,556,000
            
            $
            2,056,0002009
            
            
            1,000,000
            
            
            -
            
            
            584,000
            
            
            1,584,0002010
            
            
            -
            
            
            -
            
            
            562,000
            
            
            562,0002011
            
            
            -
            
            
            -
            
            
            579,000
            
            
            579,0002012
            
            
            -
            
            
            -
            
            
            443,000
            
            
            443,000Thereafter
            
            
            -
            
            
            -
            
            
            -
            
            
            -Less:
                Deferred debt discount
            
            
            (138,000
            )
            
            -
            
            
            -
            
            
            (138,000
            )$
            862,000
            
            $
            500,000
            
            $
            3,724,000
            
            $
            5,086,000




**Inflation**





The
      Company believes that the effect of inflation on its assets, consisting of
      cash,
      securities, office equipment, leasehold improvements and computers has not
      been
      significant.





**Recently
      Issued Accounting Standards**





In
      July
      2006, the FASB released Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which
      clarifies the accounting and reporting for uncertainty in income tax law. FIN
      48
      prescribes a comprehensive model for the financial statement recognition,
      measurement, presentation and disclosure of uncertain tax positions taken or
      expected to be taken in income tax returns. The provisions of FIN 48 are
      effective for the Company for its fiscal year commencing October 1, 2007.
      Earlier adoption is permitted as of the beginning of an enterprise's fiscal
      year, provided the enterprise has not yet issued financial statements, including
      financial statements for any interim period for that fiscal year. The cumulative
      effects, if any, of applying FIN 48 will be recorded as an adjustment to
      accumulated deficit as of the beginning of the period of adoption. The Company
      is evaluating the impact that the adoption of this pronouncement will have
      on
      the consolidated financial position, results of operations, or cash flows
      of the Company.




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value. The objective of SFAS 159 is to reduce both complexity in accounting
      for financial instruments and the volatility in earnings caused by measuring
      related assets and liabilities differently. Generally accepted accounting
      principles have required different measurement attributes for different assets
      and liabilities that can create artificial volatility in earnings. The FASB
      has
      indicated it believes that SFAS 159 helps to mitigate this type of
      accounting-induced volatility by enabling companies to report related assets
      and
      liabilities at fair value, which would likely reduce the need for companies
      to
      comply with detailed rules for hedge accounting. SFAS 159 also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between companies that choose different measurement attributes for similar
      types
      of assets and liabilities.




SFAS
      159
      does not eliminate disclosure requirements included in other accounting
      standards, including requirements for disclosures about fair value measurements
      included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
      Financial Instruments." SFAS 159 is effective for the Company as of the
      beginning of fiscal year 2009. The adoption of this pronouncement is not
      expected to have an impact on the Company's consolidated financial
      position, results of operations or cash flows.




-29-




In
      December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
      "Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement, whether issued
      as a separate agreement or included as a provision of a financial instrument
      or
      other agreement, should be separately recognized and measured in accordance
      with
      SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
      additional disclosure regarding the nature of any registration payment
      arrangements, alternative settlement methods, the maximum potential amount
      of
      consideration and the current carrying amount of the liability, if any. The
      guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
      Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
      Certain Financial Instruments with Characteristics of both Liabilities and
      Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
      Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
      of
      Others", to include scope exceptions for registration payment
      arrangements.





FSP
      EITF
      00-19-2 is effective immediately for registration payment arrangements and
      the
      financial instruments subject to those arrangements that are entered into or
      modified subsequent to the issuance date of this FSP, or for financial
      statements issued for fiscal years beginning after December 15, 2006, and
      interim periods within those fiscal years, for registration payment arrangements
      entered into prior to the issuance date of this FSP. The adoption of this
      pronouncement is not expected to have an impact on the
      Company's consolidated financial position, results of operations or cash
      flows.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





The
      Company's primary market risk arises from the fact that it engages in
      proprietary trading and makes dealer markets in equity securities. Accordingly,
      the Company may be required to maintain certain amounts of inventories in order
      to facilitate customer order flow. The Company may incur losses as a result
      of
      price movements in these inventories due to changes in interest rates, foreign
      exchange rates, equity prices and other political factors. The Company is not
      subject to direct market risk due to changes in foreign exchange rates. However,
      the Company is subject to market risk as a result of changes in interest rates
      and equity prices, which are affected by global economic conditions. The Company
      manages its exposure to market risk by limiting its net long or short positions.
      Trading and inventory accounts are monitored daily by management and the Company
      has instituted position limits.





Credit
      risk represents the amount of accounting loss the Company could incur if
      counterparties to its proprietary transactions fail to perform and the value
      of
      any collateral proves inadequate. Although credit risk relating to various
      financing activities is reduced by the industry practice of obtaining and
      maintaining collateral, the Company maintains more stringent requirements to
      further reduce its exposure. The Company monitors its exposure to counterparty
      risk on a daily basis by using credit exposure information and monitoring
      collateral values. The Company maintains a credit committee, which reviews
      margin requirements for large or concentrated accounts and sets higher
      requirements or requires a reduction of either the level of margin debt or
      investment in high-risk securities or, in some cases, requiring the transfer
      of
      the account to another broker-dealer.





The
      Company monitors its market and credit risks daily through internal control
      procedures designed to identify and evaluate the various risks to which the
      Company is exposed. There can be no assurance, however, that the Company's
      risk
      management procedures and internal controls will prevent losses from occurring
      as a result of such risks.





The
      following table shows the market values of the Company's securities owned
      and
      securities sold, but not yet purchased as of
      September 30, 2007:




-30-




Securities owned
            
            Securities sold, but
              not yet purchasedCorporate
                stocks
            
            $
            972,000
            
            $
            -Government
                obligations
            
            
            219,000
            
            
            77,000$
            1,191,000
            
            $
            77,000





**Item
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





See
      Part
      IV, Item 15(a)(1) for a list of financial statements filed as part of this
      Report.





**Item
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





There
      were no disagreements with accountants on accounting and financial disclosure
      for the fiscal year ended September 30, 2007.





**Item
      9A. CONTROLS AND PROCEDURES**





Evaluation
      of disclosure controls and procedures. Based on
      the evaluation of the Company’s disclosure controls and procedures (as defined
      in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange
      Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief Executive Officer and
      Acting Chief Financial Officer have concluded that, as of the end of the period
      covered by this report, the Company’s disclosure controls and procedures were
      adequate and effective to ensure that material information relating to the
      Company and its consolidated subsidiaries would be made known to them by others
      within those entities, particularly during the period in which this yearly
      report on Form 10-K was being prepared.





Changes
      in internal controls. There
      were no significant changes in the Company’s internal controls or in other
      factors that could significantly affect those controls and procedures subsequent
      to the date of our evaluation nor any significant deficiencies or material
      weaknesses in such disclosure controls and procedures requiring corrective
      actions.





**Item
      9B. OTHER INFORMATION**





There
      is
      no other information to be disclosed by the Company during the fourth quarter
      of
      fiscal year 2007 that has not been reported on a current report on Form
      8-K.





-31-




**PART
      III**





**Item
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





The
      other
      information required by this Item will be included in the Company’s 2008 Proxy
      Statement and  is
      incorporated herein by reference.





**Item
      11. EXECUTIVE COMPENSATION**





The
      information required by this Item will be included in the Company’s 2008 Proxy
      Statement and is incorporated herein by reference.





**Item
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND** **MANAGEMENT**





The
      information required by this Item will be included in the Company’s 2008 Proxy
      Statement and is incorporated herein by reference.





**Item
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





The
      information required by this Item will be included in the Company’s 2008 Proxy
      Statement and is incorporated herein by reference.





**Item
      14.**  **PRINCIPAL
      ACCOUNTING FEES AND SERVICES**





The
      information required by this Item will be included in the Company’s 2008 Proxy
      Statement and is incorporated herein by reference.





**Item
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





(a)
            The
                following financial statements are included in Part II, Item
                8:





1.
            Financial
                Statements


Independent
      Auditors' Reports


Consolidated
      Financial Statements


Statements
      of Financial Condition, September 30, 2007 and September 30, 2006


Statements
      of Operations for the Years ended September 30, 2007, September 30, 2006 and
      September 30, 2005


Statement
      of Changes in Stockholders' Equity for the Years ended September 30, 2007,
      September 30, 2006 and September 30, 2005


Statements
      of Cash Flows for the Years ended September 30, 2007, September 30, 2006 and
      September 30, 2005


Notes
      to
      Consolidated Financial Statements




2.
            Financial
                Statement Schedules





Schedules
                not listed above have been omitted because they are not applicable
                or have
                been included in footnotes to the consolidated financial
                statements.





(b)
            See
                Exhibit Index.


-32-




**SIGNATURES**








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





NATIONAL
      HOLDINGS CORPORATION


(Registrant)





Date:
                December 10, 2007
            By:
            /s/
                Mark GoldwasserMark
                GoldwasserChairman,
                President and Chief Executive OfficerDate:
                December 10, 2007
            By:
            /s/
                Robert H. DaskalRobert
                H. DaskalChief
                Financial Officer








Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.








Date:
                December 10, 2007
            By:
            /s/
                Mark GoldwasserMark
                Goldwasser,Chairman,
                President and Chief Executive OfficerDate:
                December 10, 2007
            By:
            /s/
                Gary A. RosenbergGary
                A. Rosenberg, DirectorDate:
                December 10, 2007
            By:
            /s/
                Robert J. RosanRobert
                J. Rosan, DirectorDate:
                December 10, 2007
            By:
            /s/
                Norman J. KurlanNorman
                J. Kurlan, DirectorDate:
                December 10, 2007
            By:
            /s/
                Marshall S. GellerMarshall
                S. Geller, DirectorDate:
                December 10, 2007
            By:
            /s/
                Christopher C. DeweyChristopher
                C. Dewey, Director





-33-


**EXHIBIT
      INDEX**




3.1
            Certificate
                of Incorporation, as amended, previously filed as Exhibit 3.5. to
                Form
                10-Q in May 2004 and hereby incorporated by reference.3.2
            The
                Company's Bylaws, as amended, previously filed as Exhibit 3.3 to
                Form 10-Q
                in February 2002, and hereby incorporated by reference.3.3
            The
                Company’s By-Laws, as amended and restated on December 12,
                2001.3.4
            Certificate
                of Designations, Preferences, and Relative Optional or Other Special
                Rights of Preferred Stock and Qualifications, Limitations and Restrictions
                Thereof of Series A Convertible Preferred Stock, as amended, previously
                filed as Exhibit 3.6 to Form 10-Q in May 2004 and hereby incorporated
                by
                reference.3.5
            Certificate
                of Designation of Series B Preferred Stock, filed with the Secretary
                of
                State of the State of Delaware on January 11, 2006.3.6
            Certificate
                of Amendment to the Certificate of Incorporation, filed with the
                Secretary
                of State of the State of Delaware on March 15, 2006 filed as Exhibit
                3.6
                to Form 10-Q in May 2006 and hereby incorporated by
                reference.3.7
            Certificate
                of Amendment to the Certificate of Designation of Series A Preferred
                Stock, filed with the Secretary of State of the State of Delaware
                on March
                15, 2006 filed as Exhibit 3.7 to Form 10-Q in May 2006 and hereby
                incorporated by reference.4.1
            Form
                of Warrant filed as Exhibit 4.1 to Form 8-K in January 2006 and hereby
                incorporated by reference.4.2
            Form
                of Promissory Note filed as Exhibit 4.2 to Form 8-K in January 2006
                and
                hereby incorporated by reference.4.3
            Amendment
                No. 1 to 11% Convertible Promissory Note filed as Exhibit 4.3 to
                Form 10-Q
                in February 2007 and hereby incorporated by reference.4.4
            Form
                of Warrant filed as Exhibit 4.4 to Form 8-K in February 2007 and
                hereby
                incorporated by reference.4.5
            Form
                of 10% Promissory Note filed as Exhibit 4.5 to Form 8-K in February
                2007
                and hereby incorporated by reference.10.1
            Office
                lease, Chicago, Illinois, previously filed as Exhibit 10.27 to Form
                10-K
                in December 1996 and hereby incorporated by reference.10.2
            Amended
                office lease, Chicago, Illinois, previously filed as Exhibit 10.29
                to Form
                10-K in December 1996 and hereby incorporated by
                reference.10.3
            Office
                lease, Seattle, Washington previously filed as Exhibit 10.20 to Form
                10-K
                in December 1999 and hereby incorporated by reference.10.4
            Form
                of Note payable agreement dated January 2001, previously filed as
                Exhibit
                10.23 to Form 10-Q in May 2001 and hereby incorporated by
                reference.10.5
            Secured
                Demand Note dated February 2001, previously filed as Exhibit 10.24
                to Form
                10-Q in May 2001 and hereby incorporated by reference.10.6
            Loan
                and security agreement dated January 2001, previously filed as Exhibit
                10.25 to Form 10-Q in February 2001 and hereby incorporated by
                reference.10.7*
            2001
                Stock Option Plan, previously included in the Proxy Statement-Schedule
                14A
                filed in January 2001 and hereby incorporated by
                reference.10.8
            Audit
                committee charter, previously filed as Exhibit 10.22 to Form 10-Q
                in
                August 2000 and hereby incorporated by reference.10.9
            Purchase
                Agreement by and among Olympic Cascade Financial Corporation, Mark
                Goldwasser and Triage Partners, LLC dated as of December 14, 2001,
                previously filed as Exhibit 10.30 to Form 8-K in January 2002 and
                hereby
                incorporated by reference.10.10
            Stock
                Purchase Agreement between Steven A. Rothstein, certain other persons
                or
                entities and Triage Partners, LLC dated as of December 14, 2001,
                previously filed as Exhibit 10.31 to Form 8-K in January 2002 and
                hereby
                incorporated by reference.




-34-




10.11
            Securities
                Exchange Agreement by and among Olympic Cascade Financial Corporation,
                Gregory P. Kusnick, Karen Jo Gustafson, Gregory C. Lowney and Maryanne
                K.
                Snyder dated as of December 14, 2001, previously filed as Exhibit
                10.32 to
                Form 8-K in January 2002 and hereby incorporated by
                reference.10.12
            Escrow
                Agreement by and made among Olympic Cascade Financial Corporation,
                Mark
                Goldwasser, Triage Partners, LLC and National Securities Corporation
                dated
                as of December 28, 2001, previously filed as Exhibit 10.33 to Form
                8-K in
                January 2002 and hereby incorporated by reference.10.13
            Form
                of Warrant issued in December 2002.10.14
            Form
                of Securities Purchase Agreement, previously filed as Exhibit 10.36
                to
                Form 8-K in February 2004 and hereby incorporated by
                reference.10.15
            Form
                of Note, previously filed as Exhibit 10.37 to Form 8-K in February
                2004
                and hereby incorporated by reference.10.16
            Form
                of Warrant, previously filed as Exhibit 10.38 to Form 8-K in February
                2004
                and hereby incorporated by reference.10.17
            Form
                of Registration Rights Agreement, previously filed as Exhibit 10.39
                to
                Form 8-K in February 2004 and hereby incorporated by
                reference.10.18
            Clearing
                Agreement previously filed as Exhibit 10.36 to Form 10-K in June
                2004 and
                hereby incorporated by reference.10.19
            Form
                of Warrant issued in August 2004 filed as Exhibit 10.40 to Form 8-K
                in
                August 2004 and hereby incorporated by reference.10.20
            Form
                of Registration Rights Agreement dated in August 2004 filed as Exhibit
                10.41 to Form 8-K in August 2004 and hereby incorporated by
                reference.10.21*
            Severance
                Agreement dated February 4, 2005 between Michael A. Bresner and National
                Securities Corporation filed as Exhibit 10.43 to Form 8-K in February
                2005
                and hereby incorporated by reference.10.22
            Warrant
                issued by the Company to Triage Partners LLC dated April 1, 2005
                filed as
                Exhibit 10.45 to Form 8-K in April 2005 and hereby incorporated by
                reference.10.23
            Securities
                Purchase Agreement dated as of January 11, 2006 by and among Olympic
                Cascade Financial Corporation and the investors set forth therein
                filed as
                Exhibit 10.48 to Form 8-K in January 2006 and hereby incorporated
                by
                reference.10.24
            Registration
                Rights Agreement dated as of January 11, 2006 by and among Olympic
                Cascade
                Financial Corporation and the investors set forth therein filed as
                Exhibit
                10.49 to Form 8-K in January 2006 and hereby incorporated by
                reference.10.25*
            Employment
                Agreement dated as of March 15, 2006 between the Company and Mark
                Goldwasser filed as Exhibit 10.50 to Form 10-Q in May 2006 and hereby
                incorporated by reference.10.26
            Securities
                Purchase Agreement dated as of March 17, 2006 filed as Exhibit 10.51
                to
                Form 10-Q in May 2006 and hereby incorporated by
                reference.10.27
            Securities
                Purchase Agreement, dated as of February 22, 2007 by and among National
                Holdings Corporation and the investors set forth therein filed as
                Exhibit
                10.52 to Form 8-K in February 2007 and hereby incorporated by
                reference.10.28
            Registration
                Rights Agreement, dated as of February 22, 2007 by and among National
                Holdings Corporation and the investors set forth therein filed as
                Exhibit
                10.53 to Form 8-K in February 2007 and hereby incorporated by
                reference.10.29*
            2006
                Stock Option Plan, previously included in the Proxy Statement-Schedule
                14A
                filed in January 2006 and hereby incorporated by
                reference14.
            The
                Code of Ethics filed as Exhibit 14 to Form 10-K in December 2003
                and
                hereby incorporated by reference.16.1
            Change
                in Certifying Accountant, previously filed in Form 8-K in August
                1998 and
                hereby incorporated by reference.16.2
            Change
                in its Independent Public Accountants, previously filed in Form 8-K
                in May
                2003 and hereby incorporated by reference.16.3
            Change
                in its Independent Public Accountants, previously filed in Form 8-K
                in
                October 2003 and hereby incorporated by
                reference.




-35-




21.
            Subsidiaries
                of Registrant.23.1
            Consent
                of Marcum & Kliegman LLP24.
            Power
                of Attorney, previously filed to Forms S-3 in May 1999 and June
                1999.31.1
            Chief
                Executive Officer’s Certificate pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            Chief
                Financial Officer’s Certificate pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Chief
                Executive Officer’s Certificate pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.32.2
            Chief
                Financial Officer’s Certificate pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.*Compensatory
                agreements




-36-






**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders


National
      Holdings Corporation




We
      have
      audited the accompanying consolidated statements of financial condition of
      National Holdings Corporation and Subsidiaries (the "Company") as of September
      30, 2007 and 2006, and the related consolidated statements of operations,
      changes in stockholders' equity and cash flows for each of the three years
      in
      the period ended September 30, 2007. These consolidated financial statements
      are
      the responsibility of the Company's management. Our responsibility is to express
      an opinion on these 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits include consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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 consolidated financial position of National
      Holdings Corporation and Subsidiaries as of September 30, 2007 and 2006, and
      the
      consolidated results of its operations and its cash flows for each of the three
      years in the period ended September 30, 2007, in conformity with accounting
      principles generally accepted in the United States of America.






/s/
      Marcum & Kliegman LLP




New
      York,
      New York


November
      30, 2007





F-1


**NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF FINANCIAL CONDITION**
  September 30,
              
              September 30,2007
              
              2006**ASSETS**CASH
              
              $
              4,957,000
              
              $
              1,441,000DEPOSITS
                  WITH CLEARING ORGANIZATIONS
              
              
              402,000
              
              
              300,000RECEIVABLES
                  FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
              
              
              4,739,000
              
              
              3,548,000OTHER
                  RECEIVABLES, net of allowance for uncollectible accounts of $467,000
                  at
                  September 30, 2007 and 2006, respectively
              
              
              784,000
              
              
              380,000ADVANCES
                  TO REGISTERED REPRESENTATIVES
              
              
              4,010,000
              
              
              1,556,000SECURITIES
                  OWNEDMarketable,
                  at market value
              
              
              1,191,000
              
              
              475,000Non-marketable,
                  at fair value
              
              
              -
              
              
              402,000FIXED
                  ASSETS, net
              
              
              304,000
              
              
              305,000SECURED
                  DEMAND NOTE
              
              
              500,000
              
              
              1,000,000OTHER
                  ASSETS
              
              
              396,000
              
              
              300,000TOTAL
                  ASSETS
              
              $
              17,283,000
              
              $
              9,707,000**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**PAYABLE
                  TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
              
              $
              1,115,000
              
              $
              113,000SECURITIES
                  SOLD, BUT NOT YET PURCHASED, at market
              
              
              77,000
              
              
              162,000ACCOUNTS
                  PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
              
              
              7,907,000
              
              
              3,943,000CONVERTIBLE
                  NOTES PAYABLE, net of debt discount of $159,000 at September 30,
                  2006
              
              
              -
              
              
              841,000NOTES
                  PAYABLE, net of debt discounts of $138,000 and $45,000 at September
                  30,
                  2007 and 2006, respectively
              
              
              862,000
              
              
              805,000TOTAL
                  LIABILITIES
              
              
              9,961,000
              
              
              5,864,000SUBORDINATED
                  BORROWINGS
              
              
              500,000
              
              
              1,000,000COMMITMENTS
                  AND CONTINGENCIES (NOTES 15 and 16)
              
              
              -
              
              
              -STOCKHOLDERS'
                  EQUITYPreferred
                  stock, $.01 par value, 200,000 shares authorized; 50,000 shares
                  designated
                  as Series A and 20,000 shares designated as Series B
              
              
              -
              
              
              -Series
                  A 9% cumulative convertible preferred stock, $.01 par value, 50,000
                  shares
                  authorized; 37,550 shares issued and outstanding (liquidation preference:
                  $3,755,000) at September 30, 2007 and 35,316 shares issued and
                  outstanding
                  (liquidation preference: $3,531,600) at September 30, 2006
              
              
              -
              
              
              -Series
                  B 10% cumulative convertible preferred stock, $.01 par value, 20,000
                  shares authorized; 0 shares issued and outstanding at September
                  30, 2007
                  and 10,000 shares issued and outstanding (liquidation
                  preference:$1,000,000)
                  at September 30, 2006
              
              
              -
              
              
              -Common
                  stock, $.02 par value, 30,000,000 shares authorized; 8,602,628
                  and
                  5,223,968 shares issued and outstanding, at September 30, 2007
                  and 2006,
                  respectively
              
              
              172,000
              
              
              104,000Additional
                  paid-in capital
              
              
              19,919,000
              
              
              16,956,000Accumulated
                  deficit
              
              
              (13,269,000
              )
              
              (14,217,000
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              6,822,000
              
              
              2,843,000TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              17,283,000
              
              $
              9,707,000
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-2
 
 **NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 Years
                  EndedSeptember 30, 2007
              
              September 30, 2006
              
              September 30, 2005REVENUESCommissions
              
              $
              39,237,000
              
              $
              32,140,000
              
              $
              33,134,000Net
                  dealer inventory gains
              
              
              15,729,000
              
              
              7,838,000
              
              
              5,710,000Investment
                  banking
              
              
              9,097,000
              
              
              11,323,000
              
              
              528,000Total
                  commission and fee revenues
              
              
              64,063,000
              
              
              51,301,000
              
              
              39,372,000Interest
                  and dividends
              
              
              2,824,000
              
              
              2,891,000
              
              
              2,739,000Transfer
                  fees and clearing services
              
              
              4,075,000
              
              
              3,336,000
              
              
              3,097,000Other
              
              
              1,857,000
              
              
              1,199,000
              
              
              522,00072,819,000
              
              
              58,727,000
              
              
              45,730,000EXPENSESCommissions
                  and fees
              
              
              52,271,000
              
              
              42,276,000
              
              
              32,838,000Employee
                  compensation and related expenses
              
              
              7,464,000
              
              
              5,835,000
              
              
              5,010,000Clearing
                  fees
              
              
              1,745,000
              
              
              1,538,000
              
              
              432,000Communications
              
              
              1,719,000
              
              
              1,748,000
              
              
              1,670,000Occupancy
                  and equipment costs
              
              
              2,996,000
              
              
              2,805,000
              
              
              2,886,000Professional
                  fees
              
              
              2,266,000
              
              
              1,213,000
              
              
              1,520,000Interest
              
              
              531,000
              
              
              494,000
              
              
              448,000Taxes,
                  licenses, registration
              
              
              666,000
              
              
              617,000
              
              
              344,000Other
                  administrative expenses
              
              
              1,789,000
              
              
              1,606,000
              
              
              1,765,00071,447,000
              
              
              58,132,000
              
              
              46,913,000Net
                  income (loss)
              
              
              1,372,000
              
              
              595,000
              
              
              (1,183,000
              )Preferred
                  stock dividends
              
              
              (409,000
              )
              
              (381,000
              )
              
              (290,000
              )Net
                  income (loss) attributable to common stockholders
              
              $
              963,000
              
              $
              214,000
              
              $
              (1,473,000
              )INCOME
                  (LOSS) PER COMMON SHAREBasic:Net
                  income (loss) attributable to common stockholders
              
              $
              0.16
              
              $
              0.04
              
              $
              (0.29
              )Diluted:Net
                  income (loss) attributable to common stockholders
              
              $
              0.13
              
              $
              0.04
              
              $
              (0.29
              )Weighted
                  average number of shares outstanding:Basic
              
              
              6,042,646
              
              
              5,146,422
              
              
              5,024,643Diluted
              
              
              9,669,531
              
              
              5,278,299
              
              
              5,024,643
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-3
 **NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY**
 
 **YEARS
        ENDED SEPTEMBER 30, 2007, SEPTEMBER 30, 2006 AND SEPTEMBER 30,
        2005**
  AdditionalPreferred Stock
              
              Common Stock
              
              Paid-In
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBALANCE,
                  September 30, 2004
              
              
              31,177
              
              $
              -
              
              
              4,984,332
              
              $
              100,000
              
              $
              14,790,000
              
              $
              (12,961,000
              )
              $
              1,929,000Issuance
                  of series A preferred stock dividends
              
              
              2,143
              
              
              -
              
              
              -
              
              
              -
              
              
              322,000
              
              
              (322,000
              )
              
              -Exercise
                  of warrants
              
              
              -
              
              
              -
              
              
              21,546
              
              
              -
              
              
              19,000
              
              
              -
              
              
              19,000Issuance
                  of restricted common stock:Settlement
                  of arbitration
              
              
              -
              
              
              -
              
              
              40,000
              
              
              1,000
              
              
              39,000
              
              
              -
              
              
              40,000Warrants
                  issued in connection with debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              125,000
              
              
              -
              
              
              125,000Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,183,000
              )
              
              (1,183,000
              )BALANCE,
                  September 30, 2005
              
              
              33,320
              
              
              -
              
              
              5,045,878
              
              
              101,000
              
              
              15,295,000
              
              
              (14,466,000
              )
              
              930,000Issuance
                  of series A preferred stock dividends
              
              
              1,996
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000
              
              
              (300,000
              )
              
              -Payment
                  of series B preferred stock dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (46,000
              )
              
              (46,000
              )Issuance
                  of restricted common stock:From
                  private placement
              
              
              -
              
              
              -
              
              
              159,090
              
              
              3,000
              
              
              170,000
              
              
              -
              
              
              173,000Employee
                  bonuses
              
              
              -
              
              
              -
              
              
              19,000
              
              
              -
              
              
              12,000
              
              
              -
              
              
              12,000Issuance
                  of series B preferred stock
              
              
              10,000
              
              
              -
              
              
              -
              
              
              -
              
              
              972,000
              
              
              -
              
              
              972,000Warrants
                  issued in connection with debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              187,000
              
              
              -
              
              
              187,000Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              20,000
              
              
              -
              
              
              20,000Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              595,000
              
              
              595,000BALANCE,
                  September 30, 2006
              
              
              45,316
              
              
              -
              
              
              5,223,968
              
              
              104,000
              
              
              16,956,000
              
              
              (14,217,000
              )
              
              2,843,000Issuance
                  of series A preferred stock dividends
              
              
              2,537
              
              
              -
              
              
              -
              
              
              -
              
              
              317,000
              
              
              (317,000
              )
              
              -Payment
                  of series B preferred stock dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (107,000
              )
              
              (107,000
              )Exercise
                  of warrants
              
              
              -
              
              
              -
              
              
              976,674
              
              
              19,000
              
              
              1,291,000
              
              
              -
              
              
              1,310,000Exercise
                  of stock options
              
              
              -
              
              
              -
              
              
              20,000
              
              
              -
              
              
              14,000
              
              
              -
              
              
              14,000Conversion
                  of series A preferred stock
              
              
              (303
              )
              
              -
              
              
              24,240
              
              
              1,000
              
              
              (1,000
              )
              
              -
              
              
              -Conversion
                  of series B preferred stock
              
              
              (10,000
              )
              
              -
              
              
              1,333,333
              
              
              27,000
              
              
              (27,000
              )
              
              -
              
              
              -Conversion
                  of notes
              
              
              -
              
              
              -
              
              
              1,024,413
              
              
              21,000
              
              
              1,003,000
              
              
              -
              
              
              1,024,000Warrants
                  issued in connection with debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              194,000
              
              
              -
              
              
              194,000Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              172,000
              
              
              -
              
              
              172,000Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,372,000
              
              
              1,372,000BALANCE,
                  September 30, 2007
              
              
              37,550
              
              $
              -
              
              
              8,602,628
              
              $
              172,000
              
              $
              19,919,000
              
              $
              (13,269,000
              )
              $
              6,822,000
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
 
 **NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 Years endedSeptember 30, 2007
              
              September 30, 2006
              
              September 30, 2005CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income (loss)
              
              $
              1,372,000
              
              $
              595,000
              
              $
              (1,183,000
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activitiesDepreciation
                  and amortization
              
              
              148,000
              
              
              162,000
              
              
              145,000Amortization
                  of deferred financing costs
              
              
              30,000
              
              
              4,000
              
              
              -Amortization
                  of note discount
              
              
              262,000
              
              
              189,000
              
              
              163,000Compensatory
                  element of common stock issuance
              
              
              -
              
              
              12,000
              
              
              -Compensatory
                  element of restricted common stock grant
              
              
              5,000
              
              
              -
              
              
              -Compensatory
                  element of common stock option issuances
              
              
              167,000
              
              
              19,000
              
              
              -Provision
                  for doubtful accounts
              
              
              -
              
              
              25,000
              
              
              150,000Issuance
                  of common stock in settlement of arbitration
              
              
              -
              
              
              -
              
              
              40,000Changes
                  in assets and liabilitiesDeposits
                  with clearing organizations
              
              
              (102,000
              )
              
              -
              
              
              695,000Receivables
                  from broker-dealers, clearing organizations and others
              
              
              (4,049,000
              )
              
              (42,000
              )
              
              829,000Securities
                  owned: marketable, at market value
              
              
              (716,000
              )
              
              (309,000
              )
              
              (17,000
              )Securities
                  owned: non-marketable, at fair value
              
              
              402,000
              
              
              (402,000
              )
              
              -Other
                  assets
              
              
              (104,000
              )
              
              104,000
              
              
              101,000Payables
              
              
              4,987,000
              
              
              (111,000
              )
              
              (737,000
              )Securities
                  sold, but not yet purchased, at market
              
              
              (85,000
              )
              
              118,000
              
              
              11,000Net
                  cash provided by operating activities
              
              
              2,317,000
              
              
              364,000
              
              
              197,000CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of fixed assets
              
              
              (147,000
              )
              
              (217,000
              )
              
              (94,000
              )Net
                  cash used in investing activities
              
              
              (147,000
              )
              
              (217,000
              )
              
              (94,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESNet
                  proceeds from issuance of common stock and warrants
              
              
              -
              
              
              173,000
              
              
              -Net
                  proceeds from issuance of preferred stock
              
              
              -
              
              
              972,000
              
              
              -Net
                  proceeds from issuance of convertible notes payable
              
              
              -
              
              
              1,000,000
              
              
              -Net
                  proceeds from issuance of notes payable and warrants
              
              
              1,000,000
              
              
              -
              
              
              -Cash
                  payment of deferred financing costs
              
              
              (22,000
              )
              
              (28,000
              )
              
              -Payment
                  of notes payable
              
              
              (850,000
              )
              
              (1,175,000
              )
              
              (75,000
              )Dividends
                  paid
              
              
              (107,000
              )
              
              (46,000
              )
              
              -Exercise
                  of stock options
              
              
              14,000
              
              
              -
              
              
              -Exercise
                  of warrants
              
              
              1,311,000
              
              
              -
              
              
              19,000Net
                  cash provided by (used in) financing activities
              
              
              1,346,000
              
              
              896,000
              
              
              (56,000
              )NET
                  INCREASE IN CASH
              
              
              3,516,000
              
              
              1,043,000
              
              
              47,000CASH
                  BALANCEBeginning
                  of the year
              
              
              1,441,000
              
              
              398,000
              
              
              351,000End
                  of the year
              
              $
              4,957,000
              
              $
              1,441,000
              
              $
              398,000SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during the year for:Interest
              
              $
              555,000
              
              $
              501,000
              
              $
              450,000Series
                  B preferred stock dividends
              
              $
              107,000
              
              $
              46,000
              
              $
              -SUPPLEMENTAL
                  DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIESWarrants
                  issued in connection with debt
              
              $
              194,000
              
              $
              187,000
              
              $
              125,000Series
                  A preferred stock dividends
              
              $
              317,000
              
              $
              300,000
              
              $
              322,000Common
                  stock issued to holders of convertible notes
              
              $
              1,024,000
              
              $
              -
              
              $
              -
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5




NATIONAL
      HOLDINGS CORPORATION


AND
      SUBSIDIARIES





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS





SEPTEMBER
      30, 2007, SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005





1.
            ORGANIZATION





National
      Holdings Corporation (“National Holdings” or **** the
      “Company”), a
      Delaware corporation organized in 1996, **** is
      a
      financial services organization, operating primarily through its wholly owned
      subsidiary, National Securities Corporation (“National Securities”), a
      Washington corporation organized in 1947 . National
      Securities conducts a national securities brokerage business through its main
      offices in Seattle, Washington and New York, New York. The
      Company’s business includes securities brokerage for individual and
      institutional clients, market-making trading activities, asset management and
      corporate finance services. National Securities is an introducing broker and
      clears all transactions through clearing organizations on a fully disclosed
      basis. On March 15, 2006, the Company changed its name from “Olympic Cascade
      Financial Corporation” to “National Holdings Corporation.”





National
      Holdings formed a new wholly owned subsidiary, National Insurance
      Corporation, a
      Washington corporation (“National Insurance”) in
      the
      third quarter of fiscal year 2006. National Insurance provides fixed insurance
      products to its clients, including life insurance, disability insurance, long
      term care insurance and fixed annuities. National Insurance commenced business
      operations during the second quarter of fiscal year 2007 that have been
      diminimus.





During
      fiscal year 2007, National Holdings formed three additional wholly owned
      subsidiaries: National Securities Futures Corporation (“National Futures”), National
      Holdings Mortgage Corporation (“National Mortgage”), and National Group Benefits
      Corporation (“National Group Benefits”), each a Washington corporation. None of
      these three corporations have commenced active business operations.





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES





a.
            Principles
                of Consolidation-
                The consolidated financial statements include the accounts of National
                Holdings and its wholly owned subsidiaries. All significant inter-company
                accounts and transactions have been eliminated in
                consolidation.





b.
            Estimates****-****The
                preparation of financial statements in conformity with accounting
                principles generally accepted in the United States of America requires
                management to make estimates and assumptions that affect the reported
                amounts of assets and liabilities, disclosure of contingent assets
                and
                liabilities at the date of the financial statements, and the reported
                amounts of revenues and expenses during the reporting period. Actual
                results could differ from those
                estimates.





c.
            Revenue
                Recognition-
                Customer security transactions and the related commission income
                and
                expense are recorded as of the trade date. Investment banking revenues
                include gains, losses, and fees, net of syndicate expenses, arising
                from
                securities offerings in which the Company acts as an underwriter
                or agent.
                Investment banking revenues also include fees earned from providing
                financial advisory services. Investment banking management fees are
                recorded on the offering date, sales concessions on the settlement
                date,
                and underwriting fees at the time the underwriting is completed and
                the
                income is reasonably determinable. Customers who are financing their
                transaction on margin are charged interest. The Company’s margin
                requirements are in accordance with the terms and conditions mandated
                by
                its clearing firms, National Financial Services LLC (“NFS”), Penson
                Financial Services, Inc. (“Penson”) and Legent Clearing LLC (“Legent”).
                The interest is billed on the average daily balance of the margin
                account.


F-6





Net
      dealer inventory gains result from securities transactions entered into for
      the
      account and risk of the Company. Net dealer inventory gains are recorded on
      a
      trade date basis. Transfer fees are charged for each customer’s security
      transaction, and are recognized as of the trade date. Investment advisory fees
      are account management fees for high net worth clients based on the amount
      of
      the assets under management. These fees are billed quarterly and recognized
      at
      such time that the service is performed and collection is probable.





The
      Company generally acts as an agent in executing customer orders to buy or sell
      listed and over-the-counter securities in which it does not make a market,
      and
      charges commissions based on the services the Company provides to its customers.
      In executing customer orders to buy or sell a security in which the Company
      makes a market, the Company may sell to, or purchase from, customers at a price
      that is substantially equal to the current inter-dealer market price plus or
      minus a mark-up or mark-down. The Company may also act as agent and execute
      a
      customer's purchase or sale order with another broker-dealer market-maker at
      the
      best inter-dealer market price available and charge a commission. Mark-ups,
      mark-downs and commissions are generally priced competitively based on the
      services it provides to its customers. In each instance the commission charges,
      mark-ups or mark-downs, are in compliance with guidelines established by the
      FINRA.





d.
            Cash
                and Cash Equivalents-
                The Company considers all highly liquid temporary cash investments
                with an
                original maturity of three months or less when purchased, to be cash
                equivalents. As of September 30, 2007, cash includes $5,000 of restricted
                cash.





e.
            Fixed
                Assets-
                Fixed assets are recorded at cost. Depreciation is calculated using
                the
                straight-line method based on the estimated useful lives of the related
                assets, which range from three to five years. Leasehold improvements
                are
                amortized using the straight-line method over the shorter of the
                estimated
                useful lives of the assets or the terms of the leases. Maintenance
                and
                repairs are charged to expense as incurred; costs of major additions
                and
                betterments that extend the useful life of the asset are capitalized.
                When
                assets are retired or otherwise disposed of, the costs and related
                accumulated depreciation or amortization are removed from the accounts
                and
                any gain or loss on disposal is
                recognized.





f.
            Income
                Taxes-
                The Company recognizes deferred tax assets and liabilities based
                on the
                difference between the financial statements carrying amounts and
                the tax
                basis of assets and liabilities, using the effective tax rates in
                the
                years in which the differences are expected to reverse. A valuation
                allowance related to deferred tax assets is also recorded when it
                is more
                likely than not that some or all of the deferred tax asset may not
                be
                realized.


F-7





g.
            Investment
                in Limited Partnership****-
                The Company accounts for its investment in the limited partnership
                in
                accordance with the equity method of accounting. Such asset has been
                included in other assets in the accompanying consolidated statements
                of
                financial condition. The Company has an investment in the limited
                partnership for which the carrying value is $0 at September 30,
                2007.





h.
            Fair
                Value of Financial Instruments****-
                The carrying amounts reported in the balance sheet for cash, receivables,
                accounts payable, accrued expenses and other liabilities approximates
                fair
                value based on the short-term maturity of these
                instruments.





i.
            Impairment
                of Long-Lived Assets****-****The
                Company reviews long-lived assets for impairment whenever circumstances
                and situations change such that there is an indication that the carrying
                amounts may not be recovered. At September 30, 2007, the Company
                has
                determined that there has been no impairment of its long-lived
                assets.





j.
            Common
                Stock Purchase Warrants****-****The
                Company accounts for the issuance of common stock purchase warrants
                issued
                in connection with capital financing transactions in accordance with
                the
                provisions of Emerging Issues Task Force Issue No. 00-19 "Accounting
                for
                Derivative Financial Instruments Indexed to, and Potentially Settled
                in, a
                Company's Own Stock" (“EITF 00-19”). Based on the provisions of EITF
                00-19, the Company classifies as equity any contracts that (i) require
                physical settlement or net-share settlement or (ii) gives the Company
                a
                choice of net-cash settlement or settlement in its own shares (physical
                settlement or net-share settlement). The Company classifies as assets
                or
                liabilities any contracts that (i) require net-cash settlement (including
                a requirement to net-cash settle the contract if an event occurs
                and if
                that event is outside the control of the Company) or (ii) gives the
                counterparty a choice of net-cash settlement or settlement in shares
                (physical settlement or net-share
                settlement).





The
      Company assessed the classification of its derivative financial instruments
      as
      of September 30, 2007, which consist of common stock purchase warrants, and
      determined that such derivatives meet the criteria for equity classification
      under EITF 00-19.





k.
            Convertible
                Instruments****-****The
                Company evaluates and accounts for conversion options embedded in
                its
                convertible instruments in accordance with SFAS No. 133
                “Accounting for Derivative Instruments and Hedging Activities”
                (“SFAS 133”) and EITF 00-19.





SFAS 133
      generally provides three criteria that, if met, require companies to bifurcate
      conversion options from their host instruments and account for them as free
      standing derivative financial instruments in accordance with EITF 00-19. These
      three criteria include circumstances in which (a) the economic
      characteristics and risks of the embedded derivative instrument are not clearly
      and closely related to the economic characteristics and risks of the host
      contract, (b) the hybrid instrument that embodies both the embedded
      derivative instrument and the host contract is not remeasured at fair value
      under otherwise applicable generally accepted accounting principles with changes
      in fair value reported in earnings as they occur and (c) a separate
      instrument with the same terms as the embedded derivative instrument would
      be
      considered a derivative instrument subject to the requirements of SFAS 133.
      SFAS 133 and EITF 00-19 also provide an exception to this rule when the
      host instrument is deemed to be conventional (as that term is described in
      the
      implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The
      Meaning of “Conventional Convertible Debt Instrument” in EITF
      00-19).


F-8


The
      Company accounts for convertible instruments (when it has determined that the
      embedded conversion options should not be bifurcated from their host
      instruments) in accordance with the provisions of EITF 98-5 “Accounting for
      Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
      EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible
      notes
      for the intrinsic value of conversion options embedded in debt instruments
      based
      upon the differences between the fair value of the underlying common stock
      at
      the commitment date of the note transaction and the effective conversion price
      embedded in the note. Debt discounts under these arrangements are amortized
      over
      the term of the related debt to their earliest date of redemption. The Company
      also records when necessary deemed dividends for the intrinsic value of
      conversion options embedded in preferred shares based upon the differences
      between the fair value of the underlying common stock at the commitment date
      of
      the note transaction and the effective conversion price embedded in the
      note.





The
      Company evaluated the conversion option embedded in the convertible preferred
      stock and determined, in accordance with the provisions of these statements,
      that such conversion option does not meet the criteria requiring bifurcation
      of
      these instruments. The characteristics of the common stock that is issuable
      upon
      a holder’s exercise of the conversion option embedded in the convertible
      preferred stock are deemed to be clearly and closely related to the
      characteristics of the preferred shares (as that term is clarified in
      paragraph 61.l. of the implementation guidance included in Appendix A
      of SFAS 133). Additionally, the Company’s conversion options, if free
      standing, would not be considered derivatives subject to the accounting
      guidelines prescribed under SFAS 133.


F-9





l.
            Net
                Income (Loss) per Common Share-
                Basic net income (loss) per share is computed on the basis of the
                weighted
                average number of common shares outstanding. Diluted net income (loss)
                per
                share is computed on the basis of the weighted average number of
                common
                shares outstanding plus the potential dilution that could occur if
                securities or other contracts to issue common shares were exercised
                or
                converted.





Years
                EndedSeptember
                30,
            
            September
                30,
            
            September
                30,2007
            
            2006
            
            2005Numerator:Net
                income (loss)
            
            $
            1,372,000
            
            $
            595,000
            
            $
            (1,183,000
            )Preferred
                stock dividends
            
            
            (409,000
            )
            
            (381,000
            )
            
            (290,000
            )Numerator
                for basic earnings per share—net income (loss) attributable to common
                stockholders - as reported
            
            
            963,000
            
            
            214,000
            
            
            (1,473,000
            )Effect
                of dilutive securities:Series
                A preferred stock
            
            
            327,000
            
            
            -
            
            
            -Numerator
                for diluted earnings per share–net
                income
                (loss)attributable to common stockholders - as
                adjusted
            
            $
            1,290,000
            
            $
            214,000
            
            $
            (1,473,000
            )Denominator:Denominator
                for basic earnings per share—weighted average shares
            
            
            6,042,646
            
            
            5,146,422
            
            
            5,024,643Effect
                of dilutive securities:Assumed
                conversion of Series A preferred stock
            
            
            3,004,000
            
            
            -
            
            
            -Stock
                options
            
            
            366,712
            
            
            36,520
            
            
            -Warrants
            
            
            256,173
            
            
            95,357
            
            
            -Dilutive
                potential common shares
            
            
            3,626,885
            
            
            131,877
            
            
            -Denominator
                for diluted earnings per share—adjusted weighted-average shares and
                assumed conversions
            
            
            9,669,531
            
            
            5,278,299
            
            
            5,024,643Net
                income (loss) available to common stockholdersBasic:
            
            $
            0.16
            
            $
            0.04
            
            $
            (0.29
            )Diluted:
            
            $
            0.13
            
            $
            0.04
            
            $
            (0.29
            )





For
      the
      fiscal year ended September 30, 2006, 5,158,613 shares attributable to the
      outstanding Series A and B Preferred Stock and convertible notes were excluded
      from the calculation of diluted net income per share because their inclusion
      would have been anti-dilutive. For the fiscal year ended September 30, 2005,
      5,357,278 shares attributable to outstanding Series A Preferred Stock, stock
      options and warrants were excluded from the net loss per share because their
      inclusion would have been anti-dilutive.





m.
            Stock-Based
                Compensation-
                Prior to October 1, 2005, the Company accounted for employee stock
                transactions in accordance with Accounting Principle Board, APB Opinion
                No. 25, “Accounting for Stock Issued to Employees.” The Company had
                adopted the pro forma disclosure requirements of Statement of Financial
                Accounting Standards No. 123, “Accounting For Stock-Based
                Compensation.”


F-10





Effective
                October 1, 2005, the Company adopted FASB Statement of Financial
                Accounting Standard (“SFAS”) No. 123R “Share Based Payment.” 
                This statement is a revision of SFAS Statement No. 123, and
                supersedes APB Opinion No. 25, and its related implementation
                guidance. SFAS 123R addresses all forms of share based payment (“SBP”)
                awards including shares issued under employee stock purchase plans,
                stock
                options, restricted stock and stock appreciation rights. Under SFAS
                123R,
                SBP awards will result in a charge to operations that will be measured
                at
                fair value on the awards grant date, based on the estimated number
                of
                awards expected to vest over the service period.  During fiscal years
                2007 and 2006, the Company granted 1,120,000 and 170,000 stock options,
                respectively, with a fair value of approximately $1,052,000 and $88,000,
                respectively. A charge of $167,000 and $20,000 was recorded in fiscal
                years 2007 and 2006, respectively, relating to the amortization of
                the
                fair value associated with these grants.





Additionally
                in fiscal year 2007, the Company granted 50,000 shares of restricted
                stock
                with a fair value of $111,000. The fair value of the grant will be
                charged
                to the statement of operations over the four-year vesting period.
                During
                the fiscal year ended September 30, 2007 the Company recognized a
                charge
                of $5,000 for the amortization of this grant. During the fiscal year
                ended
                September 30, 2006, the Company issued 19,000 shares of common stock
                with
                a fair value of $12,000 to certain employees. The charge has been
                included
                in the statement of operations during the respective
                period.





For
      fiscal year 2005 the Company applied APB Opinion No. 25, “Accounting for
      Stock Issued to Employees.”  As required under SFAS No. 148,
“Accounting for Stock-based Compensation - Transition and Disclosure,” the
      following table presents pro forma net income and basic and diluted earnings
      per
      share as if the fair value-based method had been applied to all awards during
      that year.




Year
                EndedSeptember
                30,2005Net
                loss attributable to common stockholders - as reported
            
            $
            (1,473,000
            )Stock-based
                    employee compensation cost determined under fair value method,
                    net of tax
                    effects
            
            
            (869,000
            )Net
                loss attributable to common stockholders - pro forma
            
            $
            (2,342,000
            )Loss
                per shareBasic
                loss per share:Net
                loss attributable to common stockholders - as reported
            
            $
            (0.29
            )Per
                    share stock-based employee compensation cost determined under
                    fair value
                    method, net of tax effects
            
            
            (0.17
            )Net
                loss attributable to common stockholders - pro forma
            
            $
            (0.46
            )Diluted
                loss per share:Net
                loss attributable to common stockholders - as reported
            
            $
            (0.29
            )Per
                    share stock-based employee compensation cost determined under fair
                    value method, net of tax effects
            
            
            (0.17
            )Net
                loss attributable to common stockholders - pro forma
            
            $
            (0.46
            )


F-11


The
      Black-Scholes option valuation model was used to estimate the fair value of
      the
      options granted during the fiscal years ended September 30, 2007, 2006 and
      2005.
      The model includes subjective input assumptions that can materially affect
      the
      fair value estimates. The model was developed for use in estimating the fair
      value of traded options that have no vesting restrictions and that are fully
      transferable. For example, the expected volatility is estimated based on the
      most recent historical period of time equal to the weighted average life of
      the
      options granted. Options issued under the Company's option plans have
      characteristics that differ from traded options. In the Company's opinion,
      this
      valuation model does not necessarily provide a reliable single measure of the
      fair value of its employee stock options. The principal assumptions used in
      applying the Black-Scholes model along with the results from the model were
      as
      follows:




Years
                EndedSeptember
                30,
            
            September
                30,
            
            September
                30,2007
            
            2006
            
            2005Assumptions:Risk-free
                interest rate
            
            
            4.40
            %
            
            4.40
            %
            
            3.15
            %Expected
                life, in years
            
            
            3.0
            
            
            3.0
            
            
            5.0Expected
                volatility
            
            
            83
            %
            
            88
            %
            
            135
            %





As
      of
      September 30, 2007, there was $1,060,000 of total unrecognized deferred
      compensation costs related to share-based compensation arrangements. The Company
      expects that future forfeitures will be diminimus





A
      summary
      of the status of the Company’s nonvested shares as of September 30, 2007, and
      changes during the fiscal year then ended is presented below:




WeightedAverageGrant
                DateNonvested
                Shares
            
            Shares
            
            Fair
                ValueNonvested
                at September 30, 2006
            
            
            75,000
            
            $
            0.33Granted
            
            
            945,000
            
            $
            0.96Vested
            
            
            (120,000
            )
            $
            0.65Expired
            
            
            0
            
            $
            -Nonvested
                at September 30, 2007
            
            
            900,000
            
            $
            0.95




F-12




n.
            Concentrations
                of Credit Risk-
                The Company is engaged in trading and providing a broad range of
                securities brokerage and investment services to a diverse group of
                retail
                and institutional clientele, as well as corporate finance and investment
                banking services to corporations and businesses. Counterparties to
                the
                Company’s business activities include broker-dealers and clearing
                organizations, banks and other financial institutions. The Company
                uses
                clearing brokers to process transactions and maintain customer accounts
                on
                a fee basis for the Company. The Company uses three clearing brokers
                for
                substantially all of its business. The Company permits the clearing
                firms
                to extend credit to its clientele secured by cash and securities
                in the
                client’s account. The Company’s exposure to credit risk associated with
                the non-performance by its customers and counterparties in fulfilling
                their contractual obligations can be directly impacted by volatile
                or
                illiquid trading markets, which may impair the ability of customers
                and
                counterparties to satisfy their obligations to the Company. The Company
                has agreed to indemnify the clearing brokers for losses they incur
                while
                extending credit to the Company’s clients. It is the Company’s policy to
                review, as necessary, the credit standing of its customers and each
                counterparty. Amounts due from customers that are considered uncollectible
                by the clearing broker are charged back to the Company by the clearing
                broker when such amounts become determinable. Upon notification of
                a
                charge back, such amounts, in total or in part, are then either (i)
                collected from the customers, (ii) charged to the broker initiating
                the
                transaction and included in other receivables in the accompanying
                consolidated statements of financial condition, and/or (iii) charged
                as an
                expense in the accompanying consolidated statements of financial
                condition, based on the particular facts and circumstances.


The
      Company maintains cash with major financial institutions. The Federal Deposit
      Insurance Corporation (“FDIC”) insures up to $100,000 at each institution. At
      times such amounts may exceed the FDIC limits. At September 30, 2007 the
      uninsured cash bank balance was $4,979,000. The Company believes it is not
      exposed to any significant credit risks for cash.





o.
            Other
                Receivables-
                The Company extends unsecured credit in the normal course of business
                to
                its registered representatives. The determination of the amount of
                uncollectible accounts is based on the amount of credit extended
                and the
                length of time each receivable has been outstanding, as it relates
                to each
                individual registered representative. The allowance for doubtful
                accounts
                reflects the amount of loss that can be reasonably estimated by
                management, and is included in other expenses in the accompanying
                consolidated statements of
                operations.





p.
            Advances
                to Registered Representatives-
                Advances are given to certain registered representatives as an incentive
                for their affiliation with National Securities. The representative
                signs
                an independent contractor agreement with National Securities for
                a
                specified term, typically a three-year period. The advance is then
                amortized on a straight-line basis over the amount of time the
                representative is obligated to be affiliated with National Securities,
                and
                is included in commissions expense in the accompanying consolidated
                statements of operations. In the event a representative’s affiliation with
                National Securities terminates prior to the fulfillment of their
                contract,
                the representative is required to repay the unamortized
                balance.





q.
            Securities
                Owned-
                Marketable securities which consist of publicly traded unrestricted
                common
                stock and bonds are valued at the closing price on the valuation
                date.
                Non-marketable securities which consist of non-tradable warrants
                exercisable into freely trading common stock of public companies
                are
                carried at fair value as determined in good faith by
                management.




r.
            Other
                Assets-
                Other assets consist primarily of pre-paid expenses and lease
                deposits.


F-13


s.
            Recently
                Issued Accounting Standards****-
                In July 2006, the FASB released Interpretation No. 48, "Accounting
                for
                Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109"
                ("FIN 48"), which clarifies the accounting and reporting for uncertainty
                in income tax law. FIN 48 prescribes a comprehensive model for the
                financial statement recognition, measurement, presentation and disclosure
                of uncertain tax positions taken or expected to be taken in income
                tax
                returns. The provisions of FIN 48 are effective for the Company for
                its
                fiscal year commencing October 1, 2007. The cumulative effects, if
                any, of
                applying FIN 48 will be recorded as an adjustment to accumulated
                deficit
                as of the beginning of the period of adoption. The Company is evaluating
                the impact that the adoption of this pronouncement will have on
                the consolidated financial position, results of operations, or cash
                flows of the Company.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value. The objective of SFAS 159 is to reduce both complexity in accounting
      for financial instruments and the volatility in earnings caused by measuring
      related assets and liabilities differently. Generally accepted accounting
      principles have required different measurement attributes for different assets
      and liabilities that can create artificial volatility in earnings. The FASB
      has
      indicated it believes that SFAS 159 helps to mitigate this type of
      accounting-induced volatility by enabling companies to report related assets
      and
      liabilities at fair value, which would likely reduce the need for companies
      to
      comply with detailed rules for hedge accounting. SFAS 159 also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between companies that choose different measurement attributes for similar
      types
      of assets and liabilities.





SFAS
      159
      does not eliminate disclosure requirements included in other accounting
      standards, including requirements for disclosures about fair value measurements
      included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
      Financial Instruments." SFAS 159 is effective for the Company as of the
      beginning of fiscal year 2009. The adoption of this pronouncement is not
      expected to have an impact on the Company's consolidated financial
      position, results of operations or cash flows.





In
      December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
      "Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement, whether issued
      as a separate agreement or included as a provision of a financial instrument
      or
      other agreement, should be separately recognized and measured in accordance
      with
      SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
      additional disclosure regarding the nature of any registration payment
      arrangements, alternative settlement methods, the maximum potential amount
      of
      consideration and the current carrying amount of the liability, if any. The
      guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
      Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
      Certain Financial Instruments with Characteristics of both Liabilities and
      Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
      Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
      of
      Others", to include scope exceptions for registration payment
      arrangements.


F-14





FSP
                EITF 00-19-2 is effective immediately for registration payment
                arrangements and the financial instruments subject to those arrangements
                that are entered into or modified subsequent to the issuance date
                of this
                FSP, or for financial statements issued for fiscal years beginning
                after
                December 15, 2006, and interim periods within those fiscal years,
                for
                registration payment arrangements entered into prior to the issuance
                date
                of this FSP. The adoption of this pronouncement is not expected to
                have an
                impact on the Company's consolidated financial position, results of
                operations or cash flows.





3.
            CLEARING
                AGREEMENTS





In
      June
      2004, National Securities entered into an agreement with Fiserv Securities,
      Inc.
      (“Fiserv”) to clear its brokerage business. The conversion from First Clearing
      Corporation, its former clearing firm, to Fiserv was completed in the first
      week
      of October 2004. As part of this transaction, Fiserv provided National
      Securities with an $800,000 conversion assistance payment, $250,000 of which
      was
      paid upon execution of the clearing agreement, $250,000 of which was paid in
      August 2004, and $300,000 of which was paid in October 2004. Such amounts were
      recorded as a reduction in clearing fees expense in the respective
      periods.





In
      March
      2005, NFS acquired the clearing business of Fiserv. In April 2005, National
      Securities entered into a clearing agreement with NFS that became effective
      in
      June 2005. As part of this transaction, NFS provided National Securities with
      a
      $1.0 million conversion fee credit to reimburse the Company for the
      transitional, incremental costs incurred by National Securities relating to
      the
      conversion of its clearing business to NFS. National Securities was paid
      $250,000 in May 2005, and the remaining $750,000 was paid in July 2005. Such
      amounts were recorded as a reduction in clearing fees expense (in accordance
      with EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer
      (including a Reseller of the Vendor’s Products)”) in the respective
      periods.





In
      the
      first quarter of fiscal year 2007, NFS paid National Securities a $750,000
      general business credit that is being amortized over an eight year period ending
      November 2014, corresponding with the expiration date of the clearing agreement.
      In the second quarter of fiscal year 2007, NFS provided National Securities
      a
      $250,000 clearing fee waiver that is being amortized over a two year period
      ending December 2008, corresponding with the time period that certain
      performance standards were to be achieved. The clearing agreement includes
      a
      termination fee if National Securities terminates the agreement without cause.
      In June 2005, National Securities entered into a clearing agreement with Penson
      for the purpose of providing clearing services that are not provided by NFS.
      Additionally, in June 2007, National Securities entered into a clearing
      agreement with Legent for the purpose of providing clearing services that are
      not provided by NFS and to maintain a pre-existing clearing relationship for
      brokers newly associated with National Securities. The Company believes that
      the
      overall effect of its clearing relationships has been beneficial to the
      Company’s cost structure, liquidity and capital resources.








F-15




4.
            BROKER-DEALERS
                AND CLEARING ORGANIZATIONS RECEIVABLES AND
                PAYABLES





At
      September 30, 2007 and 2006 the receivables of $4,739,000 and $3,548,000,
      respectively, from broker-dealers and clearing organizations represent net
      amounts due for fees and commissions. At September 30, 2007 and 2006, the
      amounts payable to broker-dealers and clearing organizations of $1,115,000
      and
      $113,000, respectively, represent amounts payable for inventory purchases on
      behalf of the Company and its customers.





5.
            OTHER
                RECEIVABLES





An
      analysis of other receivables and the allowance for uncollectible accounts
      on
      such receivables, for the fiscal years ended September 30, 2005, 2006 and 2007
      is as follows:




Other
            
            
            
            NetReceivables
            
            Allowance
            
            ReceivablesBalance,
                September 30, 2004
            
            $
            1,739,000
            
            $
            (850,000
            )
            $
            889,000Additions
            
            
            110,000
            
            
            -
            
            
            110,000Collections
            
            
            (364,000
            )
            
            -
            
            
            (364,000
            )Provision
            
            
            -
            
            
            (150,000
            )
            
            (150,000
            )Write-offs
            
            
            (632,000
            )
            
            632,000
            
            
            -Balance,
                September 30, 2005
            
            
            853,000
            
            
            (368,000
            )
            
            485,000Additions
            
            
            343,000
            
            
            -
            
            
            343,000Collections
            
            
            (349,000
            )
            
            -
            
            
            (349,000
            )Provision
            
            
            -
            
            
            (99,000
            )
            
            (99,000
            )Balance,
                September 30, 2006
            
            
            847,000
            
            
            (467,000
            )
            
            380,000Additions
            
            
            513,000
            
            
            -
            
            
            513,000Collections
            
            
            (109,000
            )
            
            -
            
            
            (109,000
            )Provision
            
            
            -
            
            
            -
            
            
            -Balance,
                September 30, 2007
            
            $
            1,251,000
            
            $
            (467,000
            )
            $
            784,000





6.
                ADVANCES
                    TO REGISTERED
                    REPRESENTATIVES





An
      analysis of advances to registered representatives for the fiscal years ended
      September 30, 2006 and 2007 is as follows:




Balance,
                September 30, 2005
            
            $
            1,653,000Advances
            
            
            1,184,000Amortization
                of advances
            
            
            (1,281,000
            )Balance,
                September 30, 2006
            
            
            1,556,000Advances
            
            
            3,860,000Amortization
                of advances
            
            
            (1,406,000
            )Balance,
                September 30, 2007
            
            $
            4,010,000


F-16





The
      unamortized advances outstanding at September 30, 2007, 2006 and 2005
      attributable to registered representatives who ended their affiliation with
      National Securities prior to the fulfillment of their obligation was $134,000,
      $32,000 and $44,000, respectively.





7.
                SECURITIES
                    OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED, AT
                    MARKET





The
      following table shows the market values of the Company's securities owned
      and
      securities sold, but not yet purchased as of
      September 30, 2007 and 2006, respectively:





September
                30, 2007
            
            September
                30, 2006Securities
            
            
            
            SecuritiesSecurities
            
            sold,
                but not
            
            Securities
            
            sold,
                but notowned
            
            yet
                purchased
            
            owned
            
            yet
                purchasedCorporate
                stocks
            
            $
            972,000
            
            $
            -
            
            $
            459,000
            
            $
            162,000Government
                obligations
            
            
            219,000
            
            
            77,000
            
            
            16,000
            
            
            -$
            1,191,000
            
            $
            77,000
            
            $
            475,000
            
            $
            162,000





Securities
      sold, but not yet purchased commit the Company to deliver specified securities
      at predetermined prices. The transactions may result in market risk since,
      to
      satisfy the obligation, the Company must acquire the securities at market
      prices, which may exceed the values reflected in the consolidated statements
      of
      financial condition.





Securities
      owned, non-marketable, which consist of warrants that are not exercisable into
      freely trading common stock of public companies, totaled $0 and $402,000 as
      of
      September 30, 2007 and 2006, respectively.





8.
            FIXED
                ASSETS





Fixed
      assets as of September 30, 2007 and 2006, respectively, consist of the
      following:





September
                30, 2007
            
            September
                30, 2006
            
            Estimated
                Useful LivesOffice
                machines
            
            $
            138,000
            
            $
            138,000
            
            
            5
                yearsFurniture
                and fixtures
            
            
            186,000
            
            
            160,000
            
            
            5
                yearsTelephone
                system
            
            
            34,000
            
            
            34,000
            
            
            5
                yearsElectronic
                equipment
            
            
            699,000
            
            
            596,000
            
            
            3
                yearsLeasehold
                improvements
            
            
            280,000
            
            
            262,000
            
            
            Lesser
                of terms of leases or useful lives1,337,000
            
            
            1,190,000Less
                accumulated depreciation and amortization
            
            
            (1,033,000
            )
            
            (885,000
            )Fixed
                assets - net
            
            $
            304,000
            
            $
            305,000





Depreciation
      and amortization expense for the years ended September 30, 2007, 2006 and 2005
      was $148,000, $162,000 and $145,000, respectively.


F-17


9.
            OTHER
                ASSETS





Other
      assets as of September 30, 2007 and 2006, respectively, consist of the
      following:





September
                30, 2007
            
            September
                30, 2006Pre-paid
                expenses
            
            $
            292,000
            
            $
            203,000Deposits
            
            
            38,000
            
            
            38,000Deferred
                financing costs
            
            
            16,000
            
            
            24,000Other
            
            
            50,000
            
            
            35,000Total
            
            $
            396,000
            
            $
            300,000





10.
            ACCOUNTS
                PAYABLE, ACCRUED EXPENSES AND OTHER
                LIABILITIES





Accounts
      payable, accrued expenses and other liabilities as of September 30, 2007 and
      2006, respectively, consist of the following:





September
                30, 2007
            
            September
                30, 2006Commissions
                payable
            
            $
            5,128,000
            
            $
            1,993,000Deferred
                clearing fee credits
            
            
            828,000
            
            
            -Telecommunications
                vendors payable
            
            
            366,000
            
            
            291,000Legal
                payable
            
            
            84,000
            
            
            325,000Deferred
                rent payable
            
            
            133,000
            
            
            152,000Other
                vendors
            
            
            1,368,000
            
            
            1,182,000Total
            
            $
            7,907,000
            
            $
            3,943,000





11.
            CONVERTIBLE
                NOTES PAYABLE





In
      January 2006, the Company completed a financing transaction that included 11%
      convertible promissory notes in the principal amount of $1,000,000 that were
      convertible into common stock at a price of $1.00 per share. Under a conversion
      option contained in the convertible promissory notes the Company was entitled to convert the notes into common
      stock
      at any time if the following occur:





·
            The
                closing price of the common stock has equaled or exceeded $2.00 per
                share
                for 10 consecutive trading days and the trading volume exceeds 10,000
                during that 10 day period or


·
            The
                closing price of the common stock has equaled or exceeded $3.00 per
                share
                for 10 consecutive trading days regardless of the trading volume,
                and


·
            The
                shares of common stock into which the notes are convertible are then
                covered by an effective registration
                statement.





The
      convertible promissory notes were to mature in January 2011. The Company granted
      300,000 warrants to acquire shares of common stock to the note holders, and
      the
      fair value of the warrants was calculated using the Black-Scholes Option
      Valuation Model. The Company recorded a debt discount of approximately $187,000
      that was charged to interest expense over the life of the debt. Such
      amortization has been included in “Interest” in the accompanying consolidated
      financial statements. In June 2007, the Company exercised its conversion option
      contained in its 11% convertible promissory notes, and issued 1,024,413 shares
      of its common stock in full payment of the $1,000,000 convertible promissory
      notes, plus accrued interest. The unamortized debt discount at September 30,
      2006 of approximately $159,000 was expensed in fiscal year 2007 as “Interest” in
      the accompanying consolidated financial statements.




F-18


The
      following table summarizes convertible notes payable at September 30,
      2006.


September 30,200611%
                  convertible notes payable
              
              $
              1,000,000Less:
                  Deferred debt discount
              
              
              (159,000
              )$
              841,000




The
      Company incurred interest expense related to these convertible notes of $262,000
      and $111,000 for the fiscal years ended September 30, 2007 and 2006,
      respectively.





12.
            NOTES
                PAYABLE





In
      February 2004, the Company consummated a private offering of its securities
      to a
      limited number of accredited investors wherein the Company issued an aggregate
      of $850,000 of three-year, 10% senior subordinated promissory notes to four
      unaffiliated parties. The note holders received three-year warrants to purchase
      an aggregate of 170,000 shares of the Company’s common stock at an exercise
      price of $1.50 per share, with a fair value of approximately $143,000. The
      Company amortized the total debt discount of $183,000 over the three-year term
      of these promissory notes. Such amortization has been included in “Interest” in
      the accompanying consolidated financial statements. These notes were repaid
      in
      full during the fiscal year ended September 30, 2007.





In
      August
      2005, upon the maturity of previously issued notes, the Company and two note
      holders entered into new note agreements providing for $1.0
      million of notes
      with a maturity date of July 31, 2007, together with warrants having an
      expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
      of common stock at a price of $1.25 per share. The Company recorded a debt
      discount of approximately $130,000 for the fair value of the warrants. The
      Company amortized the total allocated fair value over the term of the notes. Such
      amortization has been included in “Interest” in the accompanying consolidated
      financial statements. The
      notes
      had an interest rate of 9%. These
      notes were repaid in full in January 2006 and the warrants were
      exercised in July 2007 .





In
      February 2007, the Company completed a
      financing transaction under which certain investors purchased 10 %
      promissory notes in the principal amount of $1 .0
      million ,
      with warrants
      to purchase an aggregate of 250,000 shares of common stock at an exercise price
      of $1.40 per share. The promissory notes mature in February 2009, and have
      a
      stated interest rate of 10% per annum. The fair value of the warrants was
      calculated using the Black-Scholes Option Valuation Model. The Company recorded
      a debt discount of approximately $195,000 that is being charged to interest
      expense over the life of the debt. Such amortization has been included in
“Interest” in the accompanying consolidated financial statements.


F-19





The
      following table summarizes notes payable at September 30, 2007 and 2006,
      respectively:


September 30,
                2007
              
              September 30,
                20062007
                  10% promissory notes
              
              $
              1,000,000
              
              $
              -2004
                  10% promissory notes
              
              
              -
              
              
              850,0001,000,000
              
              
              850,000Less:
                  Deferred debt discount
              
              
              (138,000
              )
              
              (45,000
              )$
              862,000
              
              $
              805,000





The
      notes
      outstanding on September 30, 2007 mature in fiscal year 2009. The Company
      incurred interest expense related to these notes of $173,000 and $133,000 for
      the fiscal years ended September 30, 2007 and 2006, respectively.





13.
            SECURED
                DEMAND NOTE / SUBORDINATED
                BORROWINGS





Subordinated
      borrowings represent a secured demand note that was entered into between
      National Securities and a related party. National Securities is a registered
      broker-dealer. The secured demand note was entered into in accordance with
      the
      form prescribed by the FINRA, and it is accounted for in accordance with
      broker-dealer accounting SEC rule 15c3-1d. Accordingly, our balance sheet
      includes both an asset (“Secured demand note”) and the corresponding liability
      (“Subordinated borrowings”) in an identical amount. The secured demand note is
      available to compute net capital under SEC rule 15c3-1. The borrowings are
      subordinated to the claims of present and future creditors of the Company and
      cannot be repaid where such repayment will cause the Company to fail to meet
      its
      minimum net capital requirements in accordance with SEC rule
      15c3-1.





National
      Securities entered into a secured demand note collateral agreement with an
      employee of National Securities and a former Director of the Company, to borrow
      securities that can be used by the Company for collateral agreements. These
      securities have been pledged through an unrelated broker-dealer, and have a
      borrowing value totaling $500,000. This note bears interest at 5% per annum
      with
      interest paid monthly. In February 2007, upon the maturity of the previously
      issued note, National Securities and the holder entered into a new $1.0 million
      secured demand note collateral agreement with a maturity date of March 1,
      2008 . In
      May
      2007, the Company paid $500,000 of this secured demand note, and the remaining
      balance of $500,000 is due at maturity. Certain
      of the securities, totaling $163,000, have been pledged as collateral for
      security deposits for office leases under two letters of credit. No amounts
      have
      been drawn on either of these letters of credit. In addition, $249,000 of such
      securities are being maintained in a separate account and designated for a
      security deposit for an office lease. The holder also entered into a warrant
      agreement to
      purchase 150,000 shares of common stock at a price of $1.25 per share, with
      an  expiration
      date of July 31, 2008.


F-20





14.
            INCOME
                TAXES




The
      income tax provision (benefit) consists of:




Years EndedSeptember
              30,2007
            
            September
              30,2006
            
            September
              30, 2005Federal
                income tax provision (benefit)
            
            $
            -
            
            $
            -
            
            $
            -State
                income tax provision (benefit)
            
            
            -
            
            
            -
            
            
            -Change
                in valuation allowance
            
            
            -
            
            
            -
            
            
            -$
            -
            
            $
            -
            
            $
            -




The
      primary difference between income tax expense at the federal statutory rate
      and
      actual tax expense is due to the utilization of net operating loss carryovers.
      The Company did not record a provision for income taxes due to the utilization
      of net operating losses.





The
      income tax provision (benefit) related to income (loss) from continuing
      operations before income taxes and extraordinary items varies from the federal
      statutory rate as follows:





Years EndedSeptember 30,
              2007
            
            September 30,
              2006
            
            September 30,
              2005Statutory
                federal rate
            
            $
            524,000
            
            $
            168,000
            
            $
            (402,000
            )State
                income taxes net of federal income tax benefit
            
            
            93,000
            
            
            30,000
            
            
            (35,000
            )Losses
                for which no benefit is provided
            
            
            -
            
            
            -
            
            
            437,000Utilization
                of net operating loss carryforwards
            
            
            (617,000
            )
            
            (198,000
            )
            
            -$
            -
            
            $
            -
            
            $
            -





Significant
      components of the Company’s deferred tax assets that are included in other
      assets in the accompanying financial statements are as follows:




September 30,
              2007
            
            September 30,
              2006Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            3,781,000
            
            $
            4,398,000Reserves
                for uncollectible receivables
            
            
            150,000
            
            
            183,000Other
                temporary differences
            
            
            129,000
            
            
            69,000Total
                deferred tax assets
            
            
            4,060,000
            
            
            4,650,000Deferred
                tax liability:Other
                temporary differences
            
            
            (2,000
            )
            
            (161,000
            )Deferred
                tax asset
            
            
            4,058,000
            
            
            4,489,000Valuation
                allowance
            
            
            (4,058,000
            )
            
            (4,489,000
            )Net
                deferred tax asset
            
            $
            -
            
            $
            -


F-21





At
      September 30, 2007, the Company had available net operating loss carryovers
      of
      approximately $9.5 million that may be applied against future taxable income
      and
      expires at various dates through 2025, subject to certain limitations. The
      Company has a deferred tax asset arising substantially from the benefits of
      such
      net operating loss deduction and has recorded a valuation allowance for the
      full
      amount of this deferred tax asset since it is more likely than not that some
      or
      all of the deferred tax asset may not be realized. The valuation allowance
      for
      the deferred tax asset decreased $431,000 and increased $219,000 during the
      fiscal years ended September 30, 2007 and 2006, respectively. The net change
      in
      the valuation allowance is due principally to the net operating loss carryovers,
      reserve for uncollectible accounts and other temporary and permanent
      differences.





15.
            COMMITMENTS




Leases - As of
      September 30, 2007, the Company leases office space and equipment in various
      states expiring at various dates through 2012 and is committed under operating
      leases for future minimum lease payments as follows:





Fiscal Year Ending2008
            
            $
            1,556,0002009
            
            
            584,0002010
            
            
            562,0002011
            
            
            579,0002012
            
            
            443,000Thereafter
            
            
            -$
            3,724,000





The
      totals amount of rent payable under the leases is recognized on a straight
      line
      basis over the term of the leases. As of September 30, 2007 and September 30,
      2006, the Company has recognized deferred rent payable of $133,000 and $152,000,
      respectively (See Note 10). Rental expense under all operating leases for the
      years ended September 30, 2007, September 30, 2006 and September 30, 2005 was
      $1,781,000, $1,901,000 and $1,976,000, respectively.





Guarantees –
      The Company has guaranteed a lease of one of its branch offices, in the amount
      of $25,000 at September 30, 2007. The Company has determined that the fair
      value
      of the guarantee to be diminimus.





16.
            CONTINGENCIES




In
      September 2006, the former
      chairman and chief executive officer of the Company, Steven A. Rothstein,
      commenced an arbitration against the current chairman and chief executive
      officer of the Company, Mark Goldwasser, in the matter Rothstein
      et al. vs. Goldwasser ,
      FINRA
      No. 06-04000.  Rothstein is alleging fraud and inequitable conduct relating
      to his attempts to sell his investment in the Company in calendar year
      2001, and is seeking approximately $5,750,000 in damages.  The
      Company is indemnifying Mr. Goldwasser in this action.  The Company
      and Mr. Goldwasser believe this action is without merit, and intend to
      vigorously defend this action. As of September 30, 2007, the outcome of this
      arbitration is undeterminable and accordingly the Company has not established
      a
      provision for this matter.


F-22





The
      Company is also a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims seeking
      in the aggregate damages of approximately $1,000,000. The Company believes
      such claims are substantially without merit, and estimates that its liability,
      primarily for attorney representation, will approximate $200,000 (exclusive
      of
      unspecified punitive damages related to certain claims and inclusive of expected
      insurance coverage). These matters arise in the normal course of business.
      The
      Company intends to vigorously defend itself in these actions, and believes
      that
      the eventual outcome of these matters will not have a material adverse effect
      on
      the Company. However,
      the ultimate outcome of these matters cannot be determined at this time. The
      amounts related to such matters that are reasonably estimable and which have
      been accrued at September 30, 2007 and 2006, is $62,000 and $241,000 (primarily
      legal fees), respectively, and have
      been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
      the accompanying consolidated statements of financial condition . The
      Company has included in “Professional fees” litigation and other FINRA related
      expenses of $1,444,000, $799,000 and $790,000 for the fiscal years ended
      September 30, 2007, 2006 and 2005, respectively.





17.
            STOCKHOLDERS'
                EQUITY




Shares
      Authorized –
      The Company’s authorized number of shares of common stock is 30,000,000, and its
      authorized number of shares of preferred stock is 200,000. The number of
      authorized shares of preferred stock designated as Series A is
      50,000.





Common
      Stock –
      During the fiscal year ended September 30, 2007, the Company granted 50,000
      shares of restricted stock with a fair value of $111,000. The fair value of
      the
      grant will be charged to the statement of operations over the four-year vesting
      period. During the fiscal year ended September 30, 2007 the Company recognized
      a
      charge of $5,000 for the amortization of this grant.





During
      the fiscal year ended September 30, 2006, the Company issued 19,000 shares
      of
      common stock with a fair value of $12,000 to certain employees. The charge
      has
      been included in the statement of operations during the respective
      period.





In
      March
      2006, the Company sold and issued 159,090 shares of the Company’s common stock
      to an unaffiliated party for $175,000 in a
      private placement. The
      proceeds from the private placement were used to retire $175,000 of the
      Company’s promissory notes that were due to mature in January 2007.





During
      the fiscal year ended September 30, 2005, the Company issued 40,000 shares
      of
      common stock with a fair value of $40,000 for the settlement of an arbitration.
      The charge has been included in the statement of operations during the
      respective period.





Series
      A Convertible Preferred Stock –
      Each Series A convertible preferred stock is convertible into 80 shares of
      common stock ($1.25 per share of common). The holders are entitled to receive
      dividends on a quarterly basis at a rate of 9% per annum, per share. Such
      dividends are cumulative and accumulate whether or not declared by the Company’s
      Board of Directors, but are payable only when and if declared by the Company’s
      Board of Directors.





During
      the years ended September 30, 2007, 2006 and 2005, the Company’s Board of
      Directors declared in-kind dividends in the aggregate of 2,537, 1,996 and 2,143
      shares of Series A preferred stock, in payment of approximately $317,000,
      $300,000 and $322,000, respectively for dividends accumulated through March
      31
      of each year. The Company did not incur an additional charge for the in-kind
      dividends as the conversion price of the preferred stock exceeded the market
      price of the common stock underlying the conversion feature. As of September
      30,
      2007 and 2006, the amount of accumulated dividends for the Company’s 37,550 and
      33,516 issued and outstanding shares of Series A preferred stock was
      approximately $169,000 and $159,000, respectively.


F-23





During
      the fiscal year ended September
      30, 2007 a
      holder
      of the Series A convertible preferred stock converted 303 shares of preferred
      stock into 24,240 shares of common stock.





Series
      B Convertible Preferred Stock – In
      January 2006, the Company completed a
      financing transaction under which investors made a $2.0 million investment
      in
      the Company by purchasing an aggregate of the following:





·
            $1.0
                millionfor 10,000 shares of the Company’s Series B Convertible Preferred Stock
                and,


·
            11%
                convertible promissory notes in the principal amount of $1.0
                million,which
                were convertible into Common Stock at a price of $1.00 per
                sharewithwarrants
                to purchase an aggregate of 300,000 shares of Common Stock at an
                exercise
                price of $1.00 per share (See Note
                11).





The
      holders of the Series B Preferred Stock were entitled to dividends of 10% per
      annum, and each share of preferred stock was convertible into 133 shares of
      common stock ($.75 per share of common). D ividends
      were cumulative and were payable only when declared by the Company’s Board of
      Directors. Upon the issuance of the Series
      B
      Preferred Stock, the Company did not incur an additional charge for any
      beneficial conversion features as the conversion price of
      the
      preferred stock exceeded
      the market price of the
      common stock underlying the conversion feature . During
      the year ended September 30, 2007 and 2006, the Company declared and paid cash
      dividends on its Series B convertible preferred stock of $82,000 and $46,000,
      respectively.





Under
      a conversion
      option contained in its Series B preferred
      stock the Company was entitled to convert the preferred stock into common stock
      at a conversion price of $0.70 per share at any time if the following
      occur:





·
            The
                closing price of the common stock has equaled or exceeded $1.80 per
                share
                for 30 consecutive trading days and the trading volume exceeds 10,000
                during that 30 day period or


·
            The
                closing price of the common stock has equaled or exceeded $3.00 per
                share
                for 30 consecutive trading days regardless of the trading volume,
                and


·
            The
                shares of common stock into which the Series B Convertible Preferred
                Stock
                are convertible are then covered by an effective registration
                statement.





In
      the
      fourth quarter of fiscal year 2007, the
      Company exercised its conversion option and issued 1,333,333 shares of common
      stock for the retirement of the Series B
      convertible preferred stock. Accordingly, the Company is no
      longer
      obligated to pay dividends on the Series B convertible preferred
      stock.





Stock
      Options –
      The Company’s stock option plans provide for the granting of stock options to
      certain key employees, directors and investment executives. Generally, options
      outstanding under the Company’s stock option plan are granted at prices equal to
      or above the market value of the stock on the date of grant, vest either
      immediately or ratably over up to five years, and expire five years subsequent
      to award.


F-24




In
      February 2005, the Company issued 150,000 options to employees to purchase
      common stock. The options vested immediately at the date of the grant, have
      a
      5-year life and are exercisable at prices ranging from $1.25 to $1.375 per
      share. Prior to October 1, 2005, the Company applied APB Opinion No. 25,
“Accounting for Stock Issued to Employees” and accordingly did not record a
      charge for the options granted to employees.





In
      February 2005, prior to the adoption of SFAS No. 123R on October 1, 2005, the
      Company modified the terms of 522,000 existing options by restating the exercise
      price to a range from $1.25 to $1.375 and fully accelerated the vesting period
      for these options. Accordingly, the Company did not incur an additional charge
      for accelerating the vesting of these options.





In
      the
      fiscal year ended September 30, 2006, the Company issued options to purchase
      170,000 shares of its common stock. The options vest over periods from six
      months to two years, have a 5-year life and are exercisable at prices from
      $1.00
      to $1.35 per share. The fair value of the options was $88,000, and $20,000
      and
      $30,000 was charged to operations in the fiscal years ended September 2006
      and
      2007, respectively.





In
      the
      fiscal year ended September 30, 2007, the Company issued options to purchase
      1,120,000 shares of its common stock. The options vest over periods from six
      months to four years, have a 5-year life and are exercisable at prices from
      $1.30 to $2.50 per share. The fair value of the options was $1,052,000 and
      $137,000 was charged to operations in the fiscal year ended September
      2007.





In
      March
      2006, the Company’s shareholders approved the 2006 stock option plan that
      reserved 1,500,000 shares of common stock for issuance of options granted under
      such plan. A summary of the status of the Company’s stock options outstanding at
      September 30, 2007 is in the tables presented below.





Options Outstanding
            
            Options ExercisableRange of
              Exercise
              Prices
            
            Number
              Outstanding
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Weighted
              Average
              Exercise
              Prices
            
            Number
              Exercisable
            
            Weighted
              Average
              Exercise
              Prices$0.40-$1.00
            
            
            130,000
            
            
            2.57
            
            $
            0.90
            
            
            105,000
            
            $
            0.88$1.25-$1.375
            
            
            877,000
            
            
            2.79
            
            $
            1.32
            
            
            802,000
            
            $
            1.32$1.55-$1.705
            
            
            420,000
            
            
            4.45
            
            $
            1.57
            
            
            120,000
            
            $
            1.57$2.00-$2.50
            
            
            580,000
            
            
            4.56
            
            $
            2.59
            
            
            80,000
            
            $
            2.332,007,000
            
            
            
            
            
            
            
            
            1,107,000


F-25





Weighted
            
            AggregateAverage Price
            
            IntrinsicOutstanding
            
            Per Share
            
            ValueBalance,
                September 30, 2004
            
            
            1,025,150
            
            $
            3.47Granted
            
            
            672,000
            
            $
            1.32Forfeitures
            
            
            (903,483
            )
            $
            3.73Balance,
                September 30, 2005
            
            
            793,667
            
            $
            1.35
            
            $
            --Granted
            
            
            170,000
            
            $
            1.14Forfeitures
            
            
            (31,667
            )
            $
            1.58Balance,
                September 30, 2006
            
            
            932,000
            
            $
            1.30
            
            $
            56,000Granted
            
            
            1,120,000
            
            $
            1.88Exercised
            
            
            (20,000
            )
            $
            0.72Forfeitures
            
            
            (25,000
            )
            $
            2.00Balance,
                September 30, 2007
            
            
            2,007,000
            
            $
            1.62
            
            $
            2,359,000





As
      of
      September 30, 2007, the aggregate intrinsic value of the Company’s outstanding
      and exercisable options was $2,359,000 and $1,574,000,
      respectively.





Warrants –
      In April 2005, in connection with the resignation of the former chairmen of
      the
      Company, the Company issued to his designee, a three-year warrant to purchase
      50,000 shares of the Company’s common stock at $1.25 per share. The warrants
      were fully vested. Prior to October 1, 2005, the Company applied APB Opinion
      No. 25, “Accounting for Stock Issued to Employees” and accordingly did not
      record a charge for the warrant that was granted.





In
      January 2006, as further discussed in Notes 11 and 17, the Company completed
      a
      financing transaction that included five-year warrants to purchase 300,000
      shares of the Company’s common stock at $1.00 per share.





In
      February 2007, as further discussed in Note 12, the Company completed a
      financing transaction that included five-year warrants to purchase 250,000
      shares of the Company’s common stock at $1.40 per share.





During
      the years ended September 30, 2007 and 2005 the warrant holders exercised
      976,674 and 21,546 of their warrants and provided cash proceeds to the Company
      of $1,311,000 and $20,000, respectively. No warrants were exercised during
      the
      year ended September 30, 2006.


F-26


The
      following tables summarize information about warrants outstanding at September
      30, 2007.





Warrants





Shares
            
            Weighted Average
              Exercise Price
            
            ExercisableOutstanding
                at September 30, 2004
            
            
            2,325,076
            
            $
            1.36
            
            
            2,325,076Granted
            
            
            50,000
            
            $
            1.25Exercised
            
            
            (21,546
            )
            $
            0.93Expired
            
            
            (11,250
            )
            $
            3.61Outstanding
                at September 30, 2005
            
            
            2,342,280
            
            $
            1.36
            
            
            2,342,280Granted
            
            
            300,000
            
            $
            1.00Expired
            
            
            (76,923
            )
            $
            1.25Outstanding
                at September 30, 2006
            
            
            2,565,357
            
            $
            1.28
            
            
            2,565,357Granted
            
            
            250,000
            
            $
            1.40Exercised
            
            
            (976,674
            )
            $
            1.34Expired
            
            
            (1,088,683
            )
            $
            1.30Outstanding
                at September 30, 2007
            
            
            750,000
            
            $
            1.20
            
            
            750,000




Warrants
                Outstanding and ExercisableExercise Prices
            
            Number
              Outstanding
            
            Weighted Average
              Remaining
              Contractual Life
            
            Weighted Average
              Exercise Prices$1.00
            
            
            300,000
            
            
            3.28
            
            $
            1.00$1.25
            
            
            50,000
            
            
            0.5
            
            $
            1.25$1.25
            
            
            150,000
            
            
            0.83
            
            $
            1.25$1.40
            
            
            250,000
            
            
            4.42
            
            $
            1.40750,000





As
      of
      September 30, 2007, the aggregate intrinsic value of the Company’s outstanding
      and exercisable warrants was $1,200,000.




18.
            NET
                CAPITAL REQUIREMENTS





National
      Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
      Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
      National Securities has elected to use the alternative standard method permitted
      by the rule. This requires that National Securities maintain minimum net capital
      equal to the greater of $250,000 or a specified amount per security based on
      the
      bid price of each security for which National Securities is a market maker. At
      September 30, 2007, National Securities’ net capital exceeded the requirement by
      $2,134,000.




Advances,
      dividend payments and other equity withdrawals from its subsidiaries are
      restricted by the regulations of the SEC, and other regulatory agencies. These
      regulatory restrictions may limit the amounts that a subsidiary may dividend
      or
      advance to the Company.


F-27





19.
            EMPLOYEE
                BENEFITS





National
      Securities has a
      defined 401(k) profit sharing plan (the “Plan”) that covers substantially all of
      its employees. Under the terms of the Plan, employees can elect to defer up
      to
      25% of eligible compensation, subject to certain limitations, by making
      voluntary contributions to the Plan. The Company’s annual contributions are made
      at the discretion of the Board of Directors. During the fiscal years ended
      September 30, 2007, 2006 and 2005, the Company made no contributions to the
      Plan.





20.
            SUBSEQUENT
                EVENT





In
      November 2007, the Company entered into a definitive merger agreement vFinance,
      Inc., a
      publicly traded company who’s wholly owned subsidiary is also a registered
      broker-dealer with a similar business to National Securities. The
      merger agreement is subject to numerous conditions, including: execution of
      definitive transaction documents, compliance with state and federal securities
      laws and regulations, the completion of an equity financing with gross proceeds
      of at least $3.0 million, and corporate, shareholder and regulatory approvals.
      However, n o
      assurance can be given that the Company will consummate the merger with vFinance,
      Inc.


F-28





21.
            UNAUDITED
                QUARTERLY DATA





Selected
      Quarterly Financial Data (Dollars in thousands, except per share
      data)





December
            
            March
            
            June
            
            September31, 2005
            
            31, 2006
            
            30, 2006
            
            30, 2006Revenues
            
            $
            13,691
            
            $
            18,787
            
            $
            13,984
            
            $
            12,265Net
                income (loss)
            
            $
            259
            
            $
            424
            
            $
            152
            
            $
            (240
            )Preferred
                stock dividends
            
            
            (76
            )
            
            (95
            )
            
            (104
            )
            
            (106
            )Net
                income (loss) attributable to common stockholders
            
            $
            183
            
            $
            329
            
            $
            48
            
            $
            (346
            )Income
                (loss) per common share - Basic
            
            $
            0.04
            
            $
            0.06
            
            $
            0.01
            
            $
            (0.07
            )Income
                (loss) per common share - Diluted
            
            $
            0.04
            
            $
            0.04
            
            $
            0.01
            
            $
            (0.07
            )





December
            
            March
            
            June
            
            September31, 2006
            
            31, 2007
            
            30, 2007
            
            30, 2007Revenues
            
            $
            14,286
            
            $
            17,615
            
            $
            20,229
            
            $
            20,689Net
                income (loss)
            
            $
            (85
            )
            $
            576
            
            $
            1,561
            
            $
            (680
            )Preferred
                stock dividends
            
            
            (105
            )
            
            (103
            )
            
            (109
            )
            
            (92
            )Net
                income (loss) attributable to common stockholders
            
            $
            (190
            )
            $
            473
            
            $
            1,452
            
            $
            (772
            )Income
                (loss) per common share - Basic
            
            $
            (0.04
            )
            $
            0.09
            
            $
            0.26
            
            $
            (0.10
            )Income
                (loss) per common share - Diluted
            
            $
            (0.04
            )
            $
            0.05
            
            $
            0.14
            
            $
            (0.10
            )




Income
      (loss) per share for each quarter was computed independently using the
      weighted-average number of shares outstanding during the quarter. However,
      income (loss) per share for the year was computed using the weighted-average
      number of shares outstanding during the year. As a result, the sum of the income
      (loss) per share for the four quarters may not equal the full year income (loss)
      per share. The Company realized a majority of its investment banking revenue
      in
      the second and third quarters of fiscal year 2007. In the fourth quarter of
      fiscal year 2007, the Company incurred significant costs related to the
      expansion of its business operations, including the
      recruitment of new registered representatives .


F-29





22.
            FINANCIAL
                INFORMATION - NATIONAL HOLDINGS CORPORATION





National
      Holdings was organized in 1996 and began operations on February 6, 1997. The
      following National Holdings (parent company only) financial information should
      be read in conjunction with the other notes to the consolidated financial
      statements.





**STATEMENTS
      OF FINANCIAL CONDITION**





September
                30,
            
            September
                30,2007
            
            2006**ASSETS**Cash
            
            $
            189,000
            
            $
            134,000Investment
                in subsidiaries
            
            
            7,527,000
            
            
            4,309,000Other
                assets
            
            
            92,000
            
            
            252,000$
            7,808,000
            
            $
            4,695,000**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Accounts
                payable, accrued expensesand
                other liabilities
            
            $
            124,000
            
            $
            206,000Convertible
                notes payable
            
            
            862,000
            
            
            841,000Notes
                payable
            
            
            -
            
            
            805,000986,000
            
            
            1,852,000Stockholders'
                equity
            
            
            6,822,000
            
            
            2,843,000$
            7,808,000
            
            $
            4,695,000





**STATEMENTS
      OF OPERATIONS**





Years endedSeptember 30,
            
            September 30,
            
            September 30,2007
            
            2006
            
            2005Operating
                expenses
            
            $
            (1,056,000
            )
            $
            (1,017,000
            )
            $
            (1,247,000
            )Other
                income (expense)Gain
                on investment
            
            
            38,000
            
            
            192,000
            
            
            -Gain
                on investment in subsidiaries
            
            
            2,390,000
            
            
            1,420,000
            
            
            64,000Net
                income (loss) before income tax
            
            $
            1,372,000
            
            $
            595,000
            
            $
            (1,183,000
            )


F-30


**STATEMENTS
      OF CASH FLOWS**





Years endedSeptember 30, 2007
            
            September 30, 2006
            
            September 30, 2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            1,372,000
            
            $
            595,000
            
            $
            (1,183,000
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities (Gain) loss on investment in subsidiaries
            
            
            (2,315,000
            )
            
            (1,424,000
            )
            
            (157,000
            )Amortization
                of deferred financing costs
            
            
            30,000
            
            
            4,000
            
            
            -Amortization
                of note discount
            
            
            261,000
            
            
            189,000
            
            
            163,000Compensatory
                element of common stock issuance
            
            
            -
            
            
            12,000
            
            
            -Compensatory
                element of restricted common stock grant
            
            
            5,000
            
            
            -
            
            
            -Compensatory
                element of common stock option issuances
            
            
            29,000
            
            
            19,000
            
            
            -Issuance
                of common stock in settlement of arbitration
            
            
            -
            
            
            -
            
            
            40,000Changes
                in assets and liabilities
            
            
            -
            
            
            (154,000
            )
            
            1,021,000Net
                cash provided by (used in) operating activities
            
            
            (618,000
            )
            
            (759,000
            )
            
            (116,000
            )CASH
                FLOWS FROM INVESTING ACTIVITIES(Capital
                contributions to) advances from subsidiary - net
            
            
            (698,000
            )
            
            (5,000
            )
            
            17,000Net
                cash provided by (used in) investing activities
            
            
            (698,000
            )
            
            (5,000
            )
            
            17,000CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                proceeds from issuance of common stock and warrants
            
            
            -
            
            
            173,000
            
            
            -Net
                proceeds from issuance of preferred stock
            
            
            -
            
            
            972,000
            
            
            -Net
                proceeds from issuance of convertible notes payable
            
            
            -
            
            
            1,000,000
            
            
            -Net
                proceeds from issuance of notes payable and warrants
            
            
            1,000,000
            
            
            -
            
            
            -Cash
                payment of deferred financing costs
            
            
            (22,000
            )
            
            (28,000
            )
            
            -Payments
                of notes payable
            
            
            (850,000
            )
            
            (1,175,000
            )
            
            (75,000
            )Dividends
                paid
            
            
            (82,000
            )
            
            (46,000
            )
            
            -Exercise
                of stock options
            
            
            14,000
            
            
            -
            
            
            -Exercise
                of warrants
            
            
            1,311,000
            
            
            -
            
            
            19,000Net
                cash provided by financing activities
            
            
            1,371,000
            
            
            896,000
            
            
            (56,000
            )NET
                (DECREASE) INCREASE IN CASH
            
            
            55,000
            
            
            132,000
            
            
            (155,000
            )CASH
                BALANCEBeginning
                of year
            
            
            134,000
            
            
            2,000
            
            
            157,000End
                of year
            
            $
            189,000
            
            $
            134,000
            
            $
            2,000SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the year for:Interest
            
            $
            486,000
            
            $
            406,000
            
            $
            389,000Series
                B preferred stock dividends
            
            $
            82,000
            
            $
            46,000
            
            $
            -SUPPLEMENTAL
                  DISCLOSURES OF NONCASH INVESTING AND FINANCING
                  ACTIVITIESWarrants
                issued in connection with debt
            
            $
            194,000
            
            $
            187,000
            
            $
            125,000Series
                A preferred stock dividends
            
            $
            317,000
            
            $
            300,000
            
            $
            322,000Common
                stock issued to holders of convertible notes
            
            $
            1,024,000
            
            $
            -
            
            $
            -





F-31