UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


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

For the Quarter Ended June 30, 2004         Commission File Number 001-12629
                      -------------                                ---------

                      OLYMPIC CASCADE FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)


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


         875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611
--------------------------------------------------------------------------------
        (Address of principal executive offices)              (Zip code)

Registrant's telephone number, including area code:           (312) 751-8833

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 [X]  No  [ ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares  outstanding of registrant's  common stock, par value $0.02
per share, at August 12, 2004 was 3,634,332.


                                       1
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS


              OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

            CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                              June 30,        September 30,
                                                                                                2004               2003
                                                                                             (unaudited)     (see note below)
                                                                                           --------------    ---------------
<S>                                                                                            <C>                <C>
CASH                                                                                         $   313,000        $   451,000
DEPOSITS WITH CLEARING ORGANIZATIONS                                                             769,000          1,041,000
RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS                                     2,905,000          3,724,000
OTHER RECEIVABLES, net of reserve for uncollectible accounts of $725,000 and $650,000
            at June 30, 2004 and September 30, 2003, respectively                                810,000            709,000
ADVANCES TO REGISTERED REPRESENTATIVES                                                         1,674,000            644,000
SECURITIES HELD FOR RESALE, at market                                                            613,000            374,000
FIXED ASSETS, net                                                                                303,000            247,000
SECURED DEMAND NOTE                                                                            1,000,000          1,000,000
OTHER ASSETS                                                                                     592,000            545,000
                                                                                           --------------    ---------------

TOTAL ASSETS                                                                                 $ 8,979,000        $ 8,735,000
                                                                                           ==============    ===============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS                                         $        --        $   258,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market                                                741,000            116,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES                                       3,738,000          4,520,000
NOTES PAYABLE                                                                                  1,812,000          3,170,000
                                                                                           --------------    ---------------
TOTAL LIABILITIES                                                                              6,291,000          8,064,000
                                                                                           --------------    ---------------

SUBORDINATED BORROWINGS                                                                        1,000,000          1,000,000
                                                                                           --------------    ---------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
          Series A 9% cumulative convertible preferred stock, $.01 par value,
             50,000 shares authorized; 31,177 shares issued and outstanding
             (liquidation preference: $3,117,700) at June 30, 2004, and 27,825
             shares issued and outstanding (liquidation preference: $2,782,500)
             at September 30, 2003, respectively                                                      --                 --
          Common stock, $.02 par value, 30,000,000 shares authorized,  3,557,409
              shares and  3,367,558  shares issued and  outstanding  at June 30,
              2004 and
              September 30, 2003, respectively                                                    71,000             67,000
          Additional paid-in capital                                                          13,694,000         12,628,000
          Accumulated deficit                                                                (12,077,000)       (13,024,000)
                                                                                           --------------    ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                                           1,688,000           (329,000)
                                                                                           --------------    ---------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                         $ 8,979,000        $ 8,735,000
                                                                                           ==============    ===============
</TABLE>

Note:  The balance sheet at September 30, 2003 has been derived from the audited
consolidated financial statements at that date.


                                       2
<PAGE>



              OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                             Three Months Ended                      Nine Months Ended
                                                    -------------------------------------  ---------------------------------
                                                         June 30,            June 30,         June 30,          June 30,
                                                           2004                2003             2004              2003
                                                    -------------------   ---------------  ---------------   ---------------
REVENUES:
<S>                                                       <C>               <C>              <C>               <C>
     Commissions                                          $ 10,852,000      $ 10,566,000     $ 37,525,000      $ 22,461,000
     Net dealer inventory gains                              1,715,000         3,192,000        5,767,000         9,417,000
     Interest and dividends                                    937,000           359,000        2,468,000           975,000
     Transfer fees and clearing services                       769,000           572,000        2,098,000         1,293,000
     Investment banking                                        398,000           214,000        1,098,000           345,000
     Gain on extinguishment of debt                                 --                --        1,131,000                --
     Other                                                     183,000           172,000          515,000           570,000
                                                    -------------------   ---------------  ---------------   ---------------

TOTAL REVENUES                                              14,854,000        15,075,000       50,602,000        35,061,000
                                                    -------------------   ---------------  ---------------   ---------------

EXPENSES:
     Commissions                                            10,296,000        10,328,000       34,604,000        23,274,000
     Employee compensation and related expenses              1,399,000           898,000        4,207,000         2,979,000
     Clearing fees                                             635,000           769,000        2,397,000         1,993,000
     Communications                                            751,000           694,000        2,061,000         1,961,000
     Occupancy and equipment costs                             807,000           628,000        2,248,000         2,057,000
     Interest                                                  118,000            31,000          260,000           109,000
     Professional fees                                         637,000           382,000        1,462,000           912,000
     Litigation settlement                                          --                --          400,000                --
     Taxes, licenses, registration                             182,000            95,000          444,000           229,000
     Other                                                     339,000           887,000        1,069,000         1,935,000
                                                    -------------------   ---------------  ---------------   ---------------

TOTAL EXPENSES                                              15,164,000        14,712,000       49,152,000        35,449,000
                                                    -------------------   ---------------  ---------------   ---------------

NET INCOME (LOSS)                                             (310,000)          363,000        1,450,000          (388,000)

Preferred stock dividends                                      (70,000)          (62,000)        (196,000)         (187,000)
                                                    -------------------   ---------------  ---------------   ---------------

Net income (loss) attributable to common
 stockholders                                               $ (380,000)        $ 301,000      $ 1,254,000        $ (575,000)
                                                    ===================   ===============  ===============   ===============

NET INCOME (LOSS) PER COMMON SHARE

Basic:
     Net income (loss) attributable to common
     stockholders                                              $ (0.11)           $ 0.09           $ 0.37           $ (0.18)
                                                    ===================   ===============  ===============   ===============

Diluted:
     Net income (loss) attributable to common
     stockholders                                              $ (0.11)           $ 0.06           $ 0.21           $ (0.18)
                                                    ===================   ===============  ===============   ===============

Weighted average number of shares outstanding
     Basic                                                   3,397,885         3,367,558        3,377,630         3,110,530
                                                    ===================   ===============  ===============   ===============
     Diluted                                                 3,397,885         5,229,722        6,055,194         3,110,530
                                                    ===================   ===============  ===============   ===============
</TABLE>

                                       3
<PAGE>

              OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Nine Months Ended
                                                                        ------------------------------------------
                                                                           June 30, 2004         June 30, 2003
                                                                        -------------------   --------------------
<S>                                                                            <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                                           $ 1,450,000          $    (388,000)
   Adjustments to reconcile net income (loss) to net
   cash used in operating activities
          Depreciation and amortization                                            128,000                174,000
          Amortization of note discount                                             81,000                     --
          Provision for doubtful accounts                                           75,000                300,000
          Gain on extinguishment of debt                                        (1,131,000)                    --
          Forgiveness of loan                                                     (251,000)              (325,000)
   Changes in assets and liabilities
          Restricted cash                                                               --                309,000
          Deposits with clearing organizations                                     272,000                649,000
          Receivables from broker-dealers, clearing organizations
            and others                                                            (387,000)            (2,392,000)
          Securities held for resale, at market                                   (239,000)            (1,497,000)
          Other assets                                                             (47,000)              (292,000)
          Payables                                                              (1,037,000)             3,059,000
          Securities sold, but not yet purchased, at market                        625,000                190,000
                                                                       --------------------  ---------------------
   Net cash used in operating activities                                          (461,000)              (213,000)
                                                                       --------------------  ---------------------

CASH FLOWS FROM INVESTING ACTIVITIES
          Purchase of fixed assets                                                (184,000)               (65,000)
                                                                       --------------------  ---------------------

CASH FLOWS FROM FINANCING ACTIVITIES
          Net proceeds from issuance of notes payable and warrants               1,032,000                     --
          Payment of notes payable                                                (750,000)                49,000
          Decrease in cash overdraft                                                    --               (408,000)
          Net proceeds from issuance of common stock and warrants                       --                554,000
          Proceeds from exercise of employee stock options and warrants            225,000                     --
                                                                       --------------------  ---------------------
   Net cash provided by financing activities                                       507,000                195,000
                                                                       --------------------  ---------------------

NET DECREASE IN CASH                                                              (138,000)               (83,000)

CASH BALANCE
          Beginning of the period                                                  451,000                325,000
                                                                       --------------------  ---------------------

          End of the period                                                    $   313,000          $     242,000
                                                                        ===================   ====================

SUPPLEMENTAL  DISCLOSURES OF CASH FLOW  INFORMATION  Cash paid
          during the period for:
          Interest                                                             $    85,000          $     109,000
                                                                        ===================   ====================

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
             FINANCING ACTIVITIES
          Conversion of accounts payable to loan payable                       $        --          $     375,000
                                                                        ===================   ====================
          Gain on extinguishment of debt                                       $ 1,131,000          $          --
                                                                        ===================   ====================
          Exchange of accounts payable for common stock                        $        --          $      50,000
                                                                        ===================   ====================
          Forgiveness of loan                                                  $   251,000          $     325,000
                                                                        ===================   ====================
</TABLE>


                                       4
<PAGE>

              OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying  consolidated financial statements of Olympic Cascade Financial
Corporation  ("Olympic" or the "Company")  have been prepared in accordance with
generally accepted  accounting  principles for interim financial  statements and
with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 10-01 of Regulation S-X under the Exchange
Act.  Accordingly,  they do not include all of the  information  and disclosures
required for annual  financial  statements.  In the opinion of  management,  all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair  presentation  have been  included.  The condensed  consolidated  financial
statements  as of and for the three and nine month  periods  ended June 30, 2004
and June 30,  2003 are  unaudited.  The  results of  operations  for the interim
periods are not  necessarily  indicative  of the results of  operations  for the
fiscal  year.  These  consolidated   financial  statements  should  be  read  in
conjunction with the  consolidated  financial  statements and related  footnotes
included thereto in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2003.

Reclassifications  -  Certain  amounts  shown in the  prior  period's  condensed
consolidated  financial  statements  have been  reclassified to conform with the
current period's condensed consolidated financial statement presentation.  These
reclassifications  had no effect on net income  (loss) or  stockholders'  equity
(deficit) as previously presented.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

Stock-Based  Compensation - During the quarter ended March 31, 2003, the Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting
for  Stock-Based  Compensation  - Transition  and  Disclosure."  This  statement
amended SFAS No. 123,  "Accounting for Stock-Based  Compensation."  As permitted
under SFAS No. 123,  the Company  continues to apply the  Accounting  Principles
Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees." As required
under SFAS No. 148, the  following  table  presents pro forma net income  (loss)
attributable to common  stockholders for basic and diluted net income (loss) per
share as if the fair value-based method had been applied to all awards.

                                       5
<PAGE>
<TABLE>
<CAPTION>
                                                                   Three Months Ended                   Nine Months Ended
                                                           -----------------------------------  ----------------------------------
                                                            June 30, 2004     June 30, 2003      June 30, 2004    June 30, 2003
                                                           -----------------------------------  ----------------------------------
<S>                                                              <C>                  <C>            <C>               <C>
Net income (loss) attributable to common stockholders - as
reported                                                         $ (380,000)          301,000        $ 1,254,000       $ (575,000)

Stock-based employee compensation cost determined  under
fair value method, net of tax effects                               (90,000)          (11,000)          (163,000)         (26,000)

                                                           -----------------------------------  ----------------------------------
Net income (loss) attributable to common stockholders - pro
forma                                                            $ (470,000)          290,000        $ 1,091,000       $ (601,000)
                                                           ===================================  ==================================

Earnings (loss) per share

Basic earnings (loss) per share:
Net income (loss) attributable to common stockholders - as
reported                                                         $    (0.11)           $ 0.09             $ 0.37          $ (0.18)

Per share stock-based employee compensation cost
determined under fair value method, net of tax effects                (0.03)                -              (0.05)           (0.01)

                                                           -----------------------------------  ----------------------------------
Net income (loss) attributable to common stockholders - pro
 forma                                                           $    (0.14)           $ 0.09             $ 0.32          $ (0.19)
                                                           ===================================  ==================================

Diluted earnings (loss) per share:
Net income (loss) attributable to common stockholders - as
reported                                                         $    (0.11)           $ 0.06             $ 0.21          $ (0.18)

Per share stock-based employee compensation cost
determined under fair value method, net of tax effects                (0.03)                -              (0.03)           (0.01)

                                                           -----------------------------------  ----------------------------------
Net income (loss) attributable to common stockholders - pro
forma                                                            $    (0.14)           $ 0.06             $ 0.18          $ (0.19)
                                                           ===================================  ==================================
</TABLE>


The Black-Scholes  option valuation model was used to estimate the fair value of
the options granted in the quarter and nine months ended June 30, 2004 and 2003.
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. Principal assumptions used in applying
the Black-Scholes model along with the results from the model were as follows:

                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                   2004          2003
                                               --------      --------
<S>                                                <C>           <C>
Assumptions:
Risk-free interest rate                            2.48%         4.01%

Dividend                                           0.00%         0.00%

Expected life, in years                             3.0           5.0

Expected volatility                                 123%          311%

Results:
Fair value of options granted                  $   1.47      $   0.36
</TABLE>




In January 2003,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Interpretation  Number 46,  "Consolidation of Variable Interest  Entities" ("FIN
No. 46"). This  interpretation  of Accounting  Research Bulletin ("ARB") No. 51,
"Consolidated   Financial  Statements,"  provides  guidance  for  identifying  a
controlling  interest in a variable interest entity ("VIE") established by means
other than voting interests.  FIN No. 46 also requires consolidation of a VIE by
an enterprise that holds such a controlling interest. In December 2003, the FASB
completed its  deliberations  regarding the proposed  modification to FIN No. 46
and issued  Interpretation  Number 46(R),  "Consolidation  of Variable  Interest
Entities - an  Interpretation  of ARB No. 51" ("FIN No.  46(R)").  The decisions
reached  included a deferral of the effective date and provisions for additional
scope exceptions for certain types of variable interests. Application of FIN No.
46(R) is required in financial statements of public entities that have interests
in VIEs or potential VIEs commonly referred to as  special-purpose  entities for
periods ending after December 15, 2003.  Application by public  entities  (other
than small  business  issuers)  for all other  types of  entities is required in
financial statements for the first reporting period ending after March 15, 2004.
The  adoption  of FIN  No.  46(R)  did  not  have  an  impact  on the  Company's
consolidated financial position, results of operations or cash flows.

NOTE 3 - SECURITIES HELD FOR RESALE AND SECURITIES SOLD, BUT NOT YET PURCHASED

The following  table shows the quoted market values of the Company's  securities
held for resale and securities sold, but not yet purchased as of June 30, 2004:


                              Securities held           Securities sold, but
                                for resale               not yet purchased
                           ----------------------      -----------------------
Corporate Stocks                       $ 255,000                    $ 148,000
Corporate Bonds                           10,000                      194,000
Government Obligations                   348,000                      399,000
                           ----------------------      -----------------------
                                       $ 613,000                    $ 741,000
                           ======================      =======================


NOTE 4 - CLEARING AGREEMENTS

In the first quarter of fiscal year 2003,  First  Clearing  Corporation  ("First
Clearing") loaned the Company an additional $375,000 in the form of clearing fee
rebates. The loan was payable in January 2004.

In December 2003, the Company engaged in various  discussions  with the National
Association of Securities  Dealers,  Inc. (the "NASD")  relating to the Security
Agreement between National Securities  Corporation,  the Company's  wholly-owned


                                       7
<PAGE>

subsidiary ("National") and First Clearing, and its effect on the computation of
National's net capital. As a result of these discussions,  on December 15, 2003,
the  Company  and First  Clearing  agreed in  principle  to the  following:  (1)
National's  clearing  deposit was reduced from  $1,000,000 to $500,000;  (2) the
excess  $500,000  resulting  from this  reduction was paid to First  Clearing to
reduce the Company's  outstanding  loan balance on its promissory  note to First
Clearing; and (3) the Security Agreement between National and First Clearing was
terminated.  Furthermore,  First Clearing  forgave  payment of the $375,000 loan
that  was  due to be paid in  January  2004,  resulting  in a  $375,000  gain on
extinguishment  of debt in the first  quarter of fiscal  year 2004.  National is
required to 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 is a market maker.  At June 30, 2004,  National's net capital  exceeded
the requirement by $518,000.

In February 2004,  the Company paid First  Clearing  $250,000 to fully repay its
promissory note that had a balance of approximately  $1,006,000 at such time. As
a  result  of the  repayment  of  this  note,  the  Company  realized  a gain on
extinguishment of debt of approximately $756,000 in the second quarter of fiscal
year  2004.  Additionally,  National  and  First  Clearing  mutually  agreed  to
terminate their clearing relationship by June 30, 2004.

On June 22, 2004,  National  entered into an agreement  with Fiserv  Securities,
Inc.  ("Fiserv")  to clear its brokerage  business.  The  conversion  from First
Clearing  to Fiserv is  expected  to be  completed  in the first week of October
2004. As part of this transaction, Fiserv will provide National with an $800,000
conversion assistance payment,  $250,000 of which was paid upon execution of the
clearing  agreement,  $250,000  of which is  payable  in  mid-August  2004,  and
$300,000 of which is payable upon  completion of the conversion in October 2004.
The Company  believes that the overall  effect of the new clearing  relationship
will be  beneficial  to the  Company's  cost  structure,  liquidity  and capital
resources.

NOTE 5 - CONTINGENCIES

In April  2002,  a former  executive  officer of the  Company,  Craig M.  Gould,
commenced  an action  against  the Company  claiming a breach of his  employment
contract,  and  seeking  approximately  $850,000  in  damages.  The  arbitration
commenced in July 2003 and was completed in December  2003. In January 2004, the
arbitration panel awarded damages against the Company of approximately  $400,000
that was accrued in the quarter ended  December 31, 2003.  The Company paid this
award during the quarter ended March 31, 2004.

In June 2002,  National was named,  together  with  others,  as a defendant in a
class action lawsuit relating to a series of private placements of securities of
Fastpoint Communications, Inc. in the Superior Court for the State of California
for the County of San Diego. Plaintiffs are seeking approximately $14.0 million,
but no  specific  amount of damages  has been  sought  against  National  in the
complaint.  National  filed its answer in April 2003. In January 2004, the court
entered an order denying class certification. Plaintiffs have filed an appeal of
this order and briefing has  recently  commenced.  The action in the lower court
has been stayed.  National  believes it has meritorious  defenses and intends to
vigorously  defend this  action,  although  the  ultimate  outcome of the matter
cannot be determined at this time. Accordingly, no adjustments have been made in
the consolidated financial statements in response to this matter.

The NASD has recently  commenced an  industry-wide  investigation of mutual fund
trading  activities.  National is one of the numerous  broker-dealers  that have
been  contacted  by the NASD with  respect to this  investigation.  The NASD has
identified  certain customer mutual fund  transactions  ordered through National
during the time period from October  2000 to February  2003 that it believes may
have constituted mutual fund timing and/or excessive trading activity.  National
has been  engaged  in  ongoing  discussions  and  negotiations  with the NASD to
informally resolve these matters.  Such resolution could result in a settlement,


                                       8
<PAGE>

whereby National,  without admitting or denying any violations,  would make both
restitution and pay a fine to the NASD, that in the aggregate would  approximate
$600,000.  Despite our on-going  discussions and negotiations  with the NASD, no
assurances can be given that informal resolution will be achieved, that a formal
proceeding will not be commenced,  or that the possible resulting  penalties and
fines would not be in a materially  greater amount. If required to litigate this
matter, National believes it has meritorious defenses, and if necessary, intends
to  vigorously  defend this  matter,  although the  ultimate  outcome  cannot be
determined  at this  time.  Accordingly,  no  adjustments  have been made in the
consolidated financial statements in response to this matter.

The Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, seeking damages aggregating approximately $2.2
million  (exclusive of specified punitive damages of approximately $5.6 million,
unspecified  punitive  damages related to certain claims and expected  insurance
coverage).  The Company has filed a counterclaim for  approximately  $220,000 in
one such  proceeding.  These matters arise out of the normal course of business.
The Company intends to vigorously  defend itself in these actions,  although the
ultimate outcome of these matters cannot be determined at this time. At June 30,
2004,  the  amount  of  $388,000  related  to such  matters  that is  reasonably
estimable has been  included in "Accounts  Payable,  Accrued  Expenses and Other
Liabilities" on the accompanying condensed consolidated  statements of financial
condition.  The Company has included in "Professional  fees" litigation and NASD
related  expenses of $484,000 and $1,183,000 in the third quarter and first nine
months of fiscal year 2004, respectively.

NOTE 6 - CUMULATIVE DIVIDENDS ON CONVERTIBLE PREFERRED STOCK

The holders of the Company's Series A Convertible Preferred Stock (the "Series A
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 accrue
whether or not declared by the  Company's  Board of  Directors,  but are payable
only when,  as and if declared by the  Company's  Board of  Directors.  In March
2004,  the  Company's  Board of  Directors  declared an in-kind  dividend in the
aggregate  of  3,352  shares  of  Series  A  Preferred   Stock,  in  payment  of
approximately  $503,000 of dividends  accrued  through  January 31,  2004.  Such
shares  were  issued  on  March  31,  2004.  At June 30,  2004,  the  amount  of
accumulated  dividends on the Company's 31,177 issued and outstanding  shares of
Series A Preferred Stock was $111,000.

NOTE 7 - INCOME (LOSS) PER COMMON SHARE

Basic income  (loss) per share is computed on the basis of the weighted  average
number of common shares outstanding. Diluted 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. Stock options and warrants, and
conversion of the Series A Preferred Stock,  were excluded from the diluted loss
per share computation for the three-month period ended June 30, 2004 and for the
nine-month  period  ended June 30, 2003,  since the Company  incurred a loss for
these periods and the inclusion of such securities would be antidilutive.


                                       9
<PAGE>

The following  table sets forth the components  used in the computation of basic
and diluted income (loss) per common share:

<TABLE>
<CAPTION>
                                                           Three Months Ended                     Nine Months Ended
                                                    ----------------------------------    ----------------------------------
                                                     June 30, 2004    June 30, 2003        June 30, 2004    June 30, 2003
                                                    ----------------------------------    ----------------------------------
<S>                                                    <C>               <C>                <C>               <C>
Net income (loss) attributable to
 common stockholders - basic                           $ (310,000)     $   363,000          $ 1,450,000       $ (388,000)

Effect of dilutive securities -
 preferred stock dividends                                (70,000)         (62,000)            (196,000)        (187,000)

                                                    ----------------------------------    ----------------------------------
Net income (loss) attributable
 to common stockholders - diluted                      $ (380,000)     $   301,000          $ 1,254,000       $ (575,000)
                                                    ==================================    ==================================

Basic-weighted average common shares
 outstanding                                            3,397,885        3,367,558            3,377,630        3,110,530

Dilutive stock options and warrants                             -            7,166              599,099                -

Weighted average assumed conversion of 9%
   cumulative convertible preferred stock                       -        1,854,998            2,078,465                -

                                                    ----------------------------------    ----------------------------------
Diluted-weighted average common shares
 outstanding                                            3,397,885        5,229,722            6,055,194        3,110,530
                                                    ==================================    ==================================

Net income (loss) attributable to common
 stockholders - basic                                  $    (0.11)     $      0.09          $      0.37       $    (0.18)
                                                    ==================================    ==================================

Net income (loss) attributable to common
 stockholders - diluted                                $    (0.11)     $      0.06          $      0.21       $    (0.18)
                                                    ==================================    ==================================
</TABLE>


For the three-month  periods ended June 30, 2004 and 2003,  2,747,647 shares and
2,356,065  shares,  respectively,  attributable to outstanding stock options and
warrants  were excluded  from the  calculation  of diluted net income (loss) per
share because the effect was antidilutive. For the nine-month periods ended June
30,  2004  and  2003,   975,150  shares  and  2,376,065  shares,   respectively,
attributable  to  outstanding  stock options and warrants were excluded from the
calculation  of diluted  net  income  (loss)  per share  because  the effect was
antidilutive.

NOTE 8 - THE AMERICAN STOCK EXCHANGE

In February 2003, the Company received a letter from The American Stock Exchange
(the  "Exchange")  indicating that it was not in compliance with certain listing
standards  relating to (1)  shareholders'  equity of less than $2.0  million and
losses from continuing operations and/or net losses in two out of its three most
recent  fiscal  years,  and (2) the  requirement  to have and  maintain an audit
committee  comprised  of at  least  three  independent  directors.  The  Company
submitted to the Exchange a plan that indicated  compliance with these items. In
May 2003,  the Exchange  notified the Company that it had accepted the Company's
plan of compliance and granted the Company an extension  until August 5, 2004 to
satisfy the financial  standards  requirements,  and an extension until July 18,
2003 to comply  with the  independent  audit  committee  requirement,  which was
satisfied in July 2003.  The Company  will be subject to periodic  review by the
Exchange Staff during the extension  period.  As of August 12, 2004, the Company
has not  received  any  notification  from  the  Exchange  with  respect  to the


                                       10
<PAGE>

financial standards  requirements.  Failure to make progress consistent with the
plan or to regain  compliance with the continued listing standards by the end of
the extension  period could result in the Company's  common stock being delisted
from the  Exchange.  In the event  that the  Company  fails to  comply  with the
listing  standards,  the Company's  common stock could trade on the OTC Bulletin
Board or in the "pink sheets" maintained by the National Quotation Bureau,  Inc.
Such alternatives are generally considered to be less efficient markets, and the
Company's stock price,  as well as the liquidity of the Company's  common stock,
may be adversely impacted as a result.

NOTE 9 - EXTENSION OF NOTES

In February 2004,  National and the holder of a $1.0 million secured demand note
that matured on February 1, 2004,  extended the term of the $1.0 million secured
demand  note to  March  1,  2005.  Upon  completion  of the  note  renewal,  the
noteholder's  warrant to purchase 75,000 shares of the Company's common stock at
a price of $5.00 per share, that was to expire on February 1, 2004, was repriced
to $1.25 per share, with an allocated fair value of approximately  $68,000,  and
the  expiration  date of such  warrants  was  extended  to July  31,  2005.  The
expiration date for the  noteholder's  warrant to purchase an additional  75,000
shares  of the  Company's  common  stock at a price of $1.75  per share was also
extended from January 25, 2004 to July 31, 2005.

In January  2004,  two other  noteholders  extended the  maturity  dates on $1.0
million of notes issued to them by the Company from January 25, 2004 to July 31,
2005.  Effective  February 1, 2004, the interest rate on each note was increased
to 12% from 9% per annum.  Additionally,  each of the  noteholders'  warrants to
purchase,  in the aggregate,  100,000 shares of the Company's  common stock at a
price of $5.00 per share  expiring on February 1, 2004 was repriced to $1.25 per
share, with an allocated fair value of approximately $90,000, and the expiration
date of such warrants was extended to July 31, 2005. The expiration date for the
noteholders'  warrants to purchase,  in the  aggregate,  an  additional  100,000
shares  of the  Company's  common  stock at a price of $1.75  per share was also
extended from January 25, 2004 to July 31, 2005.

The Company is amortizing  the total  allocated  fair value of $158,000 over the
extended  18-month term of these notes.  Such  amortization has been included in
"Interest" on the accompanying  condensed  consolidated  June 30, 2004 financial
statements.

NOTE 10 - PRIVATE PLACEMENTS

In January 2004, the Company consummated a private offering of its securities to
a limited  number of accredited  investors  pursuant to Rule 506 of Regulation D
under the Securities Act of 1933, as amended (the "Securities  Act") wherein the
Company issued an aggregate of $200,000 of three-year,  10% senior  subordinated
promissory  notes  to  five  unaffiliated   parties.  The  noteholders  received
three-year  warrants to purchase an aggregate of 50,000  shares of the Company's
common stock at an exercise  price of $1.40 per share,  with an  allocated  fair
value of approximately $40,000.

In February 2004, the Company  consummated a private  offering of its securities
to a limited number of accredited investors pursuant to Rule 506 of Regulation D
under the  Securities Act wherein the Company issued an aggregate of $850,000 of
three-year,  10%  senior  subordinated  promissory  notes  to four  unaffiliated
parties.  The noteholders  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 an allocated  fair value of  approximately  $143,000.  National
acted as the placement agent for the private  offering.  The offering period for
the private offering expired on May 30, 2004.

The Company is amortizing  the total  allocated  fair value of $183,000 over the
three-year term of these promissory  notes.  Such amortization has been included
in "Interest" on the accompanying condensed consolidated June 30, 2004 financial
statements.  The holders of the warrants  received certain  registration  rights
relating to the common stock issuable upon exercise of the warrants.


                                       11
<PAGE>

NOTE 11 - STOCKHOLDERS' EQUITY

At the  Company's  annual  meeting  of  shareholders  on  March  16,  2004,  the
shareholders voted, effective immediately, to amend the Company's Certificate of
Incorporation  to decrease the number of shares of the  Company's  common stock,
par value $.02 per share,  from 60,000,000 shares to 30,000,000  shares,  and to
increase the number of shares of Preferred Stock, par value $.01 per share, from
100,000 shares to 200,000 shares.

In the quarter ended June 30, 2004,  the Company  received  proceeds of $225,000
from the exercise of outstanding employee stock options and warrants.


PART II.  OTHER INFORMATION

ITEM 2 -  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 Quarterly 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 the
Company's  Annual Report on Form 10-K,  filed with the  Securities  and Exchange
Commission on December 29, 2003. Any forward-looking  statements contained in or
incorporated  into  this  Quarterly  Report  speak  only as of the  date of this
Quarterly  Report.  The Company  undertakes no obligation to update publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

The  Company's  third  quarter of fiscal year 2004  resulted  in  revenues  only
slightly  lower  compared to the third quarter of fiscal year 2003,  but sharply
lower compared to the second quarter of fiscal year 2004, and a modest  increase
in  expenses  compared  to the same period  last year.  The lower  revenues  are
primarily due to the recent weaker securities  markets. As a result, the Company
reported a net loss before  income  taxes of $310,000  compared  with net income
before income taxes of $363,000 for the third  quarters of fiscal years 2004 and
2003, respectively.

Total revenues  decreased  $221,000,  or 1%, in the third quarter of fiscal year
2004 to $14,854,000  from  $15,075,000 in the third quarter of fiscal year 2003.
This decrease reflects the weaker securities markets that impact trading volume,
the number of  commission  tickets  generated,  and the  charge per ticket  that
affects  commission  revenue.  During  the third  quarter  of fiscal  year 2004,
trading volume increased by approximately  14%, compared to the third quarter of
fiscal year 2003.  Commission revenue increased $286,000,  or 3%, to $10,852,000
from $10,566,000  during the third quarter of fiscal year 2004 compared with the


                                       12
<PAGE>

same period in fiscal year 2003.  Net dealer  inventory  gains,  which  includes
profits on proprietary  trading,  market making activities and customer mark-ups
and  mark-downs,  decreased  $1,477,000,  or 46%, to $1,715,000  from $3,192,000
during the third  quarter of fiscal year 2004  compared  with the same period in
fiscal year 2003.  The decrease is primarily  due to a reduction in  proprietary
trading in the bond market,  reflecting an overall  decline in this market,  and
the weaker  equity  markets in general.  During the third quarter of fiscal year
2004,  revenues  from  proprietary  trading  decreased  $1,337,000,  or 46%,  to
$1,561,000  from  $2,898,000 in the third quarter of fiscal year 2003,  revenues
from market  making  activities  decreased  $85,000,  or 37%,  to $147,000  from
$232,000 in the third  quarter of fiscal year 2003,  and revenues  from customer
mark-ups and mark-downs decreased $56,000, or 89%, to $7,000 from $63,000 in the
third quarter of fiscal year 2003.

Investment banking revenue increased $184,000, or 86%, to $398,000 from $214,000
in the third  quarter of fiscal  year 2004  compared  with the third  quarter of
fiscal year 2003. The increase in investment  banking  revenues is attributed to
the Company's  completion of private  placements and an initial public  offering
during the current quarter.  Interest and dividend income increased  $578,000 or
161%,  to  $937,000  from  $359,000  in the third  quarter  of fiscal  year 2004
compared  with the same period  last year.  The  increase in interest  income is
attributable  to an  increase  in the amount of  customer  debits in  National's
customers'  accounts and an increase in the interest rate charged to such debits
from the same period last year.  Transfer fees  increased  $197,000,  or 34%, to
$769,000  in the third  quarter of fiscal  year 2004 from  $572,000 in the third
quarter of fiscal year 2003.  The increase is due to  increased  fees charged on
certain accounts.

Other revenue, consisting of asset management fees and miscellaneous transaction
fees and trading  fees,  increased  $11,000,  or 6%, to $183,000  from  $172,000
during the third  quarter of fiscal year 2004  compared to the third  quarter of
fiscal year 2003. The increase is due to an increase in asset management fees in
the third quarter of fiscal year 2004 compared to the same period last year.

In comparison with the 1% decrease in total revenues,  total expenses  increased
3% or $452,000 to $15,164,000 for the third quarter of fiscal year 2004 compared
to  $14,712,000  in the third quarter of fiscal year 2003. The increase in total
expenses is  primarily  attributable  to  increased  employee  compensation  and
increased professional fees.

Commission expense,  which includes expenses related to commission revenue,  net
dealer inventory gains and investment  banking,  decreased $32,000, or less than
1%, to $10,296,000 in the third quarter of fiscal year 2004 from  $10,328,000 in
the third  quarter of fiscal year 2003. In the third quarter of fiscal year 2004
compared to the third quarter of fiscal year 2003, commission expense related to
commission revenue increased $1,060,000,  or 13%, to $9,230,000 from $8,170,000;
commission  expense related to net dealer inventory gains decreased  $1,239,000,
or  62%,  to  $748,000  from  $1,987,000;  and  commission  expense  related  to
investment banking increased  $147,000,  or 86%, to $318,000 from $171,000.  The
increase of commission  expense as a percentage  of commission  revenues and the
decrease of commission expense as a percentage of net dealer inventory gains are
both attributable to changes in the production of particular brokers, not all of
whom are  compensated  at the same  commission  rate.  Commission  expense  as a
percentage  of investment  banking was  relatively  unchanged  between the third
quarter  of  fiscal  year  2004 and the  third  quarter  of  fiscal  year  2003.
Commission   expense   includes  the  amortization  of  advances  to  registered
representatives  of $215,000 and  $198,000 for the third  quarter of fiscal year
2004 and 2003,  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.

Employee  compensation expense increased $501,000,  or 56%, to $1,399,000 in the
third  quarter of fiscal year 2004 from  $898,000 in the third quarter of fiscal
year 2003.  This  increase is  attributable  to the hiring of new  employees and
salary  increases  for  certain  employees.  Overall,  combined  commission  and
employee  compensation expense, as a percentage of revenue increased to 79% from
74% in the third quarter of fiscal year 2004 and 2003, respectively.


                                       13
<PAGE>

Clearing fees  decreased  $134,000,  or 17%, to $635,000 in the third quarter of
fiscal  year 2004  from  $769,000  in the third  quarter  of fiscal  year  2003.
Clearing  fees in the third  quarter  of fiscal  year 2004 were  reduced  by the
$250,000  conversion  assistance  payment  the  Company  received  from  its new
clearing firm,  Fiserv, to offset  conversion costs incurred by the Company.  In
the third quarter of fiscal year 2003, clearing fees were reduced by forgiveness
of debt,  that was fully repaid in February  2004,  from the  Company's  current
clearing  firm based on ticket  volume in the amount of $133,000.  Communication
expenses  increased  $57,000,  or 8%, to  $751,000  from  $694,000  in the third
quarter of fiscal year 2004  compared to the third  quarter of fiscal year 2003.
The increase is due to an increase in voice and data  charges.  Occupancy  costs
increased  $179,000,  or 29%, to $807,000  from $628,000 in the third quarter of
fiscal year 2004 compared to the third quarter of fiscal year 2003. The increase
in occupancy  expense is due to the  expansion of office  facilities in order to
accommodate  new  brokers.  Professional  fees  increased  $255,000,  or 67%, to
$637,000  from $382,000 in the third quarter of fiscal year 2004 compared to the
third quarter of fiscal year 2003. The increase in  professional  fees is due to
an increase in the legal fees relating to various lawsuits and arbitrations, and
legal fees related to the NASD  investigation of mutual fund trading  activities
and other  regulatory  matters.  Professional  fees include  litigation and NASD
related  expenses of $484,000 and  $213,000 in the third  quarter of fiscal year
2004 and 2003, respectively.

Interest  expense  increased  $87,000,  or 281%, to $118,000 from $31,000 in the
third  quarter of fiscal year 2004  compared to the third quarter of fiscal year
2003.  The increase is due to interest on the notes issued by the Company in the
second quarter of fiscal year 2004, and the amortization of $42,000 attributable
to newly issued  notes and  modified  notes.  Taxes,  licenses and  registration
increased  $87,000,  or 92%, to $182,000  from  $95,000 in the third  quarter of
fiscal year 2004 compared to the third quarter of fiscal year 2003. The increase
in taxes,  licenses and registration expense is due to an increase in the number
of brokers  associated  with the Company from the prior period.  Other  expenses
decreased  $548,000,  or 62%, to $339,000  from $887,000 in the third quarter of
fiscal year 2004 compared to the third quarter of fiscal year 2003. The decrease
in other expenses is due to the Company's efforts to control its fixed operating
expenses,  net of an increase in the reserve for  uncollectible  accounts on its
other receivables,  related to registered  representatives  formerly  associated
with  National  in the amount of $75,000 and  $300,000  in the third  quarter of
fiscal year 2004 and 2003, respectively.

The  Company  reported a net loss before  income  taxes of $310,000 in the third
quarter of fiscal  year 2004  compared  to net  income  before  income  taxes of
$363,000 in the third quarter of fiscal year 2003.

Overall,  the diluted net loss attributable to common  stockholders in the third
quarter of fiscal year 2004 was $380,000,  or $.11 per common share, as compared
to diluted net earnings attributable to common stockholders of $301,000, or $.06
per  common  share in the  third  quarter  of  fiscal  year  2003.  The net loss
attributable  to common  stockholders  for the third quarter of fiscal year 2004
and the net income  attributable to common stockholders for the third quarter of
fiscal year 2003  reflects  $70,000 and  $62,000,  respectively,  of  cumulative
dividends on the Company's Series A Preferred Stock.

Nine Months Ended June 30, 2004 Compared to Nine Months Ended June 30, 2003

The  Company's  first nine months of fiscal year 2004  resulted in a significant
increase in revenues,  and a comparatively  lesser increase in expenses compared
to the same period last year.  The increase in revenues is primarily  due to the
improved  securities  markets  experienced  during  the first six  months of the
fiscal year,  which  weakened  during the third quarter of fiscal year 2004, and
the gain on  extinguishments  of debt. As a result of this overall  improvement,
the Company reported net income before income taxes of $1,450,000  compared with
a net loss before  income  taxes of $388,000 for the first nine months of fiscal
years 2004 and 2003, respectively.  This represents an improvement of $1,838,000
from the prior period.


                                       14
<PAGE>

Total revenues increased $15,541,000, or 44%, in the first nine months of fiscal
year 2004 to  $50,602,000  from  $35,061,000  in the first nine months of fiscal
year 2003.  This  increase  is mainly  due to the  improved  securities  markets
experienced  during  the first  six  months of the  fiscal  year that  increased
commission revenues, the number of commission tickets generated,  and the charge
per ticket  that  affects  commission  revenue.  During the first nine months of
fiscal year 2004, trading volume increased by approximately 27%, compared to the
first nine months of fiscal year 2003. Commission revenue increased $15,064,000,
or 67%, to $37,525,000 from  $22,461,000  during the first nine months of fiscal
year 2004  compared  with the same  period  in  fiscal  year  2003.  Net  dealer
inventory gains,  which includes profits on proprietary  trading,  market making
activities and customer mark-ups and mark-downs,  decreased $3,650,000,  or 39%,
to $5,767,000 from  $9,417,000  during the first nine months of fiscal year 2004
compared  with the same  period in fiscal  year 2003.  The  decrease is due to a
reduction  in  proprietary  trading in the bond  market,  reflecting  an overall
decline in this market  compared to the strength  realized in the equity markets
during the first six months of the current  fiscal  year.  During the first nine
months  of  fiscal  year  2004,  revenues  from  proprietary  trading  decreased
$3,528,000,  or 41%, to $4,987,000  from  $8,515,000 in the first nine months of
fiscal year 2003,  revenues from market making activities  decreased $78,000, or
11%, to $663,000 from $741,000 in the first nine months of fiscal year 2003, and
revenues from customer  mark-ups and mark-downs  decreased  $44,000,  or 27%, to
$117,000 from $161,000 in the first nine months of fiscal year 2003.

Investment  banking  revenue  increased  $753,000,  or 218%, to $1,098,000  from
$345,000 in the first nine months of fiscal  year 2004  compared  with the first
nine months of fiscal year 2003. The increase in investment  banking revenues is
attributed to the  Company's  completion  of private  placements  and an initial
public  offering  during  the  current  period.  Interest  and  dividend  income
increased  $1,493,000  or 153%,  to  $2,468,000  from $975,000 in the first nine
months of fiscal year 2004 compared with the same period last year. The increase
in  interest  income is  attributable  to an  increase in the amount of customer
debits in  National's  customers'  accounts and an increase in the interest rate
charged to such debits from the same period last year.  Transfer fees  increased
$805,000,  or 62%,  to  $2,098,000  in the first nine months of fiscal year 2004
from  $1,293,000  in the first nine months of fiscal year 2003.  The increase is
due to the increase in transaction  volume  associated with the Company's retail
brokerage  business  during  the  first  six  months of the  current  year,  and
increased fees charged on certain accounts.

The Company  realized a gain on  extinguishment  of debt of $1,131,000  from its
clearing firm, First Clearing, in the first nine months of fiscal year 2004 (See
Note 4). Other revenue,  consisting of asset  management fees and  miscellaneous
transaction fees and trading fees,  decreased $55,000,  or 10%, to $515,000 from
$570,000  during the first nine months of fiscal year 2004 compared to the first
nine  months  of  fiscal  year  2003.  The  decrease  is  due  to  reduced  fees
attributable to a reduction in the volume of institutional business in the first
nine months of fiscal year 2004 compared to the same period last year.

In comparison with the 44% increase in total revenues,  total expenses increased
39% or $13,703,000 to $49,152,000  for the first nine months of fiscal year 2004
compared  to  $35,449,000  in the first nine  months of fiscal  year  2003.  The
increase in total expenses is primarily a result of greater commission  expenses
directly associated with commission revenues. The increase in total expenses was
minimized by the Company's  efforts to streamline its operations and control the
fixed expenses associated with its business.

Commission expense,  which includes expenses related to commission revenue,  net
dealer inventory gains and investment banking, increased $11,330,000, or 49%, to
$34,604,000 in the first nine months of fiscal year 2004 from $23,274,000 in the
first nine months of fiscal  year 2003.  In the first nine months of fiscal year
2004 compared to the first nine months of fiscal year 2003,  commission  expense
related to commission revenue increased $13,574,000, or 80%, to $30,549,000 from
$16,975,000;  commission expense related to net dealer inventory gains decreased


                                       15
<PAGE>

$2,846,000,  or 47%, to  $3,177,000  from  $6,023,000;  and  commission  expense
related to  investment  banking  increased  $602,000,  or 218%, to $878,000 from
$276,000.  The  increase of  commission  expense as a percentage  of  commission
revenues and the decrease of  commission  expense as a percentage  of net dealer
inventory gains are both attributable to changes in the production of particular
brokers, not all of whom are compensated at the same commission rate. Commission
expense as a percentage of investment  banking was relatively  unchanged between
the first nine  months of fiscal  year 2004 and the first nine  months of fiscal
year  2003.   Commission  expense  includes  the  amortization  of  advances  to
registered representatives of $483,000 and $574,000 for the first nine months of
fiscal year 2004 and 2003, 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.

Employee compensation expense increased $1,228,000, or 41%, to $4,207,000 in the
first nine months of fiscal year 2004 from  $2,979,000  in the first nine months
of  fiscal  year  2003.  This  increase  is  attributable  to the  hiring of new
employees,  salary  increases for certain  employees and the  establishment of a
bonus pool for senior  management.  Overall,  combined  commission  and employee
compensation  expense,  as a percentage of revenue  increased to 77% from 75% in
the first nine months of fiscal year 2004 and 2003, respectively.

Clearing fees increased $404,000, or 20%, to $2,397,000 in the first nine months
of fiscal  year 2004 from  $1,993,000  in the first nine  months of fiscal  year
2003.  Although  there was an increase in trading  volume,  clearing  fees, as a
percentage  of related  revenues,  decreased due to an increase in the number of
lower priced  tickets from the prior period.  Clearing fees in the third quarter
of fiscal year 2004 were reduced by the $250,000  conversion  assistance payment
the Company received from its new clearing firm,  Fiserv,  to offset  conversion
costs  incurred by the Company.  Clearing  fees were reduced by  forgiveness  of
debt, that was fully repaid in February 2004,  from the Company's  clearing firm
based on ticket  volume in the amount of $250,000 and $325,000 in the first nine
months  of  fiscal  year 2004 and  2003,  respectively.  Communication  expenses
increased  $100,000,  or 5%, to  $2,061,000  from  $1,961,000  in the first nine
months of fiscal  year 2004  compared  to the first nine  months of fiscal  year
2003.  The increase is due to an increase in voice and data  charges.  Occupancy
costs increased $191,000, or 9%, to $2,248,000 from $2,057,000 in the first nine
months of fiscal  year 2004  compared  to the first nine  months of fiscal  year
2003.  The  increase  in  occupancy  expense is due to the  expansion  of office
facilities in order to  accommodate  new brokers.  Professional  fees  increased
$550,000, or 60%, to $1,462,000 from $912,000 in the first nine months of fiscal
year 2004 compared to the first nine months of fiscal year 2003. The increase in
professional  fees is due to an increase  in the legal fees  relating to various
lawsuits and arbitrations,  and legal fees related to the NASD  investigation of
mutual fund trading activities and other regulatory  matters.  Professional fees
include  litigation and NASD related  expenses of $1,183,000 and $529,000 in the
first nine months of fiscal year 2004 and 2003, respectively.

In January 2004, an  arbitration  panel awarded  damages  against the Company of
approximately  $400,000 related to an employment contract with a former employee
of the Company.  This amount was recorded as  "Litigation  settlement"  and paid
during the first nine months of fiscal year 2004.

Interest expense increased  $151,000,  or 139%, to $260,000 from $109,000 in the
first nine  months of fiscal  year 2004  compared  to the first  nine  months of
fiscal year 2003.  The  increase  is due to interest on the notes  issued by the
Company in the second  quarter of fiscal  year  2004,  and the  amortization  of
$68,000  attributable to newly issued notes and modified notes. Taxes,  licenses
and registration  increased  $215,000,  or 94%, to $444,000 from $229,000 in the
first nine  months of fiscal  year 2004  compared  to the first  nine  months of
fiscal year 2003. The increase in taxes,  licenses and  registration  expense is
due to an increase in the number of brokers associated with the Company from the
prior period.  Other expenses  decreased  $866,000,  or 45%, to $1,069,000  from
$1,935,000  in the first nine months of fiscal  year 2004  compared to the first
nine months of fiscal year 2003.  The  decrease in other  expenses is due to the
Company's efforts to control its fixed operating expenses, net of an increase in
the reserve for  uncollectible  accounts  on its other  receivables,  related to
registered  representatives  formerly  associated with National in the amount of
$75,000  and  $300,000  in the first nine  months of fiscal  year 2004 and 2003,
respectively.


                                       16
<PAGE>

The Company  reported net income  before income taxes of $1,450,000 in the first
nine months of fiscal year 2004  compared to a net loss before  income  taxes of
$388,000 in the first nine months of fiscal year 2003.

Overall,  the diluted net earnings  attributable  to common  stockholders in the
first nine months of fiscal year 2004 was $1,254,000,  or $.21 per common share,
as  compared  to the diluted net loss  attributable  to common  stockholders  of
$575,000, or $.18 per common share in the first nine months of fiscal year 2003.
The net income  attributable to common stockholders for the first nine months of
fiscal year 2004 reflects $196,000 of cumulative preferred stock dividends,  and
the net loss  attributable to common  stockholders  for the first nine months of
fiscal year 2003  reflects  $187,000 of cumulative  dividends,  on the Company's
Series A Preferred Stock.

LIQUIDITY AND CAPITAL RESOURCES

National, as a registered broker-dealer,  is subject to Rule 15c3-1, the Uniform
Net Capital Rule of the Securities  and Exchange  Commission  (the "SEC"),  that
requires the maintenance of minimum net capital. National has elected to use the
alternative  standard method  permitted by the rule. This requires that National
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
is a market  maker.  On December 12,  2003,  the Company was advised by the NASD
that,  pursuant to National's  pledge of its assets as security for loans to the
Company from First  Clearing (such loans  aggregated  $2,131,000 as of September
30, 2003),  National was  inadvertently  not in compliance  with its net capital
requirements.  Accordingly,  at September 30, 2003,  National reported an excess
net capital deficiency of $829,000. This compliance requirement was corrected on
December  15,  2003,  upon  termination  of the  security  agreement  with First
Clearing.  At June 30, 2004,  National's net capital exceeded the requirement by
$518,000.

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.

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.

In July 2004, the Company filed a  Registration  Statement on Form S-3 under the
Securities  Act for the resale of certain  shares of common  stock and shares of
common stock issuable upon the exercise of certain warrants previously issued in
connection with private placement  transactions,  and certain warrants that were
issued in the private  placements that have been completed in the current fiscal
year. The Registration Statement became effective on August 11, 2004.

In August 2001, the Company  entered into an agreement with First Clearing under
which First Clearing  provides  clearing and related services for National.  The
Clearing  Agreement   expanded  the  products  and  services   capabilities  for
National's   retail  and  institutional   business,   and  enabled  National  to
consolidate  its  existing  clearing  operations  and reduce the fixed  overhead
associated with its self-clearing activities.

The  conversion  to First  Clearing  began in December 2001 and was completed in
March 2002.  It is standard  business  practice in the  brokerage  industry  for
clearing firms to provide financial support to correspondent  clearing firms. As
such, in connection with the Clearing Agreement, the Company executed a ten-year
promissory  note in favor of First Clearing under which the Company  immediately
borrowed $1,000,000.  The funds were contributed by the Company to National, and
were being used as a deposit to secure National's performance under the Clearing
Agreement. The Clearing Agreement also provided for another $1,000,000 loan that


                                       17
<PAGE>

was extended to the Company upon  substantial  completion  of the  conversion on
December 31, 2001 that was also contributed to National.  The amount of the note
that was repayable on each anniversary  date was the principal,  and interest if
any,  then  outstanding  divided by the remaining  life of the note.  Borrowings
under the promissory  note were forgivable  annually based on achieving  certain
business  performance  and trading  volumes of the Company  over the life of the
loan.

In connection with the Clearing Agreement,  additional borrowings were available
to  the  Company  upon  the   attainment  by  National  of  certain  volume  and
profitability  goals.  In finalizing the  conversion,  a dispute arose among the
Company,  US Clearing  (one of its former  clearing  firms) and First  Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the expense  equally.  The Company's share of this
settlement, $548,000, was advanced to the Company by First Clearing and added to
the existing  promissory  note. As part of the settlement,  the minimum level of
stockholders'  equity the Company was required to maintain  under the promissory
note was reduced from  $2,000,000 to $1,000,000  and no further  borrowings  are
available under the promissory note, as amended.

In the first quarter of fiscal year 2003,  First Clearing  loaned the Company an
additional $375,000 in the form of clearing fee rebates.  The loan was due to be
paid in January 2004.

In December  2003,  the  Company  engaged in various  discussions  with the NASD
relating to the Security Agreement between National and First Clearing,  and its
effect  on the  computation  of  National's  net  capital.  As a result of these
discussions,  on December 15,  2003,  the Company and First  Clearing  agreed in
principle to the  following:  (1) National's  clearing  deposit was reduced from
$1,000,000 to $500,000,  (2) the excess  $500,000 was paid to First  Clearing to
reduce the Company's outstanding loan balance on its promissory note and (3) the
Security   Agreement   between  National  and  First  Clearing  was  terminated.
Furthermore,  First Clearing  forgave payment of the $375,000 that was due to be
paid in January 2004.

In February 2004,  the Company paid First  Clearing  $250,000 to fully repay its
promissory note. As a result of the repayment of this note, the Company realized
a gain  on  extinguishment  of  debt of  approximately  $756,000.  Additionally,
National  and  First  Clearing  mutually  agreed  to  terminate  their  clearing
relationship by June 30, 2004.

On June 22, 2004,  National  entered into an agreement  with Fiserv to clear its
brokerage business.  The conversion from First Clearing to Fiserv is expected to
be completed  in the first week of October  2004.  As part of this  transaction,
Fiserv will provide  National with an $800,000  conversion  assistance  payment,
$250,000 of which was paid upon execution of the clearing agreement, $250,000 of
which is payable in  mid-August  2004,  and  $300,000  of which is payable  upon
completion  of the  conversion in October  2004.  The Company  believes that the
overall  effect  of the new  clearing  relationship  will be  beneficial  to the
Company's cost structure, liquidity and capital resources.

As of June 30, 2004, advances to registered representatives increased $1,030,000
to  $1,674,000  from  $644,000  as of  September  30,  2003.  This  increase  is
attributable  to  advances  made  to  registered   representatives   who  became
affiliated with National during this period.

In February 2004,  National and the holder of a $1.0 million secured demand note
that matured on February 1, 2004,  extended the term of the $1.0 million secured
demand note to March 1, 2005 (See Note 9).

In January  2004,  two other  noteholders  extended the  maturity  dates on $1.0
million of notes issued to them by the Company from January 25, 2004 to July 31,
2005.  Effective  February 1, 2004, the interest rate on each note was increased
to 12% from 9% per annum (See Note 9).

In January 2004, the Company issued an aggregate of $200,000 of three-year,  10%
senior  subordinated   promissory  notes  to  five  unaffiliated  parties.  Such


                                       18
<PAGE>

noteholders received three-year  warrants,  with certain registration rights, to
purchase an  aggregate  of 50,000  shares of the  Company's  common  stock at an
exercise price of $1.40 per share (See Note 10).

In February 2004, the Company issued an aggregate of $850,000 of three-year, 10%
senior  subordinated   promissory  notes  to  four  unaffiliated  parties.  Such
noteholders received three-year  warrants,  with certain registration rights, to
purchase an  aggregate  of 170,000  shares of the  Company's  common stock at an
exercise price of $1.50 per share (See Note 10).

In the quarter ended June 30, 2004,  the Company  received  proceeds of $225,000
from the exercise of outstanding employee stock options and warrants.

Although the Company has operated  profitably in the first nine months of fiscal
year 2004,  it reported a loss in the third  quarter  resulting  from the weaker
securities  market.  These market conditions have weakened further in the fourth
quarter of fiscal year 2004. If market  conditions  do not improve,  the Company
may consider  curtailing  certain of its business  activities,  further reducing
fixed   overhead  costs  and/or   seeking   additional   sources  of  financing.
Additionally,  the Company may need to secure  additional  financing in order to
assure  that it has  adequate  regulatory  capital  at such time that a proposed
settlement is reached with the NASD regarding the  investigation  of mutual fund
trading  activities  (See Note 5 herein).  The Company's  ability to obtain such
financing  may be  adversely  affected  by recent  developments  relating to the
listing of the Company's common stock on The American Stock Exchange (See Note 8
herein).

ITEM 3 - 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.


                                       19
<PAGE>

The following  table shows the quoted market values of the Company's  securities
held for resale ("long"),  securities sold, but not yet purchased  ("short") and
net positions as of June 30, 2004:

                               Long             Short             Net
                         ---------------- ------------------ --------------
Corporate Stocks               $ 255,000          $ 148,000      $ 107,000
Corporate Bonds                   10,000            194,000       (184,000)
Government Obligations           348,000            399,000        (51,000)
                         ---------------- ------------------ --------------
                               $ 613,000          $ 741,000     $ (128,000)
                         ================ ================== ==============


ITEM 4 - 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 effective.

Changes in internal controls. There were no significant changes in the Company's
internal  controls  or in other  factors  that has  materially  affected,  or is
reasonably  likely  to  materially  affect,   internal  control  over  financial
reporting subsequent to the date of our evaluation.


                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The NASD has recently  commenced an  industry-wide  investigation of mutual fund
trading  activities.  National is one of the numerous  broker-dealers  that have
been  contacted  by the NASD with  respect to this  investigation.  The NASD has
identified  certain customer mutual fund  transactions  ordered through National
during the time period from October  2000 to February  2003 that it believes may
have constituted mutual fund timing and/or excessive trading activity.  National
has been  engaged  in  ongoing  discussions  and  negotiations  with the NASD to
informally resolve these matters.  Such resolution could result in a settlement,
whereby National,  without admitting or denying any violations,  would make both
restitution and pay a fine to the NASD, that in the aggregate would  approximate
$600,000.  Despite our on-going  discussions and negotiations  with the NASD, no
assurances can be given that informal resolution will be achieved, that a formal
proceeding will not be commenced,  or that the possible resulting  penalties and
fines would not be in a materially  greater amount. If required to litigate this
matter, National believes it has meritorious defenses, and if necessary, intends
to  vigorously  defend this  matter,  although the  ultimate  outcome  cannot be
determined at this time.

During  the  quarter  ended  June 30,  2004,  there  were no  other  significant
developments in the Company's legal  proceedings.  For a detailed  discussion of
the  Company's  legal  proceedings,  please  refer  to  Note 5  herein,  and the
Company's  Annual  Report on Form 10-K for the fiscal year ended  September  30,
2003.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

None.


                                       20
<PAGE>

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

      31.1  Chief Executive Officer's Certificate pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002.
      31.2  Acting 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  Acting Chief Financial Officer's Certificate pursuant to Section 906
            of the Sarbanes-Oxley Act of 2002.
      (b)   Reports on Form 8-K

            The Company  filed a Report on Form 8-K on June 24,  2004  reporting
            that National Securities Corporation entered into a new agreement to
            clear its brokerage business.


                                       21
<PAGE>

                                   SIGNATURES

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


              OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY



August 13, 2004                  By: /s/ Mark Goldwasser
                                     ---------------------------------
                                 Mark Goldwasser
                                 President and Chief Executive Officer




August 13, 2004                  By: /s/ Robert H. Daskal
                                     ---------------------------------
                                 Robert H. Daskal
                                 Acting Chief Financial Officer

                                       22