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 March 31,
      2009
              Commission
      File Number 001-12629
 
 NATIONAL
HOLDINGS CORPORATION
 (Exact
name of registrant as specified in its charter)
  Delaware
                              36-4128138(State
      or other jurisdiction of
                              (I.R.S.
      Employerincorporation
      or organization)
                              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
 
 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 check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes
[  ]  No [  ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one).
 
 Large
Accelerated Filer  [ 
]                                             Accelerated
Filer [  ]
 
 Non-Accelerated
Filer  [ 
]                                               Smaller
Reporting Company [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES [  ]   NO
[X]
 
 As of May
14, 2009 there were 17,150,704 shares of the registrant's common stock
outstanding.
 
 
  NATIONAL
HOLDINGS CORPORATION
 FORM
10-Q
 QUARTERLY
PERIOD ENDED MARCH 31, 2009
 
 INDEX
  PART
      I – FINANCIAL INFORMATIONItem
      1 – Financial StatementsUnaudited
      Condensed Consolidated Statements of Financial Conditionas
      of March 31, 2009 and September 30, 2008
                      4Unaudited
      Condensed Consolidated Statements of Operations for thethree
      and six months ended March 31, 2009 and 2008
                      5Unaudited
      Condensed Consolidated Statements of Cash Flows for thethree
      and six months ended March 31, 2009 and 2008
                      6Notes
      to Unaudited Condensed Consolidated Financial Statements
                      7Item
      2 – Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      13Item
      3 – Quantitative & Qualitative Disclosures About Market
      Risk
                      18Item
      4 – Controls and Procedures
                      18PART
      II – OTHER INFORMATIONItem
      1 – Legal Proceedings
                      24Item
      1a– Risk Factors
                      24Item
      2 – Unregistered Sales of Equity Securities and Use of
      Proceeds
                      24Item
      3 – Defaults Upon Senior Securities
                      24Item
      4 – Submission of Matters to a Vote of Security Holders
                      24Item
      5 – Other Information
                      24Item
      6 – Exhibits
                      25Signatures
                      26
  
 2
  FORWARD-LOOKING
STATEMENTS
 
 The
following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report.  All
statements that express or involve discussions as to: expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, identified through the use of words or phrases such as we or our
management believes, expects, anticipates or hopes and words or phrases such as
will result, are expected to, will continue, is anticipated, estimated,
projection and outlook, and words of similar import) are not statements of
historical facts and may be forward-looking.  These forward-looking
statements are based largely on our expectations and are subject to a number of
risks and uncertainties including, but not limited to, economic, competitive,
regulatory, growth strategies, available financing and other factors discussed
elsewhere in this report and in the documents filed by us with the Securities
and Exchange Commission ("SEC"). Many of these factors are beyond our control.
Actual results could differ materially from the forward-looking statements we
make in this report or in other documents that reference this report. In light
of these risks and uncertainties, there can be no assurance that the results
anticipated in the forward-looking information contained in this report or other
documents that reference this report will, in fact, occur.
 
 These
forward-looking statements involve estimates, assumptions and uncertainties,
and, accordingly, actual results could differ materially from those expressed in
the forward-looking statements.  These uncertainties include, among
others, the following: (i) the inability of our broker-dealer operations to
operate profitably in the face of intense competition from larger full service
and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity
financing.
 
 Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.  New factors emerge from time to time and it is not possible
for our management to predict all of such factors, nor can our management assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
 
 
 
 3
 PART
I. FINANCIAL INFORMATION
 
 ITEM
I. FINANCIAL STATEMENTS
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONASSETS
  March
      31,
                                              
                                              
                                              September
      30,2009
                                              
                                              
                                              2008(unaudited)
                                              
                                              
                                              (see
      note below)Cash
                                              
                                              $
                                              4,414,000
                                              
                                              
                                              $
                                              7,387,000Deposit
      with clearing organizations
                                              
                                              
                                              1,261,000
                                              
                                              
                                              
                                              1,210,000Receivables
      from broker dealers and clearing organizations
                                              
                                              
                                              3,751,000
                                              
                                              
                                              
                                              3,691,000Other
      receivables, net of allowance for uncollectible accounts of
      $164,000at
      March 31, 2009 and September 30, 2008, respectively
                                              
                                              
                                              965,000
                                              
                                              
                                              
                                              580,000Advances
      to registered representatives
                                              
                                              
                                              3,853,000
                                              
                                              
                                              
                                              4,463,000Securities
      ownedMarketable,
      at market value
                                              
                                              
                                              2,128,000
                                              
                                              
                                              
                                              976,000Non-marketable,
      at fair value
                                              
                                              
                                              26,000
                                              
                                              
                                              
                                              48,000Fixed
      assets, net
                                              
                                              
                                              1,225,000
                                              
                                              
                                              
                                              1,243,000Secured
      demand note
                                              
                                              
                                              500,000
                                              
                                              
                                              
                                              500,000Intangible
      assets, net
                                              
                                              
                                              2,639,000
                                              
                                              
                                              
                                              2,950,000Other
      assets
                                              
                                              
                                              1,439,000
                                              
                                              
                                              
                                              1,429,000Total
      Assets
                                              
                                              $
                                              22,201,000
                                              
                                              
                                              $
                                              24,477,000LIABILITIES
      AND STOCKHOLDERS' EQUITYPayable
      to broker dealers and clearing organizations
                                              
                                              $
                                              310,000
                                              
                                              
                                              $
                                              730,000Securities
      sold, but not yet purchased, at market
                                              
                                              
                                              11,000
                                              
                                              
                                              
                                              63,000Accounts
      payable, accrued expenses and other liabilities
                                              
                                              
                                              13,071,000
                                              
                                              
                                              
                                              12,335,000Convertible
      notes payable, net of debt discounts of  $1,234,000
      and$1,431,000
      at March 31, 2009 and September 30, 2008, respectively
                                              
                                              
                                              4,766,000
                                              
                                              
                                              
                                              4,569,000Notes
      payable, net of debt discount of $0 and $41,000 atMarch
      31, 2009 and September 30, 2008, respectively
                                              
                                              
                                              850,000
                                              
                                              
                                              
                                              959,000Total
      Liabilities
                                              
                                              
                                              19,008,000
                                              
                                              
                                              
                                              18,656,000Subordinated
      borrowings
                                              
                                              
                                              500,000
                                              
                                              
                                              
                                              500,000Stockholders'
      EquityPreferred
      stock, $.01 par value, 200,000 shares authorized; 50,000
      sharesdesignated
      as Series A and 20,000 shares designated as Series BSeries
      A 9% cumulative convertible preferred stock, $.01 par value,
      50,000shares
      authorized; 42,957 shares issued and outstanding
    (liquidationpreference:
      $4,295,700) at March 31, 2009 and 37,550 shares issued andoutstanding
      (liquidation preference: $3,755,000) at September 30, 2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Series
      B 9% cumulative convertible preferred stock, $.01 par value,
      20,000shares
      authorized; 0 shares issued and outstanding (liquidationpreference:
      $0) at December 31, 2008 and September 30, 2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Common
      stock, $.02 par value, 50,000,000 shares authorized;16,421,538
      shares issued and outstanding, at March 31, 2009and
      September 30, 2008
                                              
                                              
                                              328,000
                                              
                                              
                                              
                                              328,000Additional
      paid-in capital
                                              
                                              
                                              39,720,000
                                              
                                              
                                              
                                              39,279,000Accumulated
      deficit
                                              
                                              
                                              (37,355,000
                                              )
                                              
                                              
                                              (34,286,000
                                              )Total  Stockholders'
      Equity
                                              
                                              
                                              2,693,000
                                              
                                              
                                              
                                              5,321,000Total
      Liabilities and Stockholders' Equity
                                              
                                              $
                                              22,201,000
                                              
                                              
                                              $
                                              24,477,000
  Note:
      The balance sheet at September 30, 2008 has been derived from the audited
      consolidated financial statements at that date.See
      accompanying notes to unaudited condensed consolidated financial
      statements
 4
    NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
  --------
      Three Months Ended ---------
                                  
                                  
                                  --------
      Six Months Ended ---------March
      31,
                                  
                                  
                                  March
      31,
                                  
                                  
                                  March
      31,
                                  
                                  
                                  March
      31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Revenues:Commissions
                                  
                                  $
                                  15,405,000
                                  
                                  
                                  $
                                  9,924,000
                                  
                                  
                                  $
                                  28,119,000
                                  
                                  
                                  $
                                  23,216,000Net
      dealer inventory gains
                                  
                                  
                                  4,126,000
                                  
                                  
                                  
                                  3,639,000
                                  
                                  
                                  
                                  13,914,000
                                  
                                  
                                  
                                  7,833,000Investment
      banking
                                  
                                  
                                  482,000
                                  
                                  
                                  
                                  67,000
                                  
                                  
                                  
                                  1,149,000
                                  
                                  
                                  
                                  67,000Total
      commission and fee revenues
                                  
                                  
                                  20,013,000
                                  
                                  
                                  
                                  13,630,000
                                  
                                  
                                  
                                  43,182,000
                                  
                                  
                                  
                                  31,116,000Interest
      and dividends
                                  
                                  
                                  336,000
                                  
                                  
                                  
                                  880,000
                                  
                                  
                                  
                                  1,033,000
                                  
                                  
                                  
                                  1,810,000Transfer
      fees and clearing services
                                  
                                  
                                  2,919,000
                                  
                                  
                                  
                                  962,000
                                  
                                  
                                  
                                  5,669,000
                                  
                                  
                                  
                                  2,273,000Other
                                  
                                  
                                  1,318,000
                                  
                                  
                                  
                                  812,000
                                  
                                  
                                  
                                  2,554,000
                                  
                                  
                                  
                                  1,450,000Total
      Revenues
                                  
                                  
                                  24,586,000
                                  
                                  
                                  
                                  16,284,000
                                  
                                  
                                  
                                  52,438,000
                                  
                                  
                                  
                                  36,649,000Expenses:Commissions
                                  
                                  
                                  18,007,000
                                  
                                  
                                  
                                  12,551,000
                                  
                                  
                                  
                                  38,463,000
                                  
                                  
                                  
                                  28,754,000Employee
      compensation and related expenses
                                  
                                  
                                  3,037,000
                                  
                                  
                                  
                                  2,308,000
                                  
                                  
                                  
                                  6,044,000
                                  
                                  
                                  
                                  4,549,000Clearing
      fees
                                  
                                  
                                  1,174,000
                                  
                                  
                                  
                                  522,000
                                  
                                  
                                  
                                  2,367,000
                                  
                                  
                                  
                                  1,136,000Communications
                                  
                                  
                                  1,031,000
                                  
                                  
                                  
                                  253,000
                                  
                                  
                                  
                                  1,893,000
                                  
                                  
                                  
                                  608,000Occupancy
      and equipment costs
                                  
                                  
                                  1,440,000
                                  
                                  
                                  
                                  869,000
                                  
                                  
                                  
                                  2,846,000
                                  
                                  
                                  
                                  1,733,000Professional
      fees
                                  
                                  
                                  607,000
                                  
                                  
                                  
                                  463,000
                                  
                                  
                                  
                                  1,370,000
                                  
                                  
                                  
                                  1,051,000Interest
                                  
                                  
                                  309,000
                                  
                                  
                                  
                                  70,000
                                  
                                  
                                  
                                  634,000
                                  
                                  
                                  
                                  143,000Taxes,
      licenses, registration
                                  
                                  
                                  342,000
                                  
                                  
                                  
                                  77,000
                                  
                                  
                                  
                                  602,000
                                  
                                  
                                  
                                  207,000Other
      administrative expenses
                                  
                                  
                                  566,000
                                  
                                  
                                  
                                  535,000
                                  
                                  
                                  
                                  1,289,000
                                  
                                  
                                  
                                  1,000,000Total
      Eexpenses
                                  
                                  
                                  26,513,000
                                  
                                  
                                  
                                  17,648,000
                                  
                                  
                                  
                                  55,508,000
                                  
                                  
                                  
                                  39,181,000Net
      loss
                                  
                                  
                                  (1,927,000
                                  )
                                  
                                  
                                  (1,364,000
                                  )
                                  
                                  
                                  (3,070,000
                                  )
                                  
                                  
                                  (2,532,000
                                  )Preferred
      stock dividends
                                  
                                  
                                  (83,000
                                  )
                                  
                                  
                                  (83,000
                                  )
                                  
                                  
                                  (169,000
                                  )
                                  
                                  
                                  (169,000
                                  )Net
      loss attributable to common stockholders
                                  
                                  $
                                  (2,010,000
                                  )
                                  
                                  $
                                  (1,447,000
                                  )
                                  
                                  $
                                  (3,239,000
                                  )
                                  
                                  $
                                  (2,701,000
                                  )Net
      loss per common shareBasic:Net
      loss attributable to common stockholders
                                  
                                  $
                                  (0.12
                                  )
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  (0.20
                                  )
                                  
                                  $
                                  (0.31
                                  )Diluted:Net
      loss attributable to common stockholders
                                  
                                  $
                                  (0.12
                                  )
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  (0.20
                                  )
                                  
                                  $
                                  (0.31
                                  )Weighted
      average number of shares outstandingBasic
                                  
                                  
                                  16,421,538
                                  
                                  
                                  
                                  8,609,628
                                  
                                  
                                  
                                  16,421,538
                                  
                                  
                                  
                                  8,606,090Diluted
                                  
                                  
                                  16,421,538
                                  
                                  
                                  
                                  8,609,628
                                  
                                  
                                  
                                  16,421,538
                                  
                                  
                                  
                                  8,606,090
  See
      accompanying notes to unaudited condensed consolidated financial
      statements
  5
 
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
  Six
      Months EndedMarch
      31,2009
                                                
                                                
                                                2008Cash
      flows from operating activitiesNet
      loss
                                                
                                                $
                                                (3,069,000
                                                )
                                                
                                                $
                                                (2,532,000
                                                )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activitiesDepreciation
      and amortization
                                                
                                                
                                                672,000
                                                
                                                
                                                
                                                101,000Amortization
      of deferred financing costs
                                                
                                                
                                                27,000
                                                
                                                
                                                
                                                6,000Amortization
      of note discount
                                                
                                                
                                                238,000
                                                
                                                
                                                
                                                49,000Compensatory
      element of common stock options issuance
                                                
                                                
                                                441,000
                                                
                                                
                                                
                                                210,000Unrealized
      loss on securities owned
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Changes
      in assets and liabilitiesDeposits
      with clearing organizations
                                                
                                                
                                                (51,000
                                                )
                                                
                                                
                                                -Receivables
      from broker-dealers, clearing organizations and others
                                                
                                                
                                                (60,000
                                                )
                                                
                                                
                                                1,687,000Other
      receivables
                                                
                                                
                                                (385,000
                                                )
                                                
                                                
                                                -Advances
      to registered representatives
                                                
                                                
                                                610,000
                                                
                                                
                                                
                                                -Securities
      owned: marketable, at market value
                                                
                                                
                                                (1,152,000
                                                )
                                                
                                                
                                                750,000Securities
      owned: non-marketable, at fair value
                                                
                                                
                                                22,000
                                                
                                                
                                                
                                                -Other
      assets
                                                
                                                
                                                (37,000
                                                )
                                                
                                                
                                                (144,000
                                                )Accounts
      payable and accrued expenses
                                                
                                                
                                                735,000
                                                
                                                
                                                
                                                -Payable
      to broker dealers and clearing organizations
                                                
                                                
                                                (419,000
                                                )
                                                
                                                
                                                (3,908,000
                                                )Securities
      sold, but not yet purchased, at market
                                                
                                                
                                                (52,000
                                                )
                                                
                                                
                                                347,000Net
      cash used in operating activities
                                                
                                                
                                                (2,480,000
                                                )
                                                
                                                
                                                (3,434,000
                                                )Cash
      flows from investing activitiesPurchase
      of fixed assets
                                                
                                                
                                                (343,000
                                                )
                                                
                                                
                                                (91,000
                                                )Net
      cash used in investing activities
                                                
                                                
                                                (343,000
                                                )
                                                
                                                
                                                (91,000
                                                )Cash
      flows from financing activitiesRepayment
      of notes payable
                                                
                                                
                                                (150,000
                                                )
                                                
                                                
                                                -Net
      proceeds from issuance of convertible notes
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,000,000Cash
      payment of deferred financing costs
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (80,000
                                                )Deferred
      merger costs
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (219,000
                                                )Exercise
      of stock options
                                                
                                                
                                                -
                                                
                                                
                                                
                                                8,000Net
      cash (used in) provided by financing activities
                                                
                                                
                                                (150,000
                                                )
                                                
                                                
                                                2,709,000Net
      decrease in cash
                                                
                                                
                                                (2,973,000
                                                )
                                                
                                                
                                                (816,000
                                                )Cash
      balanceBeginning
      of the period
                                                
                                                
                                                7,387,000
                                                
                                                
                                                
                                                4,957,000End
      of the period
                                                
                                                $
                                                4,414,000
                                                
                                                
                                                $
                                                4,141,000Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                                                
                                                $
                                                394,000
                                                
                                                
                                                $
                                                107,000Income
      taxes
                                                
                                                $
                                                56,000
                                                
                                                
                                                $
                                                23,000Supplemental
      disclosures of noncash financing activitiesWarrants
      issued in connection with debt
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                395,000Preferred
      stock dividends
                                                
                                                $
                                                676,000
                                                
                                                
                                                $
                                                -
  See
      accompanying notes to unaudited condensed consolidated financial
      statements
  6
 NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (UNAUDITED)
 
 NOTE
1. BASIS OF PRESENTATION
 
 The
accompanying condensed consolidated financial statements of National Holdings
Corporation (“National” 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 and Rule 10-01 of Regulation
S-X.  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 March 31, 2009 and for the
periods ended March 31, 2009 and March 31, 2008 are unaudited.  The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the fiscal year.  These condensed
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,
2008.
 
 NOTE 2. CONSOLIDATION
 
 The
condensed consolidated financial statements include the accounts of National and
its wholly owned subsidiaries.  National operates primarily through
National Securities Corporation (“National Securities”), vFinance Investments,
Inc. (“vFinance Investments”) and EquityStation, Inc. (“EquityStation”)
(collectively, the “Broker Dealer Subsidiaries”).  The Broker Dealer
Subsidiaries conduct a national securities brokerage business through its main
offices in New York, New York, Boca Raton, Florida, and Seattle,
Washington.
  Through
its Broker Dealer Subsidiaries, the Company offers (1) full service retail
brokerage to approximately 45,000 high net worth and institutional clients, (2)
provides investment banking, merger, acquisition and advisory services to micro,
small and mid-cap high growth companies, and (3) engages in trading securities,
including making markets in over 3,500 micro and small cap stocks and provides
liquidity in the United States Treasury marketplace.  The Broker
Dealer Subsidiaries are introducing brokers and clear all transactions through
clearing organizations on a fully disclosed basis.  They are
registered with the Securities and Exchange Commission ("SEC"), are members of
the Financial Industry Regulatory Authority, Inc. ("FINRA") (formerly the
National Association of Securities Dealers) and Securities Investor Protection
Corporation ("SIPC").  vFinance Investments is also a member of the
National Futures Association ("NFA").
 
 In July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc., a Washington corporation ("NAM").  NAM is a
federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed.  In March 2008, all of the issued and outstanding stock of
NAM was transferred from National Securities to National.  National
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 finalized certain
requisite state registrations during the second quarter of fiscal year 2007 and
commenced business operations that to date have been de
minimus.  vFinance Lending Services, Inc. (“vFinance Lending”),
originally formed as a wholly owned subsidiary of vFinance, was established in
May 2002.  It is a mortgage lender focused primarily on the commercial
sector, providing bridge loans and commercial mortgages through its nationwide
network of lenders. Its operations to date have been de minimus.  All
significant inter-company accounts and transactions have been eliminated in
consolidation.
 
 7
 NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141(R), “Business
Combinations”(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No.
141(R) establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired.  SFAS No. 141(R)also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is effective for fiscal years
beginning after December 15, 2008, and applies to any business combinations
which occur after March 31, 2009. The adoption of SFAS 141(R), effective January
1, 2009, may have an impact on accounting for future business
combinations.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51”(“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the non-controlling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS No. 160 did not have any material impact on the preparation of
the Company’s consolidated financial statements.
 
 In
March 2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The adoption of SFAS No. 161 did not have a
material impact on the preparation of the Company’s consolidated financial
statements.
 
 In May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FAS APB 14-1”). FSP APB 14-1 clarifies that convertible
debt instruments that may be settled in cash upon either mandatory or optional
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company has adopted FSP APB 14-1 beginning January 1,
2009, and this standard must be applied on a retroactive basis. The adoption of
FSP APB 14-1 did not have any impact on its consolidated financial position and
results of operations.
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS No. 162”). This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. The Company has adopted this
and found SFAS No. 162 did not have a material impact on the preparation of the
Company’s consolidated financial statements.
 
 On June
16, 2008, the FASB issued Final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether instruments granted in
share-based payment transactions are participating securities prior to vesting.
The FSP determines that unvested share-based payment awards that contain rights
to dividend payments should be included in earnings per share calculations. The
guidance will be effective for fiscal years beginning after December 15, 2008.
The requirements of (FSP) No. EITF 03-6-1 as well as the impact of its adoption
did not have any impact on the Company’s consolidated financial
statements.
 
 8
 In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4
and FIN 46(R)-8 did not have an impact on the Company’s consolidated financial
position and results of operations.
 
 NOTE 4. 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 Company granted 40,000 and 180,000 options to outside
directors during the three months ended March 31, 2009 and March 31, 2008,
respectively.  A charge of approximately $237,000 and $473,000 was
recorded in the three and six months ended March 31, 2009, respectively, and a
charge of approximately $108,000 and $210,000 was recorded in the three and six
months ended March 31, 2008, respectively, relating to the amortization of the
fair value associated with stock option grants and restricted stock
grants.
 
 The
Black-Scholes option valuation model is used to estimate the fair value of the
options granted.  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 management's
opinion, this valuation model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 A summary
of the stock option activity as of March 31, 2009, and changes during the six
month period then ended is presented below:
  WeightedWeighted
                        
                        
                        AverageAverage
                        
                        
                        Remaining
                        
                        
                        AggregateExercise
                        
                        
                        Contractual
                        
                        
                        IntrinsicShares
                        
                        
                        Price
                        
                        
                        Term
      (Yrs)
                        
                        
                        ValueOutstanding
      at September 30, 2008
                        
                        
                        6,887,640
                        
                        
                        $
                        1.58
                        
                        
                        
                        -
                        
                        
                        $
                        -Granted
                        
                        
                        40,000
                        
                        
                        
                        0.75
                        
                        
                        
                        5.00
                        
                        
                        
                        -Expired
                        
                        
                        387,175
                        
                        
                        
                        1.52
                        
                        
                        
                        1.72
                        
                        
                        
                        -Outstanding
      at March 31, 2009
                        
                        
                        6,540,465
                        
                        
                        $
                        1.58
                        
                        
                        
                        3.85
                        
                        
                        $
                        -Exerciseable
      at March 31, 2009
                        
                        
                        3,423,974
                        
                        
                        $
                        1.48
                        
                        
                        
                        2.69
                        
                        
                        $
                        -
  As of
March 31, 2009, there was approximately $1,180,000 of total unrecognized
deferred compensation costs related to share-based compensation
arrangements.  The Company has experienced a historic forfeiture rate
of approximately 38% on previously granted stock options and expects that future
forfeitures will be consistent with this experience.
 
 9
 A summary
of the status of the Company’s nonvested shares as of March 31, 2009, and
changes during the three month period then ended is presented
below:
  Weighted
      AverageGrant
      DateNonvested
      Shares
                            
                            Shares
                            
                            
                            Fair
      ValueNonvested
      at September 30, 2008
                            
                            
                            3,828,774
                            
                            
                            $
                            0.92Granted
                            
                            
                            -Vested
                            
                            
                            365,108
                            
                            
                            
                            1.38Expired
                            
                            
                            387,175
                            
                            
                            
                            0.87Nonvested
      at March 31, 2009
                            
                            
                            3,076,491
                            
                            
                            
                            0.85
  NOTE
5. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
 
 The
following table shows the quoted market values of securities owned by the
Company, and securities sold but not yet purchased by the Company, as of March
31, 2009:
  Securities
                          
                          
                          Securities
      sold, butowned
                          
                          
                          not
      yet purchasedCorporate
      stocks
                          
                          $
                          221,000
                          
                          
                          $
                          10,000Corporate
      bonds
                          
                          
                          11,000
                          
                          
                          
                          1,000Government
      obligations
                          
                          
                          1,896,000Non-marketable
      securities
                          
                          
                          26,000
                          
                          
                          
                          -$
                          2,154,000
                          
                          
                          $
                          11,000
  NOTE 6. CONTINGENCIES
 
 During
the quarter ended March 31, 2009, there were no significant developments in the
Company’s legal proceedings.  For a detailed discussion of the
Company’s legal proceedings, please refer to the Company’s Annual Report on Form
10-K for the fiscal year ended September 30, 2008.
  The
Company’s subsidiaries are defendants in various arbitrations and administrative
proceedings, lawsuits and claims together alleging damages in excess of
$22,000,000.   The Company estimates, to the extent that it can,
that based on discussions with legal counsel and prior experience, its aggregate
liability from these pending actions may be less than $500,000 (exclusive of
fees, costs and 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 based on discussions with counsel 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 March 31, 2009 and 2008, is
$135,000 and $91,000 (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 FINRA related expenses of
$164,000 and $175,000 for the second quarter of fiscal year 2009 and 2008,
respectively, and $347,000 and $490,000 for the first six months of fiscal year
2009 and 2008, respectively .
  10
  NOTE
7. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
 
 The
holders of the Company’s Series A convertible preferred stock, that are
convertible into the Company’s common stock at $1.25 per share, 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 quarter and six
months ended March 31, 2009, the Company accumulated $83,000 and $169,000,
respectively, of dividends on its Series A preferred stock.  In March
2009, the Company’s Board of Directors declared an in-kind dividend in the
aggregate of 5,407 shares of Series A preferred stock, in payment of
approximately $676,000 of dividends accrued through March 31, 2009. At March 31,
2009, the accumulated dividend on the Company’s 42,957 issued and outstanding
shares of Series A preferred stock was $0.
 
 NOTE
8. LOSS PER COMMON SHARE
 
 Basic
loss per share is computed on the basis of the weighted average number of common
shares outstanding.  Diluted loss per share is computed on the basis
of the weighted average number of common shares outstanding plus the potential
dilution that would occur if securities or other contracts to issue common
shares were exercised or converted.
 
 For both
the three and six month periods ended March 31, 2009 15,289,999 common share
equivalents were excluded from the calculation of diluted net loss per share
because their inclusion would have been anti-dilutive.  For both the
three and six month periods ended March 31, 2008, 7,721,000 common share
equivalents were excluded from the calculation of diluted net loss per share
because their inclusion would have been anti-dilutive.
 
 The
following table sets forth the common share equivalents that were excluded from
the calculation:
  Three
      Months Ended
                              
                              
                              Six
      Months EndedMarch
      31, 2009
                              
                              
                              March
      31, 2008
                              
                              
                              March
      31, 2009
                              
                              
                              March
      31, 2008Stock
      options
                              
                              
                              6,500,465
                              
                              
                              
                              2,092,000
                              
                              
                              
                              6,500,465
                              
                              
                              
                              2,092,000Warrants
                              
                              
                              1,977,974
                              
                              
                              
                              1,125,000
                              
                              
                              
                              1,977,974
                              
                              
                              
                              1,125,000Assumed
      conversion of:Series
      A Preferred Stock
                              
                              
                              3,436,560
                              
                              
                              
                              3,004,000
                              
                              
                              
                              3,436,560
                              
                              
                              
                              3,004,000Notes
                              
                              
                              3,375,000
                              
                              
                              
                              1,500,000
                              
                              
                              
                              3,375,000
                              
                              
                              
                              1,500,000Dilutive
      potential common shares
                              
                              
                              15,289,999
                              
                              
                              
                              7,721,000
                              
                              
                              
                              15,289,999
                              
                              
                              
                              7,721,000
 
 11
  NOTE
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
 
 Accounts
payable, accrued expenses and other liabilities as of March 31, 2009 and
September 30, 2008, respectively, consist of the following:
  March
      31, 2009
                      
                      
                      September
      30, 2008Commissions
      payable
                      
                      $
                      4,786,000
                      
                      
                      $
                      6,537,000Deferred
      clearing fee credits
                      
                      
                      531,000
                      
                      
                      
                      578,000Telecommunications
      vendors payable
                      
                      
                      76,000
                      
                      
                      
                      209,000Legal
      payable
                      
                      
                      793,000
                      
                      
                      
                      646,000Deferred
      rent payable
                      
                      
                      315,000
                      
                      
                      
                      313,000Accrued
      compensation
                      
                      
                      629,000
                      
                      
                      
                      679,000Capital
      lease liability
                      
                      
                      680,000
                      
                      
                      
                      613,000Other
      vendors
                      
                      
                      5,261,000
                      
                      
                      
                      2,760,000Total
                      
                      $
                      13,071,000
                      
                      
                      $
                      12,335,000
  NOTE
10. 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.  The alternative method
precludes National Securities from having to maintain a ratio of aggregate
indebtedness to net capital.  At March 31, 2009, National Securities
had net capital of approximately $415,000 which exceeded its requirement by
approximately $165,000.
 
 Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain
$100,000.  In addition to the net capital requirements, each of
vFinance Investments and EquityStation are required to maintain a ratio of
aggregate indebtedness to net capital, as defined, of not more than 15 to 1 (and
the rule of the “applicable” exchange also provides that equity capital may not
be withdrawn or cash dividends paid if the resulting net capital ratio would
exceed 10 to 1).  At March 31, 2009, vFinance Investments had net
capital of approximately $1,313,000 which was approximately $313,000 in excess
of its required net capital of $1,000,000 and its percentage of aggregate
indebtedness to net capital was 360%.  At March 31, 2009,
EquityStation had net capital of approximately $227,000 which was approximately
$127,000 in excess of its required net capital of $100,000 and its percentage of
aggregate indebtedness to net capital was 258%.  Each of the Broker
Dealer subsidiaries qualifies under the exemptive provisions of Rule 15c3-3
under Section (k)(2)(ii) of the Rule, as none of them carry the accounts of
their customers on their books nor perform custodial functions related to
customer securities.
 
 Advances,
dividend payments and other equity withdrawals from its broker dealer
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.
 
 
 12
  NOTE
11. PRO FORMA
 
 Had the
acquisition of vFinance, Inc. occurred on October 1, 2007, the results would
have been as follows:
  For
      the 6 monthsendedMarch
      31, 2008Total
      Revenue
                      
                      $
                      61,798,000Net
      loss
                      
                      
                      (4,239,000
                      )Basic
      and diluted loss per common share
                      
                      
                      (0.26
                      )
  ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 
 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, 2008.  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.
 
 OVERVIEW
 
 We are
engaged in investment banking, equity research, institutional sales and trading,
independent brokerage and advisory services and asset management services
through our principal subsidiaries, National Securities Corporation (“National
Securities”), vFinance Investments, Inc. (“vFinance Investments”) and
EquityStation, Inc. (“EquityStation”, and collectively with National Securities
and vFinance Investments, the “Broker Dealer Subsidiaries”). We are committed to
establishing a significant presence in the financial services industry by
meeting the varying investment needs of our retail, corporate and institutional
clients.
  Each of
National Securities, vFinance Investments and EquityStation is subject to
regulation by, among others, the Securities and Exchange Commission (“SEC”), the
Financial Industry Regulatory Authority (“FINRA”), the Municipal Securities
Rulemaking Board (“MSRB”) and is a member of the Securities Investor Protection
Corporation (“SIPC”).  vFinance Investments is also subject to
regulation by the National Futures Association (“NFA”). In addition, each of the
Broker Dealer Subsidiaries is licensed to conduct its brokerage activities in
all 50 states, plus the District of Columbia and Puerto Rico, with vFinance
Investments also being licensed in the U.S. Virgin Islands.
  As of
March 31, 2009, we had approximately 925associated personnel
serving retail and institutional customers, trading and investment banking
clients. With the exception of our New York, New Jersey, Florida, Washington and
Illinois branches, our approximately 84 other registered offices are owned and
operated by independent owners who maintain all appropriate licenses and are
responsible for all office overhead and expenses. Because these independent
operators, many of whom are financial planners, are required to pay their own
expenses, we generally pay them a much greater percentage of the commissions and
fee income they generate, typically 70% - 90%.
  13
 Our
registered representatives offer a broad range of investment products and
services. These products and services allow us to generate both commissions
(from transactions in securities and other investment products) and fee income
(for providing investment advisory services, namely managing a client’s
account). The investment products and services offered include but are not
limited to stocks, bonds, mutual funds, annuities, insurance, and managed money
accounts.
 
 Difficult
Market Conditions
 
 The U.S.
and global economies have continued to deteriorate and are now in a recession,
which could be long-term. We, like other companies in the financial services
sector, are exposed to volatility and trends in the securities markets and the
economy, generally. The market downturn and poor economic conditions have
reduced overall investment banking and client activity levels. It is difficult
to predict when conditions will change. Given difficult market and economic
conditions, we have focused on reducing redundancies and unnecessary expense. At
the same time, however, we continue to seek to selectively upgrade our talent
pool given the availability of experienced professionals.
 
 GrowthStrategy
 
 We
continue to evaluate opportunities to grow our businesses, including potential
acquisitions or mergers with other securities, investment banking and investment
advisory firms, and by adding to our base of independent representatives
organically.These
acquisitions may involve payments of material amounts of cash, the incurrence of
a significant amount of debt or the issuance of significant amounts of our
equity securities, which may be dilutive to our existing shareholders and/or may
increase our leverage. We cannot assure you that we will be able to consummate
any such potential acquisitions at all or on terms acceptable to us or, if we
do, that any acquired business will be profitable. There is also a risk that we
will not be able to successfully integrate acquired businesses into our existing
business and operations.
 
 Key
Indicators of Financial Performance for Management
 
 Management
periodically reviews and analyzes our financial performance across a number of
measurable factors considered to be particularly useful in understanding and
managing our business. Key metrics in this process include productivity and
practice diversification of representatives, top line commission and advisory
services revenues, gross margins, operating expenses, legal costs, taxes and
earnings per share. Management
also relies on a Non-GAAP metric referred to as earnings before interest, taxes,
depreciation, and amortization, as adjusted ("EBITDA, as adjusted") as a key
metric for evaluating the financial performance of the Company, an example of
which can be found later in this section under NON-GAAP
INFORMATION.
 
 Acquisition
of vFinance, Inc.
  In July
2008, we acquired vFinance, Inc. through a merger with a newly formed
wholly-owned subsidiary.  The assets and liabilities acquired as well
as the financial results of vFinance were included in our consolidated financial
statements after the close of business on July 1, 2008, the acquisition date.
The aggregate acquisition price was approximately $17.6 million, which consisted
of approximately 7,788,910 shares of Company common stock issued in exchange for
all of the issued and outstanding common stock of vFinance, and direct expenses
of $0.6 million in legal fees, valuation fees, severance costs and contract
cancellation costs. We accounted for the acquisition of vFinance under the
provisions of Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 141 “Business
Combinations.”
  Since
July 1, 2008, our management team has been focused on the task of eliminating
duplicative overhead and services, and eliminating unnecessary costs in an
effort to improve bottom line performance.  As of the date of this
report, the Company has made considerable progress on cost cutting measures, and
these savings are exceeding $5 million dollars on an annualized
basis.  We fully intend to continue our efforts to conserve capital
and keep costs low in an effort to improve the Company’s
profitability.
  
 14
  RESULTS
OF OPERATIONS
 
 Three Months Ended March 31,
2009 Compared to Three Months Ended March 31, 2008
 
 The
Company’s second quarter of fiscal year 2009 resulted in an increase in
revenues, but a greater increase in expenses compared to the same period last
year.  As a result, the Company reported a net loss of $1,927,000
compared with a net loss of $1,364,000 for the second quarters of fiscal years
2009 and 2008, respectively.
  Three
      Months EndedMarch
      31,
                                
                                
                                Increase
      (Decrease)2009
                                
                                
                                2008
                                
                                
                                Amount
                                
                                
                                PercentCommissions
                                
                                $
                                15,405,000
                                
                                
                                $
                                9,924,000
                                
                                
                                $
                                5,481,000
                                
                                
                                
                                55%Net
      dealer inventory gains
                                
                                
                                4,126,000
                                
                                
                                
                                3,639,000
                                
                                
                                
                                487,000
                                
                                
                                
                                13%Investment
      banking
                                
                                
                                482,000
                                
                                
                                
                                67,000
                                
                                
                                
                                415,000
                                
                                
                                
                                619%Interest
      and dividends
                                
                                
                                336,000
                                
                                
                                
                                880,000
                                
                                
                                
                                (544,000
                                )
                                
                                
                                -62%Transfer
      fees and clearance services
                                
                                
                                2,919,000
                                
                                
                                
                                962,000
                                
                                
                                
                                1,957,000
                                
                                
                                
                                203%Other
                                
                                
                                1,318,000
                                
                                
                                
                                812,000
                                
                                
                                
                                506,000
                                
                                
                                
                                62%$
                                24,586,000
                                
                                
                                $
                                16,284,000
                                
                                
                                $
                                8,302,000
                                
                                
                                
                                51%
  Total
revenues increased $8,302,000, or 51%, in the second quarter of fiscal year 2009
to $24,586,000 from $16,284,000 in the second quarter of fiscal year
2008.  Commission revenue increased $5,481,000, or 55%, to $15,405,000
from $9,924,000 during the second quarter of fiscal year 2009 compared with the
same period in fiscal year 2008, Net dealer inventory gains which includes
profits on proprietary trading, market making activities and customer mark-ups
and mark-downs, increased $487,000, or 13%, to $4,126,000 from $3,639,000 during
the second quarter of fiscal year 2009 compared with the same period in fiscal
year 2008.  The increase in total revenues, commission revenues and
net dealer inventory gains were all primarily due to the addition of vFinance
revenues as a result of the merger.
 
 Investment
banking revenue increased $415,000, or 619%, in the second quarter of fiscal
year 2009 to $482,000 from $67,000 in the second quarter of fiscal year
2008.  These revenues were attributable to the closing of a small
private placement during the quarter.  The Company did not complete
any investment banking transactions in the second quarter of fiscal year 2008,
and received only modest fee income.  Interest and dividend income
decreased by $544,000 or 62%, to $336,000 from $880,000 in the second quarter of
fiscal year 2009 compared with the same period last year.  The
decrease in interest income is attributable to generally lower customer margin
account balances, lower customer free cash balances and lower prevailing
interest rates during the quarter.  Transfer fees increased $1,957,000
or 203%, to $2,919,000 in the second quarter of fiscal year 2009 from $962,000
in the second quarter of fiscal year 2008.  The increase is due
primarily to the addition of vFinance revenues as a result of the
merger.
 
 Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees and other investment income, increased $506,000, or 62%, to
$1,318,000 from $812,000 during the second quarter of fiscal year 2009 compared
to the second quarter of fiscal year 2008.  The increase is due
primarily to the addition of vFinance revenues as a result of the
merger.
 
 In
comparison with the 51% increase in total revenues, total expenses increased 50%
or $8,865,000 to $26,513,000 for the second quarter of fiscal year 2009 compared
to $17,648,000 in the second quarter of fiscal year 2008.  The
increase in total expenses is primarily a result of the addition of vFinance
expenses as a result of the merger.
 
 15
  Three
      Months EndedMarch
      31,
                                    
                                    
                                    Increase
      (Decrease)2009
                                    
                                    
                                    2008
                                    
                                    
                                    Amount
                                    
                                    
                                    PercentCommissions
                                    
                                    $
                                    18,007,000
                                    
                                    
                                    $
                                    12,551,000
                                    
                                    
                                    $
                                    5,456,000
                                    
                                    
                                    
                                    43%Employee
      compensation
                                    
                                    
                                    3,037,000
                                    
                                    
                                    
                                    2,308,000
                                    
                                    
                                    
                                    729,000
                                    
                                    
                                    
                                    32%Clearing
      fees
                                    
                                    
                                    1,174,000
                                    
                                    
                                    
                                    522,000
                                    
                                    
                                    
                                    652,000
                                    
                                    
                                    
                                    125%Communications
                                    
                                    
                                    1,031,000
                                    
                                    
                                    
                                    253,000
                                    
                                    
                                    
                                    778,000
                                    
                                    
                                    
                                    308%Occupancy
      and equipment costs
                                    
                                    
                                    1,440,000
                                    
                                    
                                    
                                    869,000
                                    
                                    
                                    
                                    571,000
                                    
                                    
                                    
                                    66%Professional
      fees
                                    
                                    
                                    607,000
                                    
                                    
                                    
                                    463,000
                                    
                                    
                                    
                                    144,000
                                    
                                    
                                    
                                    31%Interest
                                    
                                    
                                    309,000
                                    
                                    
                                    
                                    70,000
                                    
                                    
                                    
                                    239,000
                                    
                                    
                                    
                                    341%Taxes,
      licenses and registration
                                    
                                    
                                    342,000
                                    
                                    
                                    
                                    77,000
                                    
                                    
                                    
                                    265,000
                                    
                                    
                                    
                                    344%Other
      administrative expenses
                                    
                                    
                                    566,000
                                    
                                    
                                    
                                    535,000
                                    
                                    
                                    
                                    31,000
                                    
                                    
                                    
                                    6%$
                                    26,513,000
                                    
                                    
                                    $
                                    17,648,000
                                    
                                    
                                    $
                                    8,865,000
                                    
                                    
                                    
                                    50%
  Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $5,456,000, or 43%, to
$18,007,000 in the second quarter of fiscal year 2009 from $12,551,000 in the
second quarter of fiscal year 2008.  The increase is primarily
attributable to an increase in the related commission revenues from the vFinance
merger and is consistent with the increase in commission
revenues.  Commission expense includes the amortization of advances to
registered representatives of $364,000 and $313,000 for the second quarter of
fiscal years 2009 and 2008, 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 $729,000, or 32%, to $3,307,000 in the second
quarter of fiscal year 2009 from $2,308,000 in the second quarter of fiscal year
2008.  The increase is primarily attributable to costs from vFinance
due to the merger.  Employee compensation includes the amortization of
the fair value associated with stock based compensation of $237,000 and $108,000
in second quarter of fiscal years 2009 and 2008,
respectively.  Overall, combined commission and employee compensation
expense, as a percentage of total revenue decreased to 86% from 91% in the
second quarter of fiscal year 2009 and 2008, respectively as a result of cost
cutting plans implemented due to economic conditions.
 
 Clearing
fees increased $652,000 or 125%, to $1,174,000 in the second quarter of fiscal
year 2009 from $522,000 in the second quarter of fiscal year
2008.  The increase in clearing fees is primarily attributable to
costs from vFinance due to the merger.  The greater increase in
clearing fees as compared to the increase in commission revenue is attributable
to lower average commission revenue per ticket in the second quarter of fiscal
year 2009.
 
 Communication
expenses increased $778,000 or 308%, to $1,031,000 from $253,000 in the second
quarter of fiscal year 2009 compared to the second quarter of fiscal year
2008.  The increase is partly due to costs from vFinance due to the
merger and the need for additional network connectivity between corporate
offices.  Occupancy costs increased $571,000, or 66%, to $1,440,000
from $869,000 in the second quarter of fiscal year 2009 compared to the second
quarter of fiscal year 2008.  The increase in occupancy expense is due
to annual rent increases contained in the Company’s office leases and the
addition of rented office space due to the vFinance merger.
 
 Professional
fees increased $144,000, or 31%, to $607,000 from $463,000 in the second quarter
of fiscal year 2009 compared to the second quarter of fiscal year
2008.  The increase in professional fees is primarily a result of the
filing of a registration statement and generally higher legal costs associated
with the merger with vFinance.
 
 16
 Interest
expense increased $239,000, or 341%, to $309,000 from $70,000 in the second
quarter of fiscal year 2009 compared to the second quarter of fiscal year
2008.  The increase in interest expense is attributable to new
convertible notes issued in March and June of fiscal year
2008.  Included in interest expense is the amortization of deferred
financing costs of $137,000 and $27,000 for the second quarter of fiscal years
2009 and 2008, respectively.  Taxes, licenses and registration
increased $265,000, or 344%, to $342,000 from $77,000 in the second quarter of
fiscal year 2009 compared to the second quarter of fiscal year
2008.  The increase in taxes, licenses and registration is due to
primarily to costs from vFinance due to the merger.  Other
administrative expenses increased $31,000 or 6% to $566,000 from $535,000 in the
second quarter of fiscal year 2009 compared to the second quarter of fiscal year
2008.  The increase is primarily attributable to costs from vFinance
due to the merger.
 
 The
Company reported a net loss of $1,927,000 in the second quarter of fiscal year
2009 compared to a net loss of $1,364,000 in the second quarter of fiscal year
2008.  The net loss attributable to common stockholders in the second
quarter of fiscal year 2009 was $2,010,000, or $.12 per common share, as
compared to a net loss attributable to common stockholders in the second quarter
of fiscal year 2008 of $1,447,000, or $.17 per common share.  The net
loss attributable to common stockholders for both the second quarter of fiscal
year 2009 and 2008 reflects $83,000 of cumulative preferred stock dividends on
the Company’s preferred stock.
 
 Six Months Ended March 31,
2009 Compared to Six Months Ended March 31, 2008
 
 The
Company’s first six months of fiscal year 2009 resulted in an increase in
revenues, but a greater increase in expenses compared to the same period last
year.  As a result, the Company reported a net loss of $3,070,000
compared with a net loss of $2,532,000 for the first six months of fiscal years
2009 and 2008, respectively.
  Six
      Months EndedMarch
      31,
                                            
                                            
                                            Increase
      (Decrease)2009
                                            
                                            
                                            2008
                                            
                                            
                                            Amount
                                            
                                            
                                            PercentCommissions
                                            
                                            $
                                            28,119,000
                                            
                                            
                                            $
                                            23,216,000
                                            
                                            
                                            $
                                            4,903,000
                                            
                                            
                                            
                                            21%Net
      dealer inventory gains
                                            
                                            
                                            13,914,000
                                            
                                            
                                            
                                            7,833,000
                                            
                                            
                                            
                                            6,081,000
                                            
                                            
                                            
                                            78%Investment
      banking
                                            
                                            
                                            1,149,000
                                            
                                            
                                            
                                            67,000
                                            
                                            
                                            
                                            1,082,000
                                            
                                            
                                            
                                            1615%Interest
      and dividends
                                            
                                            
                                            1,033,000
                                            
                                            
                                            
                                            1,810,000
                                            
                                            
                                            
                                            (777,000
                                            )
                                            
                                            
                                            -43%Transfer
      fees and clearance services
                                            
                                            
                                            5,669,000
                                            
                                            
                                            
                                            2,273,000
                                            
                                            
                                            
                                            3,396,000
                                            
                                            
                                            
                                            149%Other
                                            
                                            
                                            2,554,000
                                            
                                            
                                            
                                            1,450,000
                                            
                                            
                                            
                                            1,104,000
                                            
                                            
                                            
                                            76%$
                                            52,438,000
                                            
                                            
                                            $
                                            36,649,000
                                            
                                            
                                            $
                                            15,789,000
                                            
                                            
                                            
                                            43%
  Total
revenues increased $15,789,000, or 43%, in the first six months of fiscal year
2009 to $52,438,000 from $36,649,000 in the first six months of fiscal year
2008.  The increase in revenues is due primarily to the addition of
vFinance revenues as a result of the merger.  Commission revenue
increased $4,903,000, or 21%, to $28,119,000 from $23,216,000 during the first
six months of fiscal year 2009 compared with the same period in fiscal year
2008, which is due primarily to the addition of vFinance revenues as a result of
the merger.  Net dealer inventory gains which includes profits on
proprietary trading, market making activities and customer mark-ups and
mark-downs, increased $6,081,000, or 78%, to $13,914,000 from $7,833,000 during
the first six months of fiscal year 2009 compared with the same period in fiscal
year 2008.  The increase is due primarily to the addition of vFinance
revenues as a result of the merger.
 
 Investment
banking revenue increased $1,082,000, or 1,615%, in the first six months of
fiscal year 2009 to $1,149,000 from $67,000 in the first six months of fiscal
year 2008.  These revenues were attributable to the closing of a small
private placement as well as advisory and consulting services provided during
the six month period.  Interest and dividend income decreased by
$777,000 or 43%, to $1,033,000 from $1,810,000 in the first six months of fiscal
year 2009 compared with the same period last year.  The decrease in
interest income is attributable to generally lower customer margin account
balances, lower customer free cash balances and lower prevailing interest rates
during the quarter.  Transfer fees and clearance services increased
$3,396,000 or 149%, to $5,669,000 in the first six months of fiscal year 2009
from $2,273,000 in the first six months of fiscal year 2008.  The
increase is due primarily to the addition of vFinance revenues as a result of
the merger.
 
 17
 Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees and other investment income, increased $1,104,000, or 76%, to
$2,554,000 from $1,450,000 during the first six months of fiscal year 2009
compared to the first six months of fiscal year 2008.  The increase is
due primarily to the addition of vFinance revenues as a result of the
merger.
 
 In
comparison with the 43% increase in total revenues, total expenses increased 42%
or $16,327,000 to $55,508,000 for the first six months of fiscal year 2009
compared to $39,181,000 in the first six months of fiscal year
2008.  The increase in total expenses is primarily a result of the
addition of vFinance expenses as a result of the merger.
  Six
      Months EndedMarch
      31,
                                                                              
                                                                              
                                                                              Increase
      (Decrease)2009
                                                                              
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              PercentCommissions
                                                                              
                                                                              $
                                                                              38,463,000
                                                                              
                                                                              
                                                                              $
                                                                              28,754,000
                                                                              
                                                                              
                                                                              $
                                                                              9,709,000
                                                                              
                                                                              
                                                                              
                                                                              34%Employee
      compensation
                                                                              
                                                                              
                                                                              6,044,000
                                                                              
                                                                              
                                                                              
                                                                              4,549,000
                                                                              
                                                                              
                                                                              
                                                                              1,495,000
                                                                              
                                                                              
                                                                              
                                                                              33%Clearing
      fees
                                                                              
                                                                              
                                                                              2,367,000
                                                                              
                                                                              
                                                                              
                                                                              1,136,000
                                                                              
                                                                              
                                                                              
                                                                              1,231,000
                                                                              
                                                                              
                                                                              
                                                                              108%Communications
                                                                              
                                                                              
                                                                              1,893,000
                                                                              
                                                                              
                                                                              
                                                                              608,000
                                                                              
                                                                              
                                                                              
                                                                              1,285,000
                                                                              
                                                                              
                                                                              
                                                                              211%Occupancy
      and equipment costs
                                                                              
                                                                              
                                                                              2,846,000
                                                                              
                                                                              
                                                                              
                                                                              1,733,000
                                                                              
                                                                              
                                                                              
                                                                              1,113,000
                                                                              
                                                                              
                                                                              
                                                                              64%Professional
      fees
                                                                              
                                                                              
                                                                              1,370,000
                                                                              
                                                                              
                                                                              
                                                                              1,051,000
                                                                              
                                                                              
                                                                              
                                                                              319,000
                                                                              
                                                                              
                                                                              
                                                                              30%Interest
                                                                              
                                                                              
                                                                              634,000
                                                                              
                                                                              
                                                                              
                                                                              143,000
                                                                              
                                                                              
                                                                              
                                                                              491,000
                                                                              
                                                                              
                                                                              
                                                                              343%Taxes,
      licenses and registration
                                                                              
                                                                              
                                                                              602,000
                                                                              
                                                                              
                                                                              
                                                                              207,000
                                                                              
                                                                              
                                                                              
                                                                              395,000
                                                                              
                                                                              
                                                                              
                                                                              191%Other
      administrative expenses
                                                                              
                                                                              
                                                                              1,289,000
                                                                              
                                                                              
                                                                              
                                                                              1,000,000
                                                                              
                                                                              
                                                                              
                                                                              289,000
                                                                              
                                                                              
                                                                              
                                                                              29%$
                                                                              55,508,000
                                                                              
                                                                              
                                                                              $
                                                                              39,181,000
                                                                              
                                                                              
                                                                              $
                                                                              16,327,000
                                                                              
                                                                              
                                                                              
                                                                              42%
  Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $9,709,000, or 34%, to $
38,463,000 in the first six months of fiscal year 2009 from $28,754,000 in the
first six months of fiscal year 2008.  The increase is primarily
attributable to an increase in the related commission revenues from the vFinance
merger.  Commission expense includes the amortization of advances to
registered representatives of $759,000 and $804,000 for the first six months of
fiscal years 2009 and 2008, 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 $1,495,000, or 33%, to $6,044,000 in the first
six months of fiscal year 2009 from $4,549,000 in the first six months of fiscal
year 2008.  The increase is primarily attributable to costs from
vFinance due to the merger.  Employee compensation includes the
amortization of the fair value associated with stock based compensation of
$473,000 and $210,000 in first six months of fiscal years 2009 and 2008,
respectively.  Overall, combined commission and employee compensation
expense, as a percentage of revenue decreased to 85% from 91% in the first six
months of fiscal year 2009 and 2008, respectively as a result of cost cutting
plans implemented due to economic conditions.
 
 Clearing
fees increased $1,231,000 or 108%, to $2,367,000 in the first six months of
fiscal year 2009 from $1,136,000 in the first six months of fiscal year
2008.  The increase in clearing fees is primarily attributable to
costs from vFinance due to the merger.  The greater increase in
clearing fees as compared to the increase in commission revenue is attributable
to lower average commission revenue per ticket in the first six months of fiscal
year 2009.
 
 18
 Communication
expenses increased $1,285,000 or 211%, to $1,893,000 from $608,000 in the first
six months of fiscal year 2009 compared to the first six months of fiscal year
2008.  The increase is due to costs from vFinance due to the
merger.  Occupancy costs increased $1,113,000, or 64%, to $2,846,000
from $1,733,000 in the first six months of fiscal year 2009 compared to the
first six months of fiscal year 2008.  The increase in occupancy
expense is due to annual rent increases contained in the Company’s office leases
and the addition of rented office space due to the vFinance merger.
 
 Professional
fees increased $319,000, or 30%, to $1,370,000 from $1,051,000 in the first six
months of fiscal year 2009 compared to the first six months of fiscal year
2008.  The increase in professional fees is primarily a result of the
filing of a registration statement and generally higher legal costs associated
with the merger with vFinance.
 
 Interest
expense increased $491,000, or 343%, to $634,000 from $143,000 in the first six
months of fiscal year 2009 compared to the first six months of fiscal year
2008.  The increase in interest expense is attributable to new
convertible notes issued in March and June of fiscal year
2008.  Included in interest expense is the amortization of deferred
financing costs of $265,000 and $55,000 the first six months of fiscal years
2009 and 2008, respectively.  Taxes, licenses and registration
increased $395,000, or 191%, to $602,000 from $207,000 in the first six months
of fiscal year 2009 compared to the first six months of fiscal year
2008.  The increase in taxes, licenses and registration is due to
primarily attributable to costs from vFinance due to the
merger.  Other administrative expenses increased $289,000 or 29% to
$1,289,000 from $1,000,000 in the first six months of fiscal year 2009 compared
to the first six months of fiscal year 2008.  The increase is
primarily attributable to costs from vFinance due to the merger.
 
 The
Company reported a net loss of $3,070,000 in the first six months of fiscal year
2009 compared to a net loss of $2,532,000 in the first six months of fiscal year
2008.  The net loss attributable to common stockholders in the first
six months of fiscal year 2009 was $3,239,000, or $.20 per common share, as
compared to a net loss attributable to common stockholders in the first six
months of fiscal year 2008 of $2,701,000, or $.31 per common
share.  The net loss attributable to common stockholders for both the
first six months of fiscal year 2009 and 2008 reflects $169,000 of cumulative
preferred stock dividends on the Company’s preferred stock.
 
 NON-G.A.A.P.
INFORMATION
 
 Management
considers EBITDA, as adjusted, an important indicator in evaluating our business
on a consistent basis across various periods. Due to the significance of
non-recurring items, EBITDA, as adjusted, enables our board of directors and
management to monitor and evaluate our business on a consistent basis. We use
EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate
financial and strategic planning decisions regarding future operating
investments and potential acquisitions. We believe that EBITDA, as adjusted,
eliminates items that are not part of our core operations, such as interest
expense and amortization expense associated with intangible assets, or do not
involve a cash outlay, such as stock-related compensation. EBITDA, as adjusted
should be considered in addition to, rather than as a substitute for, pre-tax
income, net income and cash flows from operating activities.  For the
three and six months ended March 31, 2009, EBITDA, as adjusted, was $(620,000)
and ($432,000), respectively.  In the three and six months ended March
31, 2008, EBITDA, as adjusted, was ($957,000) and
($1,664,000),respectively.  This improvement of $337,000 and
$1,232,000 in both the three and six months ended March 31, 2009 over 2008
result from increased revenues, lower average payout per dollar of commission
earned, and a reduction of operating expenses.
 
 19
  The
following table presents a reconciliation of EBITDA, as adjusted, to net income
as reported.
  Three
      Months Ended
                                                                        
                                                                        
                                                                        Six
      Months EndedMarch
      31,
                                                                        
                                                                        
                                                                        March
      31,2009
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2009
                                                                        
                                                                        
                                                                        2008Net
      income (loss), as reported
                                                                        
                                                                        $
                                                                        (1,927,000
                                                                        )
                                                                        
                                                                        $
                                                                        (1,364,000
                                                                        )
                                                                        
                                                                        $
                                                                        (3,070,000
                                                                        )
                                                                        
                                                                        $
                                                                        (2,532,000
                                                                        )Interest
      expense
                                                                        
                                                                        
                                                                        309,000
                                                                        
                                                                        
                                                                        
                                                                        70,000
                                                                        
                                                                        
                                                                        
                                                                        634,000
                                                                        
                                                                        
                                                                        
                                                                        143,000Taxes
                                                                        
                                                                        
                                                                        33,000
                                                                        
                                                                        
                                                                        
                                                                        40,000
                                                                        
                                                                        
                                                                        
                                                                        77,000
                                                                        
                                                                        
                                                                        
                                                                        106,000Depreciation
                                                                        
                                                                        
                                                                        200,000
                                                                        
                                                                        
                                                                        
                                                                        44,000
                                                                        
                                                                        
                                                                        
                                                                        362,000
                                                                        
                                                                        
                                                                        
                                                                        101,000Amortization
                                                                        
                                                                        
                                                                        162,000
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        324,000
                                                                        
                                                                        
                                                                        
                                                                        -EBITDA
                                                                        
                                                                        
                                                                        (1,223,000
                                                                        )
                                                                        
                                                                        
                                                                        (1,210,000
                                                                        )
                                                                        
                                                                        
                                                                        (1,673,000
                                                                        )
                                                                        
                                                                        
                                                                        (2,182,000
                                                                        )Non-cash
      compensation expense
                                                                        
                                                                        
                                                                        237,000
                                                                        
                                                                        
                                                                        
                                                                        20,000
                                                                        
                                                                        
                                                                        
                                                                        473,000
                                                                        
                                                                        
                                                                        
                                                                        29,000Forgivable
      loan write down
                                                                        
                                                                        
                                                                        366,000
                                                                        
                                                                        
                                                                        
                                                                        233,000
                                                                        
                                                                        
                                                                        
                                                                        768,000
                                                                        
                                                                        
                                                                        
                                                                        489,000EBITDA,
      as adjusted
                                                                        
                                                                        $
                                                                        (620,000
                                                                        )
                                                                        
                                                                        $
                                                                        (957,000
                                                                        )
                                                                        
                                                                        $
                                                                        (432,000
                                                                        )
                                                                        
                                                                        $
                                                                        (1,664,000
                                                                        )
  Earnings
before interest, taxes, depreciation and amortization, or EBITDA, adjusted for
gains or losses on sales of assets, non-cash compensation expense and loss on
extinguishment of debt, is a key metric we use in evaluating our business.
EBITDA is considered a non-GAAP financial measure as defined by Regulation G
promulgated by the SEC under the Securities Act of 1933, as
amended.
 
 Liquidity
and Capital Resources
 
 For the
periods ended March 31, 2009 and September 30, 2008, 52% and 54% of our total
assets consisted of cash and cash equivalents, marketable securities owned and
receivables from clearing brokers and other broker dealers.  The level
of cash used in each asset class is subject to fluctuation based on market
volatility, revenue production and trading activity in the
marketplace.  Allocation of cash into marketable securities classes
are dependent upon overall market activity, but the majority of our securities
owned are in municipal securities and common stock.
 
 Our
Broker Dealer Subsidiaries are 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 March 31, 2008, National
Securities’ net capital exceeded the requirement by $165,000.  Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain $100,000,
and at March 31, 2009 the firms had excess net capital of $313,000 and $127,000,
respectively.
 
 20
 Cash used
in operations for the six months ended March 31, 2009 was $2,480,000 which was
primarily due to our net loss of $3,069,000, an increase in marketable
securities owned of $1,152,000, a decrease of the payable to broker dealers and
clearing organizations of $419,000 and increase in other receivables of $385,000
partly due to an unsecured customer debit, and offset by a reduction in advances
to registered representatives of $610,000, and an increase in accounts payable
and accrued expenses of $735,000.
 
 Investing
activities used $343,000 due to the need to purchase fixed assets under mostly
capital leases due to the move of our vFinance Boca Raton data center into a
co-location in Miami, Florida.
 
 Financing
activities used $150,000 due to the repayment of part of the note to St. Cloud
Capital Partners of $150,000.
 
 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 2009.  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.
 
 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 quarter
ended March 31, 2009 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.
 
 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 2008, upon the maturity of the previously
issued note, National Securities and the holder entered into a new $500,000
secured demand note collateral agreement with a maturity date of March 1, 2009
at which time 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, 2009.  The note collateral agreement automatically
renewed on March 1, 2009 and is set to mature on March 1, 2010.
 
 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, which notes matured in February 2009.  The Company recorded a
debt discount of approximately $195,000 that is being charged to interest
expense over the life of the debt.  The investment included $500,000
by Christopher C. Dewey and $250,000 by St. Cloud Capital Partners, L.P. (“St.
Cloud”).  Mr. Dewey, and Marshall S. Geller, the Senior Managing
Partner of St. Cloud, are each members of the Company’s board of
directors.  In February 2009, we entered into forbearance agreements
with the investors as previously reported on our Current Report on Form 8-K, as
filed with the SEC on March 2, 2009, and on April 6, 2009 we amended our
forbearance agreement with St. Cloud, as filed with the SEC on April 10,
2009.  The St. Cloud note was repaid in full on April 30,
2009.
 
 On May 6,
2009, we entered into amendments to the existing forbearance agreements with the
remaining investors, as previously reported on our Current Report on Form 8-K,
as filed with the SEC on May 6, 2009, whereby the remaining investors agreed not
exercise any of their rights under their notes until May 12, 2009.  On
May 14, 2009, we entered into second amendments to the existing forbearance
agreements with the remaining investors whereby the remaining investors agreed
not exercise any of their rights under their notes until May 22,
2009.  As of the date here, such notes remain
outstanding.
  21
 On March
31, 2008, the Company completed a financing transaction under which an investor
made an investment in the Company by purchasing a convertible promissory note in
the principal amount of $3.0 million, with a warrant to purchase 375,000 shares
of common stock at an exercise price of $2.50 per share.  The
promissory note matures in March 2012, is convertible into common stock at a
price of $2.00 per share and has a stated interest rate of 10% per
annum.  Under accounting guidance provided by EITF No 98-5 and EITF
No. 00-27 the relative fair value of the warrant was calculated using the
Black-Scholes Option Valuation Model.  The Company also recorded an
additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $791,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 On June
30, 2008, the Company completed a financing transaction under which the same
investor made an additional investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0 million, with a
warrant to purchase 468,750 shares of common stock at an exercise price of $2.00
per share.  The promissory note matures in June 2012, is convertible
into common stock at a price of $1.60 per share and has a stated interest rate
of 10% per annum.  Under accounting guidance provided by EITF No 98-5
and EITF No. 00-27 the relative fair value of the warrant was calculated using
the Black-Scholes Option Valuation Model.  The Company also recorded
an additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $789,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 In April
2005, National Securities entered into a clearing agreement with National
Financial Services LLC (“NFS”) that became effective in June 2005.  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. The Broker Dealer Subsidiaries currently have clearing
agreements with NFS, Penson Financial Services, Inc., Legent Clearing LLC and
Fortis Securities, LLC.  The Company believes that the overall effect
of its clearing relationships has been beneficial to the Company’s cost
structure, liquidity and capital resources.
 
 Contractual
Obligations
 
 There
have been no material changes during the period covered by this report, outside
of the ordinary course of our business, to the contractual obligations specified
in the table of contractual obligations disclosed in Part II, Item 7 –
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of our Annual Report on Form 10-K for the year ended September 30,
2008.
 
 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 historically made 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.
 
 22
 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 quoted market values of marketable securities owned
("long") by the Company, securities sold but not yet purchased ("short") the
Company, and net positions as of March 31, 2009:
  Long
                        
                        
                        Short
                        
                        
                        NetCorporate
      stocks
                        
                        $
                        221,000
                        
                        
                        $
                        10,000
                        
                        
                        $
                        211,000Corporate
      bonds
                        
                        
                        11,000
                        
                        
                        
                        1,000
                        
                        
                        
                        10,000Government
      obligations
                        
                        
                        1,896,000
                        
                        
                        
                        -
                        
                        
                        
                        1,896,000$
                        2,128,000
                        
                        
                        $
                        11,000
                        
                        
                        $
                        2,117,000
  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 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 quarterly report on Form 10-Q was
being prepared.
 
 Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act, is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
disclosure.
 
 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.
 
 
 23
  PART
II – OTHER INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 During
the quarter ended March 31, 2009, there were no significant developments in the
Company’s legal proceedings.  For a detailed discussion of the
Company’s legal proceedings, please refer to Note 6 herein, and the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2008.
 
 ITEM
1A.  RISK FACTORS
 
 There are
no material changes from the risk factors previously disclosed in the Company’s
Form 10-K for the year ended September 30, 2008.
 
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 None.
 
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 The
Company held its annual meeting of shareholders on March 16, 2009 as reported on
the Company’s Current report on Form 8-K, filed with the SEC on March 19,
2009
 
 ITEM
5. OTHER INFORMATION
 
 On April
9, 2009, we announced that we entered into a definitive Securities Purchase
Agreement (the “Purchase Agreement”), with Fund.Com, Inc., a Delaware
corporation (the “Investor”) whereby the Investor has agreed to provide $5
million in preferred stock financing (the “Financing”).
 
 Under the
terms of the Purchase Agreement, the Investor has agreed to purchase an
aggregate of 5,000 shares of our to be created Series C Convertible
Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”) at a
purchase price of $1,000.00 per share, and warrants to purchase an aggregate of
25,333,333 shares of common stock (on an as-exercised basis) with an exercise
price of $0.75 per share.   In connection with the Financing, the
Investor provided us with an initial investment tranche of $500,000, as
evidenced by the Company’s limited recourse promissory note, dated April 8, 2009
(the “Note”), which Note automatically converted on April 30, 2009 into 666,666
shares of common stock based on a $.75 per common share price.
 
 On May 5,
2009, we entered into Amendment No. 1 to the Purchase Agreement which provides
that the closing date of the transaction will be extended to May 29, 2009,
subject to receipt by the Company of a good faith deposit from the Investor by
May 11, 2009 in the amount of $200,000 for the payment of professional
fees.   On May 14, 2009, we entered into Amendment No. 2 to the
Purchase Agreement whereby we waived the $200,000 payment of professional fees
and agreed to close the transaction no later than May 22, 2009.
 
 24
  On May 6,
2009, we entered into amendments to the existing forbearance agreements with the
remaining investors, as previously reported on our Current Report on Form 8-K,
as filed with the SEC on May 6, 2009, whereby the remaining investors agreed not
exercise any of their rights under their notes until May 12, 2009.  On
May 14, 2009, we entered into second amendments to the existing forbearance
agreements with the remaining investors whereby the remaining investors agreed
not exercise any of their rights under their notes until May 22,
2009.  As of the date here, such notes remain
outstanding.
 
 ITEM 6.EXHIBITS
 
 4.7
              Limited
      Recourse Promissory Note, dated April 8, 2009, to Fund.Com,
      Inc.
 10.28
              Securities
      Purchase Agreement, dated April 8, 2009, by and between National Holding
      Corporation and Fund.Com, Inc.
 10.29
              Amendment
      No. 1 to Securities Purchase Agreement, dated May 5, 2009, by and between
      National Holdings Corporation and Fund.Com,
Inc.
 10.30
              Amendment
      No. 2 to Securities Purchase Agreement, dated May 14, 2009, by and between
      National Holdings Corporation and Fund.Com,
Inc.
 10.31
              Amendment
      No. 1 to Forbearance Agreement, dated as of May 6, 2009, by
      and between National Holdings Corporation and Christopher C.
      Dewey.
 10.32
              Amendment
      No. 1 to Forbearance Agreement, dated as of May 6, 2009, by
      and between National Holdings Corporation and Bedford Oak Partners,
      L.P.
 10.33
              Amendment
      No.2 to Forbearance Agreement, dated as of May 14, 2009, by
      and between National Holdings Corporation and Christopher C.
      Dewey.
 10.34
              Amendment
      No.2 to Forbearance Agreement, dated as of May 14, 2009, by
      and between National Holdings Corporation and Bedford Oak Partners,
      L.P.
 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.
 
 
 25
  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.
 
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESMay
      14, 2009
                                  By:
                                  /s/ Mark
      GoldwasserMark
      Goldwasser
                                    Chief
      Executive OfficerMay
      14, 2009
                                  By:
                                  /s/
      Alan B. LevinAlan
      B. Levin
                                    Chief
      Financial Officer
    26