**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 EndedJune
                30, 2007
            Commission
                File Number001-12629





**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
o





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Exchange
      Act Rule 12b-2 ). YES o NO
x





As
      of
      July 31, 2007 there were 8,235,878 shares of the registrant's common stock
      outstanding.











**NATIONAL
                  HOLDINGS CORPORATION AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF FINANCIAL
                  CONDITION**
  **ASSETS**June
                  30,
              
              September
                  30,2007
              
              2006(unaudited)
              
              (see
                  note
                  below)CASH
              
              $
              6,187,000
              
              $
              1,441,000RESTRICTED
                  CASH
              
              
              9,000
              
              
              —DEPOSITS
                  WITH CLEARING ORGANIZATIONS
              
              
              351,000
              
              
              300,000RECEIVABLES
                  FROM BROKER-DEALERS AND CLEARING
                  ORGANIZATIONS
              
              
              3,335,000
              
              
              3,548,000OTHER
                  RECEIVABLES, net of allowance for uncollectible accounts of
                  $467,000at
                  June 30, 2007 and September 30, 2006,
                  respectively
              
              
              774,000
              
              
              380,000ADVANCES
                  TO REGISTERED REPRESENTATIVES
              
              
              2,106,000
              
              
              1,556,000SECURITIES
                  OWNEDMarketable,
                  at market value
              
              
              917,000
              
              
              475,000Non-marketable,
                  at fair value
              
              
              —
              
              
              402,000FIXED
                  ASSETS, net
              
              
              277,000
              
              
              305,000SECURED
                  DEMAND NOTE
              
              
              500,000
              
              
              1,000,000OTHER
                  ASSETS
              
              
              708,000
              
              
              300,000TOTAL
                  ASSETS
              
              $
              15,164,000
              
              $
              9,707,000**LIABILITIES
                  AND STOCKHOLDERS'
                  EQUITY**PAYABLE
                  TO
                  BROKER-DEALERS AND CLEARING ORGANIZATIONS
              
              $
              702,000
              
              $
              113,000SECURITIES
                  SOLD, BUT NOT YET PURCHASED, at market
              
              
              215,000
              
              
              162,000ACCOUNTS
                  PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
              
              
              6,285,000
              
              
              3,943,000CONVERTIBLE
                  NOTES PAYABLE, net of debt discount of $159,000at
                  September
                  30, 2006
              
              
              —
              
              
              841,000NOTES
                  PAYABLE, net of debt discounts of $162,000 and $45,000at
                  June 30,
                  2007 and September 30, 2006, respectively
              
              
              838,000
              
              
              805,000TOTAL
                  LIABILITIES
              
              
              8,040,000
              
              
              5,864,000SUBORDINATED
                  BORROWINGS
              
              
              500,000
              
              
              1,000,000COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS'
                  EQUITYPreferred
                  stock, $.01 par value, 200,000 shares authorized; 50,000
                  sharesdesignated
                  as Series A and 20,000 shares designated as Series
                  B
              
              
              —
              
              
              —Series
                  A 9%
                  cumulative convertible preferred stock, $.01 par value,
                  50,000shares
                  authorized; 37,550 shares issued and outstanding
                  (liquidationpreference:
                  $3,755,000) at June 30, 2007 and 35,316 shares issued
                  andoutstanding
                  (liquidation preference: $3,531,600) at September 30,
                  2006
              
              
              —
              
              
              —Series
                  B 10%
                  cumulative convertible preferred stock, $.01 par value,
                  20,000shares
                  authorized; 10,000 shares issued and outstanding
                  (liquidationpreference:
                  $1,000,000) at June 30, 2007 and September 30, 2006,respectively
              
              
              —
              
              
              —Common
                  stock,
                  $.02 par value, 30,000,000 shares authorized;6,671,764
                  and 5,223,968 shares issued and
                  outstanding,at
                  June 30, 2007 and September 30, 2006,
                  respectively
              
              
              133,000
              
              
              104,000Additional
                  paid-in capital
              
              
              19,050,000
              
              
              16,956,000Accumulated
                  deficit
              
              
              (12,559,000
              )
              
              (14,217,000
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              6,624,000
              
              
              2,843,000TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              15,164,000
              
              $
              9,707,000


Note:
        The balance sheet at September 30, 2006 has been derived from the
        audited consolidated financial statements at that date.
  See
        notes
        to condensed consolidated financial statements.


-2-




**NATIONAL
                  HOLDINGS CORPORATION AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**
  Three
                  Months Ended
              
              Nine
                  Months EndedJune
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006REVENUES:Commissions
              
              $
              10,761,000
              
              $
              7,952,000
              
              $
              27,705,000
              
              $
              25,823,000Net
                  dealer inventory gains
              
              
              3,051,000
              
              
              2,219,000
              
              
              10,109,000
              
              
              6,270,000Investment
                  banking
              
              
              4,278,000
              
              
              1,574,000
              
              
              7,945,000
              
              
              8,667,000Total
                  commission and fee revenues
              
              
              18,090,000
              
              
              11,745,000
              
              
              45,759,000
              
              
              40,760,000Interest
                  and dividends
              
              
              649,000
              
              
              825,000
              
              
              2,010,000
              
              
              2,207,000Transfer
                  fees and clearing services
              
              
              1,029,000
              
              
              867,000
              
              
              3,045,000
              
              
              2,597,000Other
              
              
              461,000
              
              
              547,000
              
              
              1,314,000
              
              
              894,000TOTAL
                  REVENUES
              
              
              20,229,000
              
              
              13,984,000
              
              
              52,128,000
              
              
              46,458,000EXPENSES:Commissions
              
              
              14,017,000
              
              
              10,044,000
              
              
              36,193,000
              
              
              33,775,000Employee
                  compensation and related expenses
              
              
              2,168,000
              
              
              1,541,000
              
              
              5,430,000
              
              
              4,425,000Clearing
                  fees
              
              
              444,000
              
              
              405,000
              
              
              1,162,000
              
              
              1,205,000Communications
              
              
              419,000
              
              
              296,000
              
              
              1,247,000
              
              
              1,328,000Occupancy
                  and equipment costs
              
              
              614,000
              
              
              693,000
              
              
              2,090,000
              
              
              2,001,000Professional
                  fees
              
              
              318,000
              
              
              246,000
              
              
              1,835,000
              
              
              830,000Interest
              
              
              252,000
              
              
              104,000
              
              
              461,000
              
              
              389,000Taxes,
                  licenses, registration
              
              
              134,000
              
              
              177,000
              
              
              476,000
              
              
              490,000Other
                  administrative expenses
              
              
              302,000
              
              
              326,000
              
              
              1,182,000
              
              
              1,180,000TOTAL
                  EXPENSES
              
              
              18,668,000
              
              
              13,832,000
              
              
              50,076,000
              
              
              45,623,000NET
                  INCOME
              
              
              1,561,000
              
              
              152,000
              
              
              2,052,000
              
              
              835,000Preferred
                  stock dividends
              
              
              (109,000
              )
              
              (104,000
              )
              
              (317,000
              )
              
              (275,000
              )Net
                  income attributable to common stockholders
              
              $
              1,452,000
              
              $
              48,000
              
              $
              1,735,000
              
              $
              560,000NET
                  INCOME PER COMMON SHAREBasic:Net
                  income attributable to common stockholders
              
              $
              0.26
              
              $
              0.01
              
              $
              0.32
              
              $
              0.11Diluted:Net
                  income attributable to common stockholders
              
              $
              0.14
              
              $
              0.01
              
              $
              0.20
              
              $
              0.09Weighted
                  average number of shares outstandingBasic
              
              
              5,543,151
              
              
              5,223,968
              
              
              5,388,225
              
              
              5,120,290Diluted
              
              
              10,817,779
              
              
              5,454,099
              
              
              10,220,264
              
              
              10,378,810


See
        notes
        to condensed consolidated financial statements.


-3-




**NATIONAL
                  HOLDINGS CORPORATION AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**
  Nine
                  Months EndedJune
                  30, 2007
              
              June
                  30, 2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              $
              2,052,000
              
              $
              835,000Adjustments
                  to reconcile net income to netcash
                  provided by operating activitiesDepreciation
                  and amortization
              
              
              111,000
              
              
              113,000Amortization
                  of deferred financing costs
              
              
              27,000
              
              
              3,000Amortization
                  of note discount
              
              
              237,000
              
              
              159,000Compensatory
                  element of common stock issuance
              
              
              —
              
              
              12,000Compensatory
                  element of common stock option issuances
              
              
              85,000
              
              
              12,000Provision
                  for doubtful accounts
              
              
              —
              
              
              25,000Changes
                  in assets and liabilitiesRestricted
                  cash
              
              
              (9,000
              )
              
              —Deposits
                  with clearing organizations
              
              
              (51,000
              )
              
              —Receivables
                  from broker-dealers, clearing organizations and others
              
              
              (731,000
              )
              
              (50,000
              )Securities
                  owned: marketable, at market value
              
              
              (442,000
              )
              
              (267,000
              )Securities
                  owned: non-marketable, at fair value
              
              
              402,000
              
              
              —Other
                  assets
              
              
              (408,000
              )
              
              (202,000
              )Payables
              
              
              2,947,000
              
              
              533,000Securities
                  sold, but not yet purchased, at market
              
              
              53,000
              
              
              190,000Net
                  cash provided by operating activities
              
              
              4,273,000
              
              
              1,363,000CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of fixed assets
              
              
              (83,000
              )
              
              (193,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESNet
                  proceeds from issuance of common stock
              
              
              —
              
              
              175,000Net
                  proceeds from issuance of preferred stock
              
              
              —
              
              
              972,000Net
                  proceeds from issuance of convertible notes payable
              
              
              —
              
              
              1,000,000Net
                  proceeds from issuance of notes payable
              
              
              1,000,000
              
              
              —Cash
                  payment of deferred financing costs
              
              
              (22,000
              )
              
              (28,000
              )Payment
                  of notes payable
              
              
              (850,000
              )
              
              (1,175,000
              )Dividends
                  paid
              
              
              (75,000
              )
              
              (22,000
              )Exercise
                  of stock options and warrants
              
              
              503,000
              
              
              —Net
                  cash provided by financing activities
              
              
              556,000
              
              
              922,000NET
                  INCREASE IN CASH
              
              
              4,746,000
              
              
              2,092,000CASH
                  BALANCEBeginning
                  of the period
              
              
              1,441,000
              
              
              398,000End
                  of the period
              
              $
              6,187,000
              
              $
              2,490,000SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during the period for:Interest
              
              $
              192,000
              
              $
              234,000Dividends
              
              $
              75,000
              
              $
              21,000SUPPLEMENTAL
                  DISCLOSURES OF NONCASH INVESTING ANDFINANCING
                  ACTIVITIESWarrants
                  issued in connection with debt
              
              $
              195,000
              
              $
              187,000Preferred
                  stock dividends
              
              $
              317,000
              
              $
              300,000Common
                  stock issued to holders of convertible notes
              
              $
              1,024,413
              
              $
              —


See
        notes
        to condensed consolidated financial statements.


-4-




**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


**(UNAUDITED)**





**NOTE
      1. BASIS OF PRESENTATION**





The
      accompanying condensed consolidated financial statements of National Holdings
      Corporation (“National Holdings” 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 June 30, 2007 and for the periods ended June 30, 2007 and
      June
      30, 2006 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, 2006.





**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**





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




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




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


-5-


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





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





**NOTE
      3.**  **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.  During the nine months
      ended June 30, 2006, the Company granted 170,000 stock options with a fair
      value
      of approximately $88,000. A charge of approximately $7,000 and $12,000 was
      recorded in the three and nine months ended June 30, 2006, respectively,
      relating to the amortization of the fair value associated with these grants.
      During the nine months ended June 30, 2007, the Company granted 720,000 stock
      options with a fair value of approximately $574,000. A charge of approximately
      $55,000 and $85,000 was recorded in the three and nine months ended June 30,
      2007, respectively, relating to the amortization of the fair value associated
      with stock option grants. The Company did not make any stock options grants
      in
      the three months ended June 30, 2006 or June 30, 2007.




As
      stock-based compensation expense recognized in the condensed consolidated
      statements of operations is based on awards that are ultimately expected to
      vest, it has been reduced for expected forfeitures. SFAS No. 123(R) requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those estimates.
      Forfeitures were estimated based on historical experience. If factors change
      and
      the Company employs different assumptions in the application of SFAS No. 123(R)
      in future periods, the compensation expense that the Company records under
      SFAS
      No. 123(R) may differ significantly from what has been recorded in the current
      period.





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


-6-


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.
      Principal assumptions used in applying the Black-Scholes model along with the
      results from the model were as follows:




2007
              
              2006Assumptions:Risk-free
                  interest rate
              
              
              4.40
              %
              
              4.40
              %Expected
                  life, in years
              
              
              3.0
              
              
              3.0Expected
                  volatility
              
              
              83
              %
              
              88
              %




A
      summary
      of the stock option activity as of June 30, 2007, and changes during the nine
      month period then ended is presented below:




WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              IntrinsicShares
              
              Price
              
              Term
              
              ValueOutstanding
                  at September 30, 2006
              
              
              932,000
              
              $
              1.30
              
              
              3.31Granted
              
              
              720,000
              
              $
              1.60
              
              
              4.91Exercised
              
              
              (20,000
              )
              $
              0.72Expired
              
              
              (25,000
              )
              $
              2.00Outstanding
                  at June 30, 2007
              
              
              1,607,000
              
              $
              1.43
              
              
              3.58
              
              $
              2,517,000Exerciseable
                  at June 30, 2007
              
              
              987,000
              
              $
              1.32
              
              
              2.93
              
              $
              1,658,000




As
      of
      June 30, 2007, there was $558,000 of total unrecognized deferred compensation
      costs related to share-based compensation arrangements.





A
      summary
      of the status of the Company’s nonvested shares as of June
      30 ,
      2007,
      and changes during the nine month period then ended is presented
      below:


-7-




WeightedAverageGrant
                  DateNonvested
                  Shares
              
              Shares
              
              Fair
                  ValueNonvested
                  at September 30, 2006
              
              
              75,000
              
              $
              0.33Granted
              
              
              595,000
              
              $
              0.81Vested
              
              
              (50,000
              )
              $
              0.33Expired
              
              
              —Nonvested
                  at March 31, 2007
              
              
              620,000
              
              $
              0.79


**NOTE
      4. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
      PURCHASED**





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




Securities
                  held
              
              Securities
                  sold, butnot yetfor
                  resale
              
              purchasedCorporate
                  stocks
              
              $
              901,000
              
              $
              215,000Corporate
                  bonds
              
              
              —
              
              
              —Government
                  obligations
              
              
              16,000
              
              
              —$
              917,000
              
              $
              215,000


**NOTE
      5. CLEARING AGREEMENTS**





In
      April
      2005, the Company’s wholly-owned subsidiary, National Securities Corporation
      (“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 business
      credit, that is being amortized over an eight year period, the net amount of
      which has been included in “Accounts Payable, Accrued Expenses and Other
      Liabilities” in the accompanying consolidated statements of financial condition
      as of June 30, 2007. In the second quarter of fiscal year 2007, NFS agreed
      to
      provide National Securities a $250,000 clearing fee waiver that is being
      amortized over a two year period, the net amount of which has been included
      in
“Accounts Payable, Accrued Expenses and Other Liabilities” in the accompanying
      consolidated statements of financial condition as of June 30, 2007. The clearing
      agreement includes a termination fee if National Securities terminates the
      agreement without cause. In June 2005, National Securities entered into a
      clearing agreement with Penson Financial Services, Inc. (“Penson”) for the
      purpose of providing clearing services that are not provided by NFS.
      Additionally, in June 2007, National Securities entered into a clearing
      agreement with Legent Clearing LLC (“Legent”) for the purpose of providing
      clearing services that are not provided by NFS and to maintain a pre-existing
      clearing relationship for brokers newly associated with National Securities.
      The
      Company believes that the overall effect of these clearing relationships is
      beneficial to the Company’s cost structure, liquidity and capital
      resources.





**NOTE
      6.**  **CONTINGENCIES**





In
      September 2006, the former
      chairman and chief executive officer of the Company, Steven A. Rothstein,
      commenced an arbitration against the current chairman and chief executive
      officer of the Company, Mark


-8-


Goldwasser,
      in the matter *Rothstein
      et al. vs. Goldwasser* ,
      NASD
      No. 06-04000.  Rothstein is alleging fraud and inequitable conduct relating
      to his attempts to sell his investment in the Company in calendar year
      2001, and is seeking approximately $5,750,000 in damages.  The
      Company is indemnifying Mr. Goldwasser in this action.  The Company
      and Mr. Goldwasser believe this action is without merit, and intend to
      vigorously defend this action.





The
      Company is a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims seeking
      in the aggregate damages of approximately $1,200,000. The Company believes
      such claims are substantially without merit, and estimates that its liability,
      primarily for defense costs, will approximate $200,000 (exclusive of unspecified
      punitive damages related to certain claims and inclusive of expected insurance
      coverage). These matters arise in the normal course of business. The Company
      intends to vigorously defend itself in these actions, and believes that the
      eventual outcome of these matters will not have a material adverse effect on
      the
      Company. However,
      the ultimate outcome of these matters cannot be determined at this time. The
      amounts related to such matters that are reasonably estimable and which have
      been accrued at June 30, 2007 and 2006, is $97,000 and $207,000, 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 NASD related expenses
      of $121,000 and $127,000 for the third quarter of fiscal year 2007 and 2006,
      respectively, and $1,254,000 and $527,000 for the first nine months of fiscal
      year 2007 and 2006, respectively.





**NOTE
      7. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK**





The
      holders of the Company’s Series A convertible preferred stock, 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 accrue whether or not declared by the Company’s Board of
      Directors, but are payable only when, as and if declared by the Company’s Board
      of Directors. In March 2007, the Company’s Board of Directors declared an
      in-kind dividend in the aggregate of 2,537 shares of Series A preferred stock,
      in payment of approximately $317,000 of dividends accrued through March 31,
      2007. Such shares were issued on April 30, 2007. At June 30, 2007, the
      accumulated dividend on the Company’s 37,550 issued and outstanding shares of
      Series A preferred stock was $84,000.





The
      holders of the Company’s Series B convertible preferred stock, convertible into
      the Company’s common stock at $.75 per share, are entitled to receive dividends
      on a quarterly basis at a rate of 10% per annum per share. Such dividends are
      cumulative and are payable only when declared by the Company’s Board of
      Directors. In June 2007, the Company’s Board of Directors declared a cash
      dividend of $25,000 payable to the holders of the Series B preferred stock
      that
      was paid in July 2007. (See Note 12.)





**NOTE
      8. INCOME PER COMMON SHARE**





Basic
      income per share is computed on the basis of the weighted average number of
      common shares outstanding. Diluted income 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.





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





-9-




Three
                  Months Ended
              
              Nine
                  Months EndedJune
                  30, 2007
              
              June
                  30, 2006
              
              June
                  30, 2007
              
              June
                  30, 2006Numerator:Net
                  income
              
              $
              1,561,000
              
              $
              152,000
              
              $
              2,052,000
              
              $
              835,000Preferred
                  stock dividends
              
              
              (109,000
              )
              
              (104,000
              )
              
              (317,000
              )
              
              (275,000
              )Numerator
                  for basic earnings per share--
                  net income attributable tocommon
                  stockholders - as reported
              
              
              1,452,000
              
              
              48,000
              
              
              1,735,000
              
              
              560,000Effect
                  of dilutive securities:Interest
                  on convertible notes
              
              
              —
              
              
              —
              
              
              —
              
              
              51,000Preferred
                  stock dividends
              
              
              109,000
              
              
              —
              
              
              317,000
              
              
              275,000Numerator
                  for basic earnings per share--
                  net income attributable tocommon
                  stockholders - as adjusted
              
              $
              1,561,000
              
              $
              48,000
              
              $
              2,052,000
              
              $
              886,000Denominator:Denominator
                  for basic earnings pershare--weighted
                  average shares
              
              
              5,543,151
              
              
              5,223,968
              
              
              5,388,225
              
              
              5,120,290Effect
                  of dilutive securities:Stock
                  options
              
              
              404,669
              
              
              57,626
              
              
              229,609
              
              
              28,645Warrants
              
              
              532,626
              
              
              172,505
              
              
              265,097
              
              
              71,262Assumed
                  conversion of:Series
                  A Preferred Stock
              
              
              3,004,000
              
              
              —
              
              
              3,004,000
              
              
              2,825,280Series
                  B Preferred Stock
              
              
              1,333,333
              
              
              —
              
              
              1,333,333
              
              
              1,333,333Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              1,000,000Dilutive
                  potential common shares
              
              
              5,274,628
              
              
              230,131
              
              
              4,832,039
              
              
              5,258,520Denominator
                  for diluted earnings pershare--adjusted
                  weighted-averageshares
                  and assumed conversions
              
              
              10,817,779
              
              
              5,454,099
              
              
              10,220,264
              
              
              10,378,810Net
                  income available tocommon
                  stockholdersBasic:
              
              $
              0.26
              
              $
              0.01
              
              $
              0.32
              
              $
              0.11Diluted:
              
              $
              0.14
              
              $
              0.01
              
              $
              0.20
              
              $
              0.09




**NOTE
      9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
      LIABILITIES**





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




June
                  30, 2007
              
              September
                  30, 2006Commissions
                  payable
              
              $
              3,366,000
              
              $
              1,993,000Legal
                  payable
              
              
              97,000
              
              
              325,000Other
              
              
              2,822,000
              
              
              1,625,000Total
              
              $
              6,285,000
              
              $
              3,943,000


-10-




**NOTE
      10. NOTES PAYABLE**





In
      February 2007, t he
      Company used $850,000 of the proceeds from the private placement of 10%
      promissory notes (See Note 11) to retire promissory notes that had maturity
      dates in February 2007.





The
      Company’s $1.0 million secured demand note matured on March 1, 2007. National
      Securities and the holder of the $1.0 million secured demand note entered into
      a
      new secured demand note that matures on March 1, 2008. In May 2007, the Company
      paid $500,000 of this secured demand note, and the balance is due at maturity.




In
      June
      2007, the Company exercised the mandatory conversion option contained in its
      11%
      convertible promissory notes. The Company issued 1,024,413 shares of its common
      stock in full payment of the $1,000,000 convertible promissory notes, plus
      accrued interest. The unamortized debt discount of approximately $150,000 was
      expensed as “Interest” in the third quarter ended June 30, 2007.





**NOTE
      11. PRIVATE PLACEMENT OF 10% PROMISSORY NOTES**





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





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





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





**NOTE
      12. STOCKHOLDERS’ EQUITY**





In
      the
      three and nine months ended June 30, 2007 the Company received proceeds of
      approximately $356,000 and $503,000, respectively, from the exercise of 244,500
      and 399,143, respectively, outstanding warrants and stock options. In the second
      quarter ended March 31, 2007, a holder of Series A preferred stock converted
      303
      shares of Series A preferred stock into 24,240 share of the Company’s common
      stock. In July 2007, the Company received proceeds of approximately $289,000
      from the exercise of outstanding warrants to purchase 230,781 shares of the
      Company’s common stock.





In
      July
      2007, the Company exercised the mandatory conversion option contained in its
      Series B convertible
      preferred stock .
      The
      Company issued 1,333,333 shares of its common stock to convert in full all
      of
      its outstanding Series B convertible
      preferred stock .
      In
      addition, the Company will pay the Series B preferred shareholders a dividend
      in
      the aggregate amount of approximately $7,200 for the period from July 1, 2007
      to
      July 26, 2007.


-11-


**NOTE
      13. NEW SUBSIDIARIES**





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





In
      the
      first quarter of fiscal year 2007, the Company formed a new wholly owned
      subsidiary, National Holdings Mortgage Corporation (“National Mortgage”) that
      will operate a mortgage broker business. National Mortgage is in the process
      of
      completing the requisite state registrations, and has not yet commenced business
      operations.





**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





*The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. This Quarterly Report may contain certain statements
      of a forward-looking nature relating to future events or future business
      performance. Any such statements that refer to the Company’s estimated or
      anticipated future results or other non-historical facts are forward-looking
      and
      reflect the Company’s current perspective of existing trends and information.
      These statements involve risks and uncertainties that cannot be predicted or
      quantified and, consequently, actual results may differ materially from those
      expressed or implied by such forward-looking statements. Such risks and
      uncertainties include, among others, risks and uncertainties detailed in the
      Company’s Annual Report on Form 10-K, filed with the Securities and Exchange
      Commission on December 7, 2006. Any forward-looking statements contained in
      or
      incorporated into this Quarterly Report speak only as of the date of this
      Quarterly Report. The Company undertakes no obligation to update publicly any
      forward-looking statement, whether as a result of new information, future events
      or otherwise.*





**RESULTS
      OF OPERATIONS**





Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006





The
      Company’s third quarter of fiscal year 2007 resulted in a substantial increase
      in revenues, and a comparatively smaller increase in expenses compared
      to the same period last year. As
      a
      result, the Company reported net income of $1,561,000 compared with net income
      of $152,000 for the third quarter of fiscal years 2007 and 2006, respectively.
      This represents an improvement of $1,409,000 from the prior period.




Three
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommissions
              
              $
              10,761,000
              
              $
              7,952,000
              
              $
              2,809,000
              
              
              35
              %Proprietary
                  trading
              
              
              2,876,000
              
              
              2,133,000
              
              
              743,000
              
              
              35
              %Market
                  making
              
              
              89,000
              
              
              68,000
              
              
              21,000
              
              
              31
              %Mark-ups
                  and mark-downs
              
              
              86,000
              
              
              18,000
              
              
              68,000
              
              
              378
              %Net
                  dealer inventory gains
              
              
              3,051,000
              
              
              2,219,000
              
              
              832,000
              
              
              37
              %Investment
                  banking
              
              
              4,278,000
              
              
              1,574,000
              
              
              2,704,000
              
              
              172
              %Interest
                  and dividends
              
              
              649,000
              
              
              825,000
              
              
              (176,000
              )
              
              (21
              %)Transfer
                  fees and clearance services
              
              
              1,029,000
              
              
              867,000
              
              
              162,000
              
              
              19
              %Other
              
              
              461,000
              
              
              547,000
              
              
              (86,000
              )
              
              (16
              %)$
              20,229,000
              
              $
              13,984,000
              
              $
              6,245,000
              
              
              45
              %


-12-


Total
      revenues increased $6,245,000, or 45%, in the third quarter of fiscal year
      2007
      to $20,229,000 from $13,984,000 in the third quarter of fiscal year 2006. This
      increase is due to greater commissions and net dealer inventory gains, and
      the
      completion of both a greater number of, and larger, investment banking
      transactions. During the third quarter of fiscal year 2007, total trading volume
      decreased 20%, compared to the third quarter of fiscal year 2006. The decrease
      in trading volume compared to the increase in revenues primarily reflects an
      increase in the average revenue per trade. Trading volume in this period related
      to retail brokerage decreased 22%. Commission revenue increased $2,809,000,
      or
      35%, to $10,761,000 from $7,952,000 during the third quarter of fiscal year
      2007
      compared with the same period in fiscal year 2006. Net dealer inventory gains,
      which includes profits on proprietary trading, market making activities and
      customer mark-ups and mark-downs, increased $832,000, or 37%, to $3,051,000
      from
      $2,219,000 during the third quarter of fiscal year 2007 compared with the same
      period in fiscal year 2006. The increase is primarily due to an increase in
      proprietary trading in the bond market. During the third quarter of fiscal
      year
      2007, revenues from proprietary trading increased $743,000, or 35%, to
      $2,876,000 from $2,133,000 in the same period of fiscal year 2006, revenues
      from
      market making activities increased $21,000, or 31%, to $89,000 from $68,000
      in
      the third quarter of fiscal year 2006, and revenues from customer mark-ups
      and
      mark-downs increased $68,000, or 378%, to $86,000 from $18,000 in the third
      quarter of fiscal year 2006. ****





Investment
      banking revenue increased $2,704,000, or 172%, to $4,278,000 from $1,574,000
      in
      the third quarter of fiscal year 2007 compared with the third quarter of fiscal
      year 2006. The increase in investment banking revenues is attributable to the
      Company having completed both a greater number of, and larger,  investment
      banking transactions in the third quarter of fiscal year 2007. Interest and
      dividend income decreased $176,000, or 21%, to $649,000 from $825,000 in the
      third quarter of fiscal year 2007 compared with the same period last year.
      The
      decrease in interest income is attributable to a decrease in the amount of
      debit
      balances in National Securities’ customer accounts from the same period last
      year. Transfer fees increased $162,000, or 19%, to $1,029,000 in the third
      quarter of fiscal year 2007 from $867,000 in the third quarter of fiscal year
      2006. The increase reflects higher transfer fees for trades generated from
      the
      retail brokerage business of brokers recently associated with the
      Company.





Other
      revenue, consisting of asset management fees, and miscellaneous transaction
      fees
      and trading fees, decreased $86,000, or 16%, to $461,000 from $547,000 during
      the third quarter of fiscal year 2007 compared to the third quarter of fiscal
      year 2006. The decrease is primarily due to investment income realized in the
      Company’s venture capital fund in the third quarter of fiscal year 2006,
      partially offset by an increase in fee based assets under
      management.




Three
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommission
                  expense related to:Commission
                  revenue
              
              $
              9,891,000
              
              $
              7,111,000
              
              $
              2,780,000
              
              
              39
              %Net
                  dealer inventory gains
              
              
              2,471,000
              
              
              1,753,000
              
              
              718,000
              
              
              41
              %Investment
                  banking
              
              
              1,655,000
              
              
              1,180,000
              
              
              475,000
              
              
              40
              %Commissions
              
              
              14,017,000
              
              
              10,044,000
              
              
              3,973,000
              
              
              40
              %Employee
                  compensation
              
              
              2,168,000
              
              
              1,541,000
              
              
              627,000
              
              
              41
              %Clearing
                  fees
              
              
              444,000
              
              
              405,000
              
              
              39,000
              
              
              10
              %Communications
              
              
              419,000
              
              
              296,000
              
              
              123,000
              
              
              42
              %Occupancy
                  and equipment costs
              
              
              614,000
              
              
              693,000
              
              
              (79,000
              )
              
              (11
              %)Professional
                  fees
              
              
              318,000
              
              
              246,000
              
              
              72,000
              
              
              29
              %Interest
              
              
              252,000
              
              
              104,000
              
              
              148,000
              
              
              142
              %Taxes,
                  licenses and registration
              
              
              134,000
              
              
              177,000
              
              
              (43,000
              )
              
              (24
              %)Other
                  administrative expenses
              
              
              302,000
              
              
              326,000
              
              
              (24,000
              )
              
              (7
              %)$
              18,668,000
              
              $
              13,832,000
              
              $
              4,836,000
              
              
              35
              %


-13-


In
      comparison with the 45% increase in total revenues, total expenses increased
      35%, or $4,836,000, to $18,668,000 for the third quarter of fiscal year 2007
      compared to $13,832,000 in the third quarter of fiscal year 2006. The increase
      in total expenses is primarily the result of greater commission expenses
      directly associated with commission revenues.





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $3,973,000, or 40%, to
      $14,017,000 in the third quarter of fiscal year 2007 from $10,044,000 in the
      third quarter of fiscal year 2006. Commission expense related to commission
      revenue increased $2,780,000, or 39%, to $9,891,000 in the third quarter of
      fiscal year 2007 from $7,111,000 in the third quarter of fiscal year 2006;
      commission expense related to net dealer inventory gains increased $718,000,
      or
      41%, to $2,471,000 in the third quarter of fiscal year 2007 from $1,753,000
      in
      the third quarter of fiscal year 2006; and commission expense related to
      investment banking increased $475,000, or 40%, to $1,655,000 in the third
      quarter of fiscal year 2007 from $1,180,000 in the third quarter of fiscal
      year
      2006. Commission expense as a percentage of commission revenues increased to
      92%
      in the third quarter of fiscal year 2007 from 89% in the third quarter of fiscal
      year 2006. This increase is attributable to changes in the production of
      particular brokers, not all of who are paid at the same commission rate and
      an
      increase in the amortization of advances to registered representatives.
      Commission expense as a percentage of net dealer inventory gains increased
      to
      81% in the third quarter of fiscal year 2007 from 79% in the third quarter
      of
      fiscal year 2006. This increase is attributable to changes in the production
      of
      particular brokers and traders, not all of who are paid at the same commission
      rate. Commission expense as a percentage of investment banking revenues
      decreased to 39% in the third quarter of fiscal year 2007 from 75% in the third
      quarter of fiscal year 2006. This decrease is attributable to the type and
      size
      of the particular investment banking transactions completed in the current
      year’s quarter. Commission expense includes the amortization of advances to
      registered representatives of $371,000 and $319,000 for the third quarter of
      fiscal years 2007 and 2006, respectively. These amounts fluctuate based upon
      the
      amounts of advances outstanding and the time period for which the registered
      representatives have agreed to be affiliated with National
      Securities.





Employee
      compensation expense increased $627,000, or 41%, to $2,168,000 in the third
      quarter of fiscal year 2007 from $1,541,000 in the third quarter of fiscal
      year
      2006. The increase is attributable to new employees hired during fiscal years
      2007 and 2006, bonuses based on the current quarter’s profits and an increase in
      the amortization of the fair value associated with stock option grants. The
      amortization of the fair value associated with stock option grants is $55,000
      and $7,000 for the third quarter of fiscal years 2007 and 2006, respectively.
      Overall, combined commission and employee compensation expense, as a percentage
      of revenue decreased to 80% from 83% in the third quarter of fiscal years 2007
      and 2006, respectively. The decrease is attributable to an overall lower payout
      percentage related to commission revenues.





Clearing
      fees increased $39,000, or 10%, to $444,000 in the third quarter of fiscal
      year
      2007 from $405,000 in
      the
      third quarter of fiscal year 2006. The increase in clearing fees is attributable
      to the increase in commission revenues in the third quarter of fiscal year
      2007
      compared to the third quarter of fiscal year 2006, partially offset by the
      amortization of credits received from one of the Company’s clearing
      firms.





Communications
      expense increased $123,000, or 42%, to $419,000 from $296,000 in the third
      quarter of fiscal year 2007 compared to the third quarter of fiscal year 2006.
      The increase is primarily due to the Company’s receipt of a refund of prior
      periods charges from a service provider in the third quarter of fiscal year
      2006. Occupancy costs decreased $79,000, or 11%, to $614,000 from $693,000
      in
      the third quarter of fiscal year 2007 compared to the third quarter of fiscal
      year 2006. The decrease in occupancy expense is due to the settlement of a
      lawsuit by the Company against a former subtenant, partially offset by costs
      incurred to transfer certain of the Company’s paper files to a digital system,
      and annual rent increases contained in the Company’s office leases. Professional
      fees increased $72,000, or 29%, to $318,000 from $246,000 in the third quarter
      of fiscal


-14-




year
      2007
      compared to the third quarter of fiscal year 2006. The increase in professional
      fees is primarily a result of legal fees and costs incurred to settle certain
      arbitrations.





Interest
      expense increased $148,000, or 142%, to $252,000 from $104,000 in the third
      quarter of fiscal year 2007 compared to the third quarter of fiscal year 2006.
      The increase in interest expense is attributable to the acceleration of
      amortization on the Company’s convertible notes that were converted to common
      stock in the third quarter of fiscal year 2007. Included in interest expense
      is
      the amortization of $199,000 and $31,000 for the third quarter of fiscal years
      2007 and 2006, respectively. Taxes, licenses and registration decreased $43,000,
      or 24%, to $134,000 from $177,000 in the third quarter of fiscal year 2007
      compared to the third quarter of fiscal year 2006. The decrease in taxes,
      licenses and registration is due to a reduction in incentives provided to new
      brokers. Other administrative expenses decreased $24,000, or 7%, to $302,000
      from $326,000 in the third quarter of fiscal year 2007 compared to the third
      quarter of fiscal year 2006.





The
      Company reported net income of $1,561,000 in the third quarter of fiscal year
      2007 compared to net income of $152,000 in the
      third quarter of fiscal year 2006 .
      Overall, the diluted earnings attributable to common stockholders in the third
      quarter of fiscal year 2007 was $1,452,000, or $.14 per common share, as
      compared to the diluted earnings attributable to common stockholders of $48,000,
      or $.01 per common share in the third quarter of fiscal year 2006. The net
      income attributable to common stockholders reflects $109,000 and $104,000 of
      cumulative preferred stock dividends on the Company’s preferred stock for the
      third quarter of fiscal years 2007 and 2006, respectively.





Nine
      Months Ended June 30, 2007 Compared to Nine Months Ended June 30,
      2006





The
      Company’s first nine months of fiscal year 2007 resulted in an increase in
      revenues, and a relatively smaller increase in expenses compared
      to the same period last year. As
      a
      result, the Company reported net income of $2,052,000 compared with net income
      of $835,000 for the first nine months of fiscal years 2007 and 2006,
      respectively. This represents an improvement of $1,217,000 from the prior
      period.




Nine
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommissions
              
              $
              27,705,000
              
              $
              25,823,000
              
              $
              1,882,000
              
              
              7
              %Proprietary
                  trading
              
              
              9,174,000
              
              
              6,028,000
              
              
              3,146,000
              
              
              52
              %Market
                  making
              
              
              704,000
              
              
              151,000
              
              
              553,000
              
              
              366
              %Mark-ups
                  and mark-downs
              
              
              231,000
              
              
              91,000
              
              
              140,000
              
              
              154
              %Net
                  dealer inventory gains
              
              
              10,109,000
              
              
              6,270,000
              
              
              3,839,000
              
              
              61
              %Investment
                  banking
              
              
              7,945,000
              
              
              8,667,000
              
              
              (722,000
              )
              
              (8
              %)Interest
                  and dividends
              
              
              2,010,000
              
              
              2,207,000
              
              
              (197,000
              )
              
              (9
              %)Transfer
                  fees and clearance services
              
              
              3,045,000
              
              
              2,597,000
              
              
              448,000
              
              
              17
              %Other
              
              
              1,314,000
              
              
              894,000
              
              
              420,000
              
              
              47
              %$
              52,128,000
              
              $
              46,458,000
              
              $
              5,670,000
              
              
              12
              %


Total
      revenues increased $5,670,000, or 12%, in the first nine months of fiscal year
      2007 to $52,128,000 from $46,458,000 in the first nine months of fiscal year
      2006. This increase is due to greater commissions and net dealer inventory
      gains. During the first nine months of fiscal year 2007, total trading volume
      decreased 8%, compared to the first nine months of fiscal year 2006. The
      decrease in trading volume compared to the increase in revenues primarily
      reflects an increase in the average revenue per trade, partially offset by
      the
      Company’s re-entry into market making activities. Trading volume in this period
      related to retail brokerage decreased 15%. Commission revenue increased
      $1,882,000, or 7%, to $27,705,000 from $25,823,000 during the first nine months
      of fiscal year 2007 compared with the same period in fiscal year 2006. Net
      dealer inventory gains, which includes profits on proprietary trading, market
      making activities and customer mark-ups and mark-downs, increased $3,839,000,
      or
      61%, to $10,109,000 from $6,270,000


-15-


during
      the first nine months of fiscal year 2007 compared with the same period in
      fiscal year 2006. The increase is primarily due to an increase in proprietary
      trading in the bond market, and reflects the Company’s re-entry into market
      making activities. During the first nine months of fiscal year 2007, revenues
      from proprietary trading increased $3,146,000, or 52%, to $9,174,000 from
      $6,028,000 in the same period of fiscal year 2006, revenues from market making
      activities increased $553,000, or 366%, to $704,000 from $151,000 in the first
      nine months of fiscal year 2007, and revenues from customer mark-ups and
      mark-downs increased $140,000, or 154%, to $231,000 from $91,000 in the first
      nine months of fiscal year 2006. ****





Investment
      banking revenue decreased $722,000, or 8%, to $7,945,000 from $8,667,000 in
      the
      first nine months of fiscal year 2007 compared with the first nine months of
      fiscal year 2006. Although the Company completed more investment banking
      transactions in the first nine months of fiscal year 2007, the decrease is
      attributable to the Company having co-managed certain of these transactions
      in
      the first nine months of fiscal year 2007. Interest and dividend income
      decreased $197,000, or 9%, to $2,010,000 from $2,207,000 in the first nine
      months of fiscal year 2007 compared with the same period last year. The decrease
      in interest income is attributable to a decrease in the amount of debit balances
      in National Securities’ customer accounts from the same period last year.
      Transfer fees increased $448,000, or 17%, to $3,045,000 in the first nine months
      of fiscal year 2007 from $2,597,000 in the first nine months of fiscal year
      2006. The increase reflects higher transfer fees for trades generated from
      the
      retail brokerage business of brokers recently associated with the
      Company.





Other
      revenue, consisting of asset management fees and miscellaneous transaction
      fees
      and trading fees, increased $420,000, or 47%, to $1,314,000 from $894,000 during
      the first nine months of fiscal year 2007 compared to the first nine months
      of
      fiscal year 2006. The increase is due to an increase in fee based assets under
      management, partially offset by investment income realized in the Company’s
      venture capital fund in the third quarter of fiscal year 2006.




Nine
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommission
                  expense related to:Commission
                  revenue
              
              $
              24,853,000
              
              $
              22,833,000
              
              $
              2,020,000
              
              
              9
              %Net
                  dealer inventory gains
              
              
              7,839,000
              
              
              4,737,000
              
              
              3,102,000
              
              
              65
              %Investment
                  banking
              
              
              3,501,000
              
              
              6,205,000
              
              
              (2,704,000
              )
              
              (44
              %)Commissions
              
              
              36,193,000
              
              
              33,775,000
              
              
              2,418,000
              
              
              7
              %Employee
                  compensation
              
              
              5,430,000
              
              
              4,425,000
              
              
              1,005,000
              
              
              23
              %Clearing
                  fees
              
              
              1,162,000
              
              
              1,205,000
              
              
              (43,000
              )
              
              (4
              %)Communications
              
              
              1,247,000
              
              
              1,328,000
              
              
              (81,000
              )
              
              (6
              %)Occupancy
                  and equipment costs
              
              
              2,090,000
              
              
              2,001,000
              
              
              89,000
              
              
              4
              %Professional
                  fees
              
              
              1,835,000
              
              
              830,000
              
              
              1,005,000
              
              
              121
              %Interest
              
              
              461,000
              
              
              389,000
              
              
              72,000
              
              
              19
              %Taxes,
                  licenses and registration
              
              
              476,000
              
              
              490,000
              
              
              (14,000
              )
              
              (3
              %)Other
                  administrative expenses
              
              
              1,182,000
              
              
              1,180,000
              
              
              2,000
              
              
              0
              %$
              50,076,000
              
              $
              45,623,000
              
              $
              4,453,000
              
              
              10
              %


In
      comparison with the 12% increase in total revenues, total expenses increased
      10%, or $4,453,000, to $50,076,000 for the first nine months of fiscal year
      2007
      compared to $45,623,000 in the first nine months of fiscal year 2006. The
      increase in total expenses is primarily the result of greater commission
      expenses directly associated with commission revenues, and increases in employee
      compensation and legal fees.


-16-


Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $2,418,000, or 7%, to
      $36,193,000 in the first nine months of fiscal year 2007 from $33,775,000 in
      the
      first nine months of fiscal year 2006. Commission expense related to commission
      revenue increased $2,020,000, or 9%, to $24,853,000 in the first nine months
      of
      fiscal year 2007 from $22,833,000 in the first nine months of fiscal year 2006;
      commission expense related to net dealer inventory gains increased $3,102,000,
      or 65%, to $7,839,000 in the first nine months of fiscal year 2007 from
      $4,737,000 in the first nine months of fiscal year 2006; and commission expense
      related to investment banking decreased $2,704,000, or 44%, to $3,501,000 in
      the
      first nine months of fiscal year 2007 from $6,205,000 in the first nine months
      of fiscal year 2006. Commission expense as a percentage of commission revenues
      increased to 90% in the first nine months of fiscal year 2007 from 88% in the
      first nine months of fiscal year 2006. This increase is attributable to changes
      in the production of particular brokers, not all of who are paid at the same
      commission rate and an increase in the amortization of advances to registered
      representatives. Commission expense as a percentage of net dealer inventory
      gains increased to 78% in the first nine months of fiscal year 2007 from 76%
      in
      the first nine months of fiscal year 2006. This increase is attributable to
      changes in the production of particular brokers and traders, not all of who
      are
      paid at the same commission rate. Commission expense as a percentage of
      investment banking revenues decreased to 44% in the third quarter of fiscal
      year
      2007 from 72% in the third quarter of fiscal year 2006. This decrease is
      attributable to the type and size of the particular investment banking
      transactions completed in the current year’s quarter. Commission expense
      includes the amortization of advances to registered representatives of $947,000
      and $936,000 for the first nine months of fiscal years 2007 and 2006,
      respectively. These amounts fluctuate based upon the amounts of advances
      outstanding and the time period for which the registered representatives have
      agreed to be affiliated with National Securities.





Employee
      compensation expense increased $1,005,000, or 23%, to $5,430,000 in the first
      nine months of fiscal year 2007 from $4,425,000 in the first nine months of
      fiscal year 2006. The increase is attributable to new employees hired during
      fiscal years 2007 and 2006, bonuses based on the current period’s profits,
      year-end bonuses that were paid to certain staff employees in the first quarter
      of fiscal year 2007 and an increase in the amortization of the fair value
      associated with stock option grants. The amortization of the fair value
      associated with stock option grants is $85,000 and $12,000 for the first nine
      months of fiscal years 2007 and 2006, respectively. Overall, combined commission
      and employee compensation expense, as a percentage of revenue decreased to
      80%
      from 82% in the first nine months of fiscal years 2007 and 2006, respectively.
      The decrease is attributable to an overall lower payout percentage related
      to
      commission revenues.





Clearing
      fees decreased $43,000, or 4%, to $1,162,000 in the first nine months of fiscal
      year 2007 from $1,205,000 in the first nine months of fiscal year 2006. The
      decrease in clearing fees is attributable to the amortization of credits
      received from one of the Company’s clearing firms.





Communications
      expense decreased $81,000, or 6%, to $1,247,000 from $1,328,000 in the first
      nine months of fiscal year 2007 compared to the first nine months of fiscal
      year
      2006. The decrease is primarily due to the Company’s ability to acquire certain
      of these services at a lower price. Occupancy costs increased $89,000, or 4%,
      to
      $2,090,000 from $2,001,000 in the first nine months of fiscal year 2007 compared
      to the first nine months of fiscal year 2006. The increase in occupancy expense
      is due to costs incurred to transfer certain of the Company’s paper files to a
      digital system and annual rent increases contained in the Company’s office
      leases, partially offset by the settlement of a lawsuit by the Company against
      a
      former subtenant in the third quarter of fiscal year 2007. Professional fees
      increased $1,005,000, or 121%, to $1,835,000 from $830,000 in the first nine
      months of fiscal year 2007 compared to the first nine months of fiscal year
      2006. The increase in professional fees is primarily a result of legal fees
      and
      costs incurred to settle certain arbitrations.





Interest
      expense increased $72,000, or 19%, to $461,000 from $389,000 in the first nine
      months of fiscal year 2007 compared to the first nine months of fiscal year
      2006. The increase in interest expense is attributable to the acceleration
      of
      amortization on the Company’s convertible notes that were converted to common
      stock in the third quarter of fiscal year 2007. Included in interest expense
      is
      the amortization of


-17-


$264,000
      and $162,000 for the first nine months of fiscal years 2007 and 2006,
      respectively. Taxes, licenses and registration decreased $14,000, or 3%, to
      $476,000 from $490,000 in the first nine months of fiscal year 2007 compared
      to
      the first nine months of fiscal year 2006. The decrease in taxes, licenses
      and
      registration is due to a reduction in incentives provided to new brokers. Other
      administrative expenses increased $2,000, or less than 1%, to $1,182,000 from
      $1,180,000 in the first nine months of fiscal year 2007 compared to the first
      nine months of fiscal year 2006.





The
      Company reported net income of $2,052,000 in the first nine months of fiscal
      year 2007 compared to net income of $835,000 in
      the
      first nine months of fiscal year 2006 .
      Overall, the diluted earnings attributable to common stockholders in the first
      nine months of fiscal year 2007 was $1,735,000, or $.20 per common share, as
      compared to diluted earnings attributable to common stockholders of $560,000,
      or
      $.09 per common share in the first nine months of fiscal year 2006. The net
      income attributable to common stockholders reflects $317,000 and $275,000 of
      cumulative preferred stock dividends on the Company’s preferred
      stock for the
      first nine months of fiscal years 2007 and 2006, respectively .





**Liquidity
      and Capital Resources**





National
      Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
      Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
      National Securities has elected to use the alternative standard method permitted
      by the rule. This requires that National Securities maintain minimum net capital
      equal to the greater of $250,000 or a specified amount per security based on
      the
      bid price of each security for which National Securities is a market maker. At
      June
      30, 2007, National Securities’ net capital exceeded the requirement by
      $3,570,000.





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





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.





In
      April
      2005, National Securities entered into a clearing agreement with NFS that became
      effective in June 2005. In the first quarter of fiscal year 2007, NFS paid
      National Securities a $750,000 business credit, that is being amortized over
      an
      eight year period, the net amount of which has been included in “Accounts
      Payable, Accrued Expenses and Other Liabilities” in the accompanying
      consolidated statements of financial condition as of June 30, 2007. In the
      second quarter of fiscal year 2007, NFS agreed to provide National Securities
      a
      $250,000 clearing fee waiver, that is being amortized over a two year period,
      the net amount of which has been included in “Accounts Payable, Accrued Expenses
      and Other Liabilities” in the accompanying consolidated statements of financial
      condition as of June 30, 2007. The clearing agreement includes a termination
      fee
      if National Securities terminates the agreement without cause. In June 2005,
      National Securities entered into a clearing agreement with Penson for the
      purpose of providing clearing services that are not provided by NFS.
      Additionally, in June 2007, National Securities entered into a clearing
      agreement with Legent for the purpose of providing clearing services that are
      not provided by NFS and to maintain a pre-existing clearing relationship for
      brokers newly associated with National Securities. The Company believes that
      the
      overall effect of these clearing relationships is beneficial to the Company’s
      cost structure, liquidity and capital resources.


-18-


In
      February 2007, the Company completed a
      financing transaction under which certain investors purchased 10 %
      promissory notes in the principal amount of $1 .0
      million ,
      with warrants
      to purchase an aggregate of 250,000 shares of common stock at an exercise price
      of $1.40 per share. The promissory notes mature in February 2009, and have
      a
      stated interest rate of 10% per annum. The fair value of the warrants was
      calculated using the Black-Scholes Option Valuation Model. The Company recorded
      a debt discount of approximately $195,000 that will be 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.
      Mr. Dewey, and Marshall S. Geller, the Co-Founder and Senior Managing Partner
      of
      St. Cloud, are each members of the Company’s board of directors. The
      Company incurred legal fees and other costs related to this capital transaction
      in the amount of $22,000 that were capitalized and will be amortized to interest
      expense over the life of the promissory notes. The Company
      used $850,000 of the proceeds to retire promissory notes that had maturity
      dates
      in February 2007.





The
      Company’s $1.0 million secured demand matured on March 1, 2007. National
      Securities and the holder of the $1.0 million secured demand note entered into
      a
      new secured demand note that matures on March 1, 2008. In May 2007, the Company
      paid $500,000 of this secured demand note, and the balance is due at maturity.





In
      June
      2007, the Company exercised the mandatory conversion option contained in its
      11%
      convertible promissory notes. The Company issued 1,024,413 shares of its common
      stock in full payment of the $1,000,000 convertible promissory notes, plus
      accrued interest. The unamortized debt discount of approximately $150,000 was
      expensed as “Interest” in the third quarter ended June 30, 2007.





In
      the
      quarter and nine months ended June 30, 2007 the Company received proceeds of
      approximately $356,000 and $503,000, respectively, from the exercise of
      outstanding warrants and stock options.




**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.





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.


-19-


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 the Company's marketable
      securities owned ("long"), securities sold, but not yet purchased ("short")
      and
      net positions as of June 30, 2007:




Long
              
              Short
              
              NetCorporate
                  stocks
              
              $
              901,000
              
              $
              215,000
              
              $
              686,000Corporate
                  bonds
              
              
              —
              
              
              —
              
              
              —Government
                  obligations
              
              
              16,000
              
              
              —
              
              
              16,000$
              917,000
              
              $
              215,000
              
              $
              702,000


**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 Securities Exchange Act of 1934 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.





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.





-20-




**PART
      II - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





During
      the quarter ended June 30, 2007, 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, 2006.





**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, 2006.





**ITEM
      2.** **UNREGISTERED
      SALES OF EQUITY** **** **SECURITIES
      AND USE OF PROCEEDS**





In
      June
      2007, the Company exercised the mandatory conversion option contained in its
      11%
      convertible promissory notes. The Company issued 1,024,413 shares of its common
      stock in full payment of the $1,000,000 convertible promissory notes, plus
      accrued interest. We
      believe that the issuance of our common stock in connection with this conversion
      was exempt from registration under Section 4(2) of the Security Act of 1933,
      as
      amended. The Company received no proceeds from the issuance of such common
      stock.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5. OTHER INFORMATION**





None.





**ITEM
      6.** **EXHIBITS**





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.








-21-




**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 SUBSIDIARY**




August
      2,
      2007


By: /s/
      Mark
      Goldwasser


Mark
      Goldwasser


President
      and Chief Executive Officer




August
      2,
      2007


By: /s/
      Robert H. Daskal


Robert
      H.
      Daskal


Chief
      Financial Officer


-22-