UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
Quarter Ended December
31,
2009                                                                                                                                       Commission
File Number 001-12629





NATIONAL
HOLDINGS CORPORATION


(Exact
name of registrant as specified in its charter)





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








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


(Address
including zip code of principal executive offices)


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





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes
o    
No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one).





Large
Accelerated Filer o                                                   Accelerated
Filer o





Non-Accelerated
Filer o                                                     Smaller
Reporting Company x





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




As of
February 12, 2010 there were 17,151,704 shares of the registrant's common stock
outstanding.





NATIONAL
HOLDINGS CORPORATION


FORM
10-Q


QUARTERLY
PERIOD ENDED DECEMBER 31, 2009


INDEX


PART
      I – FINANCIAL INFORMATIONItem
      1 – Financial Statements
              4Unaudited
      Condensed Consolidated Statements of Financial Condition
                as of December 31, 2009 and September 30, 2009
              4Unaudited
      Condensed Consolidated Statements of Operations for the
                Three months Ended December 31, 2009 and 2008
              5Unaudited
      Condensed Consolidated Statements of Cash Flows for the
                Three Months Ended December 31, 2009 and 2008
              6Notes
      to Unaudited Condensed Consolidated Financial Statements
              7Item
      2 – Management’s Discussion and Analysis of Financial
      Condition
              23Item
      3 – Quantitative & Qualitative Disclosures About Market
      Risk
              28Item
      4 – Controls and Procedures
              28PART
      II – OTHER INFORMATIONItem
      1 – Legal Proceedings
              29Item
      1a – Risk Factors
              29Item
      2 – Unregistered Sales of Equity Securities and Use of
      Proceeds
              29Item
      3 -  Defaults Upon Senior Securities
              29Item
      4 -  Submissions of Matter to a Vote of Security
      Holders
              29Item
      5 -  Other Information
              29Item
      6 – Exhibits
              29Signatures
              30


2
 FORWARD-LOOKING
STATEMENTS





The
following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report.  All
statements that express or involve discussions as to: expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, identified through the use of words or phrases such as we or our
management believes, expects, anticipates or hopes and words or phrases such as
will result, are expected to, will continue, is anticipated, estimated,
projection and outlook, and words of similar import) are not statements of
historical facts and may be forward-looking.  These forward-looking
statements are based largely on our expectations and are subject to a number of
risks and uncertainties including, but not limited to, economic, competitive,
regulatory, growth strategies, available financing and other factors discussed
elsewhere in this report and in the documents filed by us with the Securities
and Exchange Commission ("SEC"). Many of these factors are beyond our control.
Actual results could differ materially from the forward-looking statements we
make in this report or in other documents that reference this report. In light
of these risks and uncertainties, there can be no assurance that the results
anticipated in the forward-looking information contained in this report or other
documents that reference this report will, in fact, occur.





These
forward-looking statements involve estimates, assumptions and uncertainties,
and, accordingly, actual results could differ materially from those expressed in
the forward-looking statements.  These uncertainties include, among
others, the following: (i) the inability of our broker-dealer operations to
operate profitably in the face of intense competition from larger full service
and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity
financing.





Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.  New factors emerge from time to time and it is not possible
for our management to predict all of such factors, nor can our management assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.





3





PART
I.                      FINANCIAL
INFORMATION


ITEM
I.                      FINANCIAL
STATEMENTS






NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITIONDecember
      31,
              
              
              September
      30,ASSETS
              
              2009
              
              
              2009Current
      Assets
              
              (unaudited)
              
              
              (see
      note below)Cash
              
              $
              5,071,000
              
              
              $
              6,493,000Deposit
      with clearing organizations
              
              
              1,211,000
              
              
              
              1,212,000Receivables
      from broker dealers and clearing organizations
              
              
              2,667,000
              
              
              
              4,910,000Other
      receivables, net of allowance for uncollectible accounts
of$402,000 and
      $630,000 at September 30, 2009 and 2008, respectively
              
              
              427,000
              
              
              
              332,000Advances
      to registered representatives - Current portion
              
              
              1,683,000
              
              
              
              1,784,000Securities
      owned: marketable – at market value
              
              
              373,000
              
              
              
              631,000Securities
      owned:nonmarketable – at fair value
              
              
              78,000
              
              
              
              60,000Total
      Current Assets
              
              
              11,510,000
              
              
              
              15,422,000Advances
      to registered representatives - Long term portion
              
              
              883,000
              
              
              
              1,096,000Fixed
      assets, net
              
              
              1,123,000
              
              
              
              1,163,000Secured
      demand note
              
              
              500,000
              
              
              
              500,000Intangible
      assets, net
              
              
              2,174,000
              
              
              
              2,329,000Other
      assets
              
              
              1,260,000
              
              
              
              1,132,000Total
      Assets
              
              $
              17,450,000
              
              
              $
              21,642,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LaibilitiesPayable
      to broker dealers and clearing organizations
              
              $
              241,000
              
              
              $
              299,000Securities
      sold, but not yet purchased, at market
              
              
              77,000
              
              
              
              4,000Accounts
      payable, accrued expenses and other liabilities - Current
      portion
              
              
              10,414,000
              
              
              
              14,162,000Notes
      payable, net of debt discounts of $0 at December 31, 2009 and September
      30, 2009 repectively
              
              
              500,000
              
              
              
              500,000Total
      Current Liabilities
              
              
              11,232,000
              
              
              
              14,965,000Accrued
      expenses and other liabilities - Long term portion
              
              
              467,000
              
              
              
              719,000Convertible
      notes payable, net of debt discount of $938,000 and
    $1,036,000December
      31, 2009 and September 30, 2009 repectively
              
              
              5,062,000
              
              
              
              4,964,000Total
      Liabilities
              
              
              16,761,000
              
              
              
              20,648,000Subordinated
      borrowings
              
              
              850,000
              
              
              
              850,000Stockholders'
      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; 42,957 shares issued and outstanding (liquidation
      preference:$4,295,700)
      at December 31, 2009 and  37,550 shares issued and
      outstanding(liquidation
      preference: $3,755,000) at September 30, 2009
              
              
              -
              
              
              
              -Series
      B 10% cumulative convertible preferred stock, $.01 par value, 20,000
      sharesauthorized;
      0 shares issued and outstanding (liquidation preference:
$0at
      December 31, 2009 and September 30, 2009, respectively
              
              
              -
              
              
              
              -Common
      stock, $.02 par value, 50,000,000 shares authorized;17,151,704
      and 16,422,538 shares issued and outstanding,at
      December 31, 2009 and September 30, 2009, respectively
              
              
              343,000
              
              
              
              343,000Additional
      paid-in capital
              
              
              41,377,000
              
              
              
              41,195,000Accumulated
      deficit
              
              
              (41,881,000
              )
              
              
              (41,394,000
              )Total  Stockholders'
      Equity
              
              
              (161,000
              )
              
              
              144,000Total
      Liabilities and Stockholders' Equity
              
              $
              17,450,000
              
              
              $
              21,642,000Note:
      The balance sheet at September 30, 2009 has been derived from the audited
      consolidated financial statements at that date.See
      accompanying notes to unaudited condensed consolidated financial
      statements








4




NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)Three
      Months EndedDecember
      31,2009
              
              
              2008Revenues:Commissions
              
              $
              17,987,000
              
              
              $
              15,410,000Net
      dealer inventory gains
              
              
              3,954,000
              
              
              
              7,092,000Investment
      banking
              
              
              1,653,000
              
              
              
              667,000Total
      commission and fee revenues
              
              
              23,594,000
              
              
              
              23,169,000Interest
      and dividends
              
              
              500,000
              
              
              
              697,000Transfer
      fees and clearing services
              
              
              2,906,000
              
              
              
              2,750,000Other
              
              
              1,388,000
              
              
              
              1,236,000Total
      Revenues
              
              
              28,388,000
              
              
              
              27,852,000Expenses:Commissions
      and fees
              
              
              21,387,000
              
              
              
              21,067,000Employee
      compensation and related expenses
              
              
              3,084,000
              
              
              
              3,074,000Clearing
      fees
              
              
              449,000
              
              
              
              1,193,000Communications
              
              
              1,020,000
              
              
              
              862,000Occupancy
      and equipment costs
              
              
              1,296,000
              
              
              
              1,381,000Professional
      fees
              
              
              505,000
              
              
              
              763,000Interest
              
              
              294,000
              
              
              
              325,000Taxes,
      licenses, registration
              
              
              350,000
              
              
              
              259,000Other
      administrative expenses
              
              
              491,000
              
              
              
              70,000Total
      Expenses
              
              
              28,876,000
              
              
              
              28,994,000Net
      loss
              
              
              (488,000
              )
              
              
              (1,142,000
              )Preferred
      stock dividends
              
              
              (97,000
              )
              
              
              (85,000
              )Net
      loss attributable to common stockholders
              
              $
              (585,000
              )
              
              $
              (1,227,000
              )Net
      loss per common shareBasic:Net
      loss attributable to common stockholders
              
              $
              (0.03
              )
              
              $
              (0.07
              )Diluted:Net
      loss attributable to common stockholders
              
              $
              (0.03
              )
              
              $
              (0.07
              )Weighted
      average number of shares outstandingBasic
              
              
              17,151,704
              
              
              
              16,421,538Diluted
              
              
              17,151,704
              
              
              
              16,421,538See
      accompanying notes to unaudited condensed consolidated financial
      statements
  5
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedDecember
      31,2009
              
              
              2008Cash
      flows from operating activitiesNet
      loss
              
              $
              (488,000
              )
              
              $
              (1,142,000
              )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activitiesDepreciation
      and amortization
              
              
              329,000
              
              
              
              324,000Amortization
      of deferred financing costs
              
              
              11,000
              
              
              
              14,000Amortization
      of note discount
              
              
              87,000
              
              
              
              123,000Amortization
      of foregivable notes to brokers
              
              
              286,000
              
              
              
              402,000Compensatory
      element of common stock options issuance
              
              
              182,000
              
              
              
              237,000Changes
      in assets and liabilitiesDeposits
      with clearing organizations
              
              
              1,000
              
              
              
              (51,000
              )Receivables
      from broker-dealers, clearing organizations and others
              
              
              2,243,000
              
              
              
              585,000Other
      receivables
              
              
              (95,000
              )
              
              
              -Advances
      to registered representatives
              
              
              28,000
              
              
              
              -Securities
      owned: marketable, at market value
              
              
              258,000
              
              
              
              (1,075,000
              )Securities
      owned: non-marketable, at fair value
              
              
              (18,000
              )
              
              
              7,000Other
      assets
              
              
              (127,000
              )
              
              
              (15,000
              )Payables
              
              
              (4,000,000
              )
              
              
              723,000Payables
      to broker dealers and clearing organizations
              
              
              (58,000
              )
              
              
              -Securities
      sold, but not yet purchased, at market
              
              
              73,000
              
              
              
              -Net
      cash provided by (used in) operating activities
              
              
              (1,288,000
              )
              
              
              132,000Cash
      flows from investing activitiesPurchase
      of fixed assets
              
              
              (134,000
              )
              
              
              (167,000
              )Net
      cash (used in) investing activities
              
              
              (134,000
              )
              
              
              (167,000
              )Net
      decrease in cash
              
              
              (1,422,000
              )
              
              
              (35,000
              )Cash
      balanceBeginning
      of the period
              
              
              6,493,000
              
              
              
              7,387,000End
      of the period
              
              $
              5,071,000
              
              
              $
              7,352,000Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
              
              $
              199,000
              
              
              $
              188,000Income
      taxes
              
              $
              42,000
              
              
              $
              -See
      accompanying notes to unaudited condensed consolidated financial
      statements


6
  NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008


(UNAUDITED)





NOTE
1. BASIS OF PRESENTATION





The
accompanying condensed consolidated financial statements of National Holdings
Corporation (“National” or the “Company”) have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.  Accordingly, they do not include all of the information and
disclosures required for annual financial statements.  In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.  The
condensed consolidated financial statements as of December 31, 2009 and for the
periods ended December 31, 2009 and December 31, 2008 are
unaudited.  The results of operations for the interim periods are not
necessarily indicative of the results of operations for the fiscal
year.  These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
footnotes included thereto in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2009.





NOTE 2. CONSOLIDATION





The
condensed consolidated financial statements include the accounts of National and
its wholly owned subsidiaries.  National operates primarily through
National Securities Corporation (“National Securities”), vFinance Investments,
Inc. (“vFinance Investments”) and EquityStation, Inc. (“EquityStation”)
(collectively, the “Broker Dealer Subsidiaries”).  The Broker Dealer
Subsidiaries conduct a national securities brokerage business through its main
offices in New York, New York, Boca Raton, Florida, and Seattle,
Washington.




Through
its Broker Dealer Subsidiaries, the Company offers (1) full service retail
brokerage to approximately 45,000 high net worth and institutional clients, (2)
provides investment banking, merger, acquisition and advisory services to micro,
small and mid-cap high growth companies, and (3) engages in trading securities,
including making markets in over 4,000 small and micro cap listed stocks and
provides liquidity in the United States Treasury marketplace.  The
Broker Dealer Subsidiaries are introducing brokers and clear all transactions
through clearing organizations on a fully disclosed basis.  They are
registered with the Securities and Exchange Commission ("SEC"), are members of
the Financial Industry Regulatory Authority, Inc. ("FINRA") (formerly the
National Association of Securities Dealers) and Securities Investor Protection
Corporation ("SIPC").  vFinance Investments is also a member of the
National Futures Association ("NFA").





In July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc., a Washington corporation ("NAM").  NAM is a
federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed.  In March 2008, all of the issued and outstanding stock of
NAM was transferred from National Securities to National.  National
formed a new wholly owned subsidiary, National Insurance Corporation, a
Washington corporation (“National Insurance”) in the third quarter of fiscal
year 2006.  National Insurance provides fixed insurance products to
its clients, including life insurance, disability insurance, long term care
insurance and fixed annuities.  National Insurance finalized certain
requisite state registrations during the second quarter of fiscal year 2007 and
commenced business operations that to date have been de
minimus.  vFinance Lending Services, Inc. (“vFinance Lending”),
originally formed as a wholly owned subsidiary of vFinance, Inc. was established
in May 2002.  It is a mortgage lender focused primarily on the
commercial sector, providing bridge loans and commercial mortgages through its
nationwide network of lenders. Its operations to date have been de
minimus.  All significant inter-company accounts and transactions have
been eliminated in consolidation.





7





NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation





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





Estimates





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





Revenue
Recognition





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





Customer
security transactions and the related commission income and expense are recorded
on a trade date basis.  Customers who are financing their transaction
on margin are charged interest.  The Company’s margin requirements are
in accordance with the terms and conditions mandated by its clearing firms,
National Financial Services LLC (“NFS”), Penson Financial Services, Inc.
(“Penson”), Legent Clearing LLC (“Legent”), Fortis Securities, LLC (“Fortis”)
and Rosenthal Collins Group, LLC. (“Rosenthal”).  The interest is
billed on the average daily balance of the margin account.





Investment
banking revenues include gains, losses, and fees, net of syndicate expenses,
arising from securities offerings in which the Company acts as an underwriter or
agent.  Investment banking revenues also include fees earned from
providing financial advisory services. Investment banking management fees
are recorded on the offering date, sales concessions on the settlement date, and
underwriting fees at the time the underwriting is completed and the income is
reasonably determinable.





Net
trading profits result from mark-ups and mark-downs in securities transactions
entered into for the account of the Company.  Some of these
transactions may involve the Company taking a position in securities that may
expose the company to losses.  Net trading profits are recorded on a
trade date basis.




Clearing
and other brokerage income are fees charged to the broker on customer’s security
transactions and are recognized as of the trade date.





Other
revenue consists primarily of investment advisory fees which are account
management fees for high net worth clients.  These fees are determined
based on a percentage of the customers assets under management, are billed
quarterly and recognized when collected.





8





Cash and Cash
Equivalents




The
Company considers all highly liquid temporary cash investments with an original
maturity of three months or less when purchased to be cash
equivalents.


Fixed
Assets





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





Income
Taxes





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





Fair Value of Financial
Instruments





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





Impairment of Long-Lived
Assets





The
Company reviews long-lived assets for impairment at least once a year or earlier
if circumstances and situations change such that there is an indication that the
carrying amounts may not be recovered, in accordance with professional
standards. In such circumstances, the Company will estimate the future cash
flows expected to result from the use of the asset and its eventual disposition.
Future cash flows are the future cash inflows expected to be generated by an
asset less the future outflows expected to be necessary to obtain those inflows.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company will
recognize an impairment loss to adjust to the fair value of the
asset.





Common Stock Purchase
Warrants





The
Company accounts for the issuance of common stock purchase warrants issued in
connection with capital financing transactions in accordance with professional
standards for "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".  In accordance with
professional standards, the Company classifies as equity any contracts that (i)
require physical settlement or net-share settlement or (ii) gives the Company a
choice of net-cash settlement or settlement in its own shares (physical
settlement or net-share settlement).  The Company classifies as assets
or liabilities any contracts that (i) require net-cash settlement (including a
requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice
of net-cash settlement or settlement in shares (physical settlement or net-share
settlement).





The
Company assessed the classification of its derivative financial instruments as
of December 31, 2009, which consist of common stock purchase warrants, and
determined that such derivatives are accounted for in accordance with
professional standards.





9





Convertible
Instruments





The
Company evaluates and accounts for conversion options embedded in its
convertible instruments in accordance with professional standards for
“Accounting for Derivative Instruments and Hedging Activities”.





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





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





The
Company evaluated the conversion option embedded in the convertible preferred
stock and determined, in accordance with the provisions of these statements,
that such conversion option does not meet the criteria requiring bifurcation of
these instruments. The characteristics of the common stock that is issuable upon
a holder’s exercise of the conversion option embedded in the convertible
preferred stock are deemed to be clearly and closely related to the
characteristics of the preferred shares.  Additionally, the Company’s
conversion options, if free standing, would not be considered derivatives
subject to the accounting guidelines prescribed in accordance with professional
standards.




10





Net Income (Loss) per Common
Share





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





Three
      Months EndedDecember
      31,
              
              
              December
      31,2009
              
              
              2008Numerator:Net
      loss
              
              $
              (488,000
              )
              
              $
              (1,142,000
              )Preferred
      stock dividends
              
              
              (97,000
              )
              
              
              -85,000Numerator
      for basic earnings per share-net income (loss)attributable
      to common stockholders - as reported
              
              
              (585,000
              )
              
              
              (1,227,000
              )Effect
      of dilutive securities:Series
      A preferred stock
              
              
              -
              
              
              
              -Numerator
      for diluted earnings per share-net income (loss)attributable
      to common stockholders - as adjusted
              
              $
              (585,000
              )
              
              $
              (1,227,000
              )Denominator:Denominator
      for basic earnings per share--weightedaverage
      shares
              
              
              17,151,705
              
              
              
              16,421,538Effect
      of dilutive securities:Assumed
      conversion of Series A preferred stock
              
              
              -
              
              
              
              -Stock
      options
              
              
              -
              
              
              
              -Warrants
              
              
              -
              
              
              
              -Dilutive
      potential common shares
              
              
              -
              
              
              
              -Denominator
      for diluted earnings per share--adjustedweighted-average
      shares and assumed conversions
              
              
              17,151,705
              
              
              
              16,421,538Net
      loss available to common stockholdersBasic
      and diluted
              
              $
              (0.03
              )
              
              $
              (0.07
              )
  11
 
 For the
three-month period ended December 31, 2009, 11,913,894 common share equivalents
were excluded from the calculation of diluted net loss per share because their
inclusion would have been anti-dilutive.  For the three-month period
ended December 31, 2008, 11,624,428 common share equivalents were excluded from
the calculation of diluted net loss per share because their inclusion would have
been anti-dilutive.
 
 The
following table sets forth the common share equivalents that were excluded from
the calculation:
 Three
      Months EndedDecember
      31, 2009
                
                
                December
      31, 2008Stock
      options
                
                
                3,376,084
                
                
                
                3,266,054Warrants
                
                
                1,726,250
                
                
                
                1,979,374Assumed
      conversion of:Series
      A Preferred Stock
                
                
                3,436,560
                
                
                
                3,004,000Notes
                
                
                3,375,000
                
                
                
                3,375,000Dilutive
      potential common shares
                
                
                11,913,894
                
                
                
                11,624,428


Stock-Based
Compensation





Effective
October 1, 2005, the Company adopted ASC Topic 718  accounting
for “Share Based Payment.”  This topic 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 Topic 718, 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 three months ended December 31, 2009 , the Company
granted 300,000 stock options that vest over periods from two to four years,
have a 5-year life and are exercisable at $0.69 per share.  A charge
of approximately $107,000 and $237,000 was recorded in the three months ended
December 31, 2009 and 2008, respectively, relating to the amortization of the
fair value associated with all remaining stock option grants and restricted
stock grants.





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




12





A summary
of the stock option activity as of December 31, 2009, and changes during the
three month period then ended is presented below:


WeightedWeighted
              
              
              AverageAverage
              
              
              Remaining
              
              
              AggregateExercise
              
              
              Contractual
              
              
              IntrinsicShares
              
              
              Price
              
              
              Term
              
              
              ValueOutstanding
      at September 30, 2009
              
              
              5,912,165
              
              
              $
              1.55
              
              
              
              3.21
              
              
              $
              2,500Granted
              
              
              300,000
              
              
              
              0.69
              
              
              
              4.75
              
              
              
              -Expired
              
              
              156,775
              
              
              
              0.62
              
              
              
              2.05
              
              
              
              -Outstanding
      at December 31, 2009
              
              
              6,055,390
              
              
              $
              1.51
              
              
              
              3.10
              
              
              $
              -Exerciseable
      at December 31, 2009
              
              
              4,103,084
              
              
              $
              2.23
              
              
              
              4.58
              
              
              $
              2,000
  As of
December 31, 2009, there was approximately $738,000 of total unrecognized
deferred compensation costs related to share-based compensation
arrangements.  The Company has experienced a historic forfeiture rate
of approximately 38% on previously granted stock options and expects that future
forfeitures will be consistent with this experience.





A summary
of the status of the Company’s nonvested shares as of December 31, 2009, and
changes during the three month period then ended is presented
below:





WeightedAverageGrant
      DateNonvested
      Shares
            
            Shares
            
            
            Fair
      ValueNonvested
      at September 30, 2009
            
            
            1,916,741
            
            
            $
            0.61Granted
            
            
            300,000
            
            
            $
            0.47Vested
            
            
            238,385
            
            
            $
            0.90Expired
            
            
            26,050
            
            
            $
            0.59Nonvested
      at December 31, 2009
            
            
            1,952,306
            
            
            $
            1.53




13





Concentrations of Credit
Risk





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





The
Company maintains cash with major financial institutions.   All
interest bearing accounts are insured up to $250,000.  On October 14,
2008 the FDIC announced its temporary Transaction Account Guarantee Program,
which provides full coverage for non-interest bearing transaction deposit
accounts at FDIC-insured institutions that agree to participate in the program.
The transaction account guarantee applies to all personal and business checking
deposit accounts that do not earn interest at participating institutions. This
unlimited insurance coverage is temporary and will remain in effect for
participating institutions until June 30, 2010.  As a result of this
coverage the Company believes it is not exposed to any significant credit risks
for cash.





Other
Receivables





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





Advances to Registered
Representatives





Advances
are given to certain registered representatives as an incentive for their
affiliation with the Broker Dealer Subsidiaries.  The representative
signs an independent contractor agreement with the Broker Dealer Subsidiaries
for a specified term, typically a three-year period.  The advance is
then amortized on a straight-line basis over the life of the broker’s agreement
with the Broker Dealer Subsidiaries, and is included in commission expense in
the accompanying consolidated statements of operations.  In the event
a representative’s affiliation terminates prior to the fulfillment of their
contract, the representative is required to repay the unamortized
balance.




14





Securities
Owned





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





Other
Assets





Other
assets consist primarily of prepaid expenses and lease deposits.





Legal and Other
Contingencies





The
outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty. SFAS No. 5, Accounting for Contingencies, requires
that an estimated loss from a loss contingency such as a legal proceeding or
claim should be accrued by a charge to income if it is probable that an asset
has been impaired or a liability has been incurred and the amount of the loss
can be reasonably estimated. Disclosure of a contingency is required if there is
at least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially impact
our results of operations, financial position, or our cash flows.





Recent Accounting
Pronouncements





In
addition to those pronouncements shown below, other pronouncements may have been
issued but deemed by management to be outside the scope of relevance to the
Company.





The new
professional standard issued in May 2009 accounting for “Subsequent Events” is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the issuance of
financial statements. Specifically, the standard sets forth: 1) the period after
the balance sheet date during which management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, 2) the circumstances that an entity should recognize
events or transactions that occur after the balance sheet date, and 3) the
disclosures that an entity should make about events or transactions that occur
after the balance sheet date.





The new
professional standard using Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles was issued in June 2009.  It sets forth that the Accounting Standards Codification(Codification) will become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the professionals to be
applied to nongovernmental entities.  Rules and interpretive releases
of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also source for authoritative GAAP for SEC registrants. When
the statement is effective, the Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative. As of September 30, 2009, the Company has adopted this
policy.





15





NOTE
4. CLEARING AGREEMENTS





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 general business credit that is being
amortized over an eight year period ending November 2014, corresponding with the
expiration date of the clearing agreement.  In the second quarter of
fiscal year 2007, NFS provided National Securities a $250,000 clearing fee
waiver that was amortized over a two year period ended December 2008,
corresponding with the time period that certain performance standards were to be
achieved.  The clearing agreement includes a termination fee if
National Securities terminates the agreement without cause. The Broker Dealer
Subsidiaries currently have clearing agreements with NFS, Penson, Legent, Fortis
and Rosenthal.  The Company believes that the overall effect of its
clearing relationships has been beneficial to the Company’s cost structure,
liquidity and capital resources.





NOTE
5. BROKER-DEALERS AND CLEARING ORGANIZATIONS RECEIVABLES AND
PAYABLES





At
December 31, 2009 and September 30, 2009, the receivables of $2,667,000 and
$4,910,000, respectively, from broker-dealers and clearing organizations
represent net amounts due for fees and commissions.  At December 31,
2009 and September 30, 2009, the amounts payable to broker-dealers and clearing
organizations of $241,000 and $299,000, respectively, represent amounts owed to
clearing firms or other broker dealers for fees on transactions and payables to
other broker dealers associated with tri-party clearing agreements.





NOTE
      6. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
    PURCHASED





The
following table shows the quoted market values of securities owned by the
Company, and securities sold but not yet purchased by the Company, as of
December 31, 2009:


Securities owned
              
              
              Securities sold, but
                not yet purchasedCorporate
      stocks
              
              $
              117,000
              
              
              $
              77,000Corporate
      bonds
              
              
              8,000
              
              
              
              --Government
      obligations
              
              
              248,000
              
              
              
              --Non-marketable
      securities
              
              
              78,000
              
              
              
              --$
              451,000
              
              
              $
              77,000
  Fair
Value Measurements
 
 Securities
owned at Fair Value as of December 31, 2009
  Securities
      owned at fair valueLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCorporate
      stocks
                  
                  $
                  117,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  117,000Corporate
      bonds
                  
                  
                  8,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,000Government
      obligations
                  
                  
                  248,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  248,000Non-marketable
      securities
                  
                  
                  -
                  
                  
                  
                  78,000
                  
                  
                  
                  -
                  
                  
                  
                  78,000$
                  373,000
                  
                  
                  $
                  78,000
                  
                  
                  $
                  -
                  
                  
                  $
                  451,000
 Securities
sold, but not yet purchased at Fair Value as of December 31, 2009
 
 Securities
      sold, butnot
      yet purchased at fair value
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCorporate
      stocks
                  
                  $
                  77,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  77,000Corporate
      bonds
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Government
      obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  77,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  77,000


16





NOTE
7. INTANGIBLE ASSETS





The
markets in which the Company operates have recently been adversely affected by
significant declines in the volume of securities transactions and in significant
fluctuations in market liquidity together with existing and anticipated
unfavorable financial and economic conditions.  Since late September
2008, the following events have occurred:





·
            
            Lehman
      Brothers filed for bankruptcy
protection;





·
            
            American
      International Group receives a loan of $85 billion from a the Federal
      Reserve;





·
            
            Washington
      Mutual’s banking assets were sold to JP
Morgan;





·
            
            The
      Emergency Economic Stabilization Act which created a $700 billion Troubled
      Assets Relief Program was signed into law
  (“TARP”);





·
            
            Central
      banks from large industrialized countries coordinate their efforts to aid
      the world economy;





·
            
            The
      TARP has been used for different purposes than originally intended to
      accommodate shifting currents in the US
economy





·
            
            The
      Federal Reserve Bank has set two new precedents by first, lowering the
      Federal Funds Rate to its lowest level ever of between 0% and .25% and
      second, modifying the structure of this instrument to one of a variable
      nature.





·
            
            The
      major US stock indexes have declined between 25.1% and 43.1% since July 1,
      2008.





The
aforementioned economic events have caused a significant decline in the assets
under management of our customers, including the customers of
vFinance.  Additionally, the Company believes that such economic
events triggered a large number of those customers to reconsider several aspects
of their investment philosophy, strategy, and execution.  Accordingly,
we believe that this may result in lower revenues and net cash flows than we
initially anticipated at the time of the acquisition of
vFinance.  This leads the Company to believe that the carrying amount
of the intangible assets resulting from this acquisition may not be
recovered.





During
December 2008, the Company estimates the future cash flows expected to result
from the use of the intangible assets resulting from merger with
vFinance.  The Company determined that such future cash flows did not
exceed the carrying value of the intangible asset as of September 30,
2008.  The Company believes that the intangible assets, which consist
substantially of customer relationships, will be held and used.





To
determine the fair value of the intangible assets, the Company used the guidance
provided by professional standards defining Fair Value
Measurements.   These professional standards provide a fair value
hierarchy which gives priority to quoted prices (unadjusted) in active markets
for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3).  Level 2 inputs are inputs other than
quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.  There is no active market
for assets identical to the Company’s acquired customer relationships nor has
the Company been able to identify, as defined.  Additionally, the
Company was unable to identify the following Level 2 inputs:  1)
quoted prices for similar assets in active markets, 2) quoted prices for similar
or identical assets in markets that are not active, or 3) inputs other than
quoted prices that are observable for the asset.  Accordingly, the
Company used mostly unobservable inputs, consisting of estimated future net cash
flows generated specifically from the acquired customer
relationships.  However, the Company did use certain Level 1 and 2
inputs to substantiate certain assumptions that helped determine the discount
rate it used in deriving the fair value of the intangible assets.





17





Based on
this method, the Company determined that the adjusted carrying basis of its
intangible assets resulting from its merger with vFinance amounts to $2,950,000
at September 30, 2008.  The difference between the adjusted carrying
basis and its unamortized carrying basis amounts to $12,999,000 and has been
recorded as an operating expense of the Company in the accompanying financial
statements.  The remaining intangible asset will be amortized over the
balance of the assets original life for 4.75 years.  Amortization of
the Company’s intangible asset for the first quarter ending December 31, 2009
and 2008 was $155,000 and $155,000, respectively.





NOTE
8. OTHER ASSETS





Other
assets as of December 31, 2009 and September 30, 2009, respectively, consist of
the following:


December
      31,
              
              
              September
      30,2009
              
              
              2009Pre-paid
      expenses
              
              $
              802,000
              
              
              $
              659,000Deposits
              
              
              179,000
              
              
              
              184,000Investments
      in unaffiliated entity
              
              
              162,000
              
              
              
              162,000Deferred
      financing costs
              
              
              104,000
              
              
              
              114,000Other
              
              
              13,000
              
              
              
              13,000Total
              
              $
              1,260,000
              
              
              $
              1,132,000
  NOTE
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES





The short
term portion of accounts payable, accrued expenses and other liabilities as of
December 31, 2009 and September 30, 2009, respectively, consist of the
following:


December
      31,
                2009
              
              
              September
      30,
                2009Commissions
      payable
              
              $
              4,973,000
              
              
              $
              7,745,000Deferred
      clearing fee credits
              
              
              94,000
              
              
              
              94,000Telecommunications
      vendors payable
              
              
              80,000
              
              
              
              82,000Legal
      payable
              
              
              543,000
              
              
              
              663,000Deferred
      rent payable
              
              
              33,000
              
              
              
              33,000Accrued
      compensation
              
              
              819,000
              
              
              
              757,000Capital
      lease liability
              
              
              603,000
              
              
              
              703,000Other
      vendors
              
              
              3,269,000
              
              
              
              4,085,000Total
              
              $
              10,414,000
              
              
              $
              14,162,000


18







NOTE
10. CONVERTIBLE NOTES PAYABLE





On March
31, 2008, the Company completed a financing transaction under which an investor
made an investment in the Company by purchasing a convertible promissory note in
the principal amount of $3.0 million, with a warrant to purchase 375,000 shares
of common stock at an exercise price of $2.50 per share.  The
promissory note matures in March 2012, is convertible into common stock at a
price of $2.00 per share and has a stated interest rate of 10% per
annum.  Using professional standards, the relative fair value of the
warrant was calculated using the Black-Scholes Option Valuation
Model.  The Company also recorded an additional debt discount for the
beneficial conversion feature of the instrument.  These amounts,
totaling approximately $791,000, have been recorded as a debt discount that will
be charged to interest expense over the life of the promissory
note.





On June
30, 2008, the Company completed a financing transaction under which the same
investor made an additional investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0 million, with a
warrant to purchase 468,750 shares of common stock at an exercise price of $2.00
per share.  The promissory note matures in June 2012, is convertible
into common stock at a price of $1.60 per share and has a stated interest rate
of 10% per annum.  Under professional standards, the relative fair
value of the warrant was calculated using the Black-Scholes Option Valuation
Model.  The Company also recorded an additional debt discount for the
beneficial conversion feature of the instrument.  These amounts,
totaling approximately $789,000, have been recorded as a debt discount that will
be charged to interest expense over the life of the promissory
note.





The
following table summarizes convertible notes payable at December 31, 2009 and
September 30, 2009:


December
      31,
              
              
              September
      30,2009
              
              
              200910%
      convertible notes payable
              
              $
              6,000,000
              
              
              $
              6,000,000Less:
      Debt discount
              
              
              (938,000
              )
              
              
              (1,036,000
              )$
              5,062,000
              
              
              $
              4,964,000
  The
Company incurred interest expense related to its convertible notes of
approximately $152,000 and $164,000 for the three months ended December 31, 2009
and 2008, respectively.





NOTE
11. NOTES PAYABLE – RELATED PARTY





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
matured in February 2009, and had a stated interest rate of 10% per
annum.  The Company obtained forbearance agreements from the lenders
and as a result, re-priced some of the warrants down to an exercise price of
$0.75 per share.  The Company recalculated the fair value of the
warrants and took an incremental charge of approximately $46,000 recorded as
interest expense, in accordance with professional standards.





During 2009
the Company repaid $500,000 of the notes payable and the other $500,000 has been
extended to a new maturity of May 2010 at a reduced interest rate of
7%.  The Company has fully amortized the debt discount associated with
these notes and an expense of $41,000 was charged to interest expense in
2009.  Such amortization had been included in “Interest” in previous
years, in the accompanying consolidated financial statements.





19





The
following table summarizes notes payable at December 31, 2009 and September 30,
2009:


December
      31,
              
              
              September
      30,2009
              
              
              20097%
      promissory notes payable
              
              $
              500,000
              
              
              $
              500,000Less:
      Debt discount
              
              
              -
              
              
              
              -$
              500,000
              
              
              $
              500,000







The note
outstanding on September 30, 2009 matures in fiscal year 2010.  This
indebtedness is owned by Christopher Dewey, who serves as a member of our Board
of Directors.  The Company incurred interest expense related to its
note of approximately $9,000 and $13,000 for the three months ended December 31,
2009 and 2008, respectively.




NOTE
12. SECURED DEMAND NOTE / SUBORDINATED BORROWINGS





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




National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company, to borrow
securities that can be used by the Company for collateral
agreements.  These securities have been pledged through an unrelated
broker-dealer, and have a borrowing value totaling
$500,000. This note
bears interest at 5% per annum with interest paid monthly. In fiscal year
2009, upon the maturity of the aforementioned note, the lender opted to not
renew the note and as such, the note is presently in “Suspended Repayment”
status, as defined in the original note.    Certain of the
securities, totaling $168,000, have been pledged as collateral for security
deposits for office leases under two letters of credit.  No amounts
have been drawn on either of these letters of credit.  The holder also
entered into a warrant agreement to purchase 150,000 shares of common stock at a
price of $1.25 per share.  This warrant expired on July 31,
2009.


In June
2009, National Securities was approved by the FINRA to receive a Subordinated
loan from Legent for $100,000.  This loan was granted subsequent to
National Securities signing a clearing agreement with Legent, to clear a portion
of the business.  This loan is forgivable after one year and National
Securities bringing over a certain number of assets to the Legent clearing
platform.




In July
2009, National Securities was approved by the FINRA to receive an additional
Subordinated loan from Legent for $250,000, also bearing interest at the rate of
4.5% payable monthly.  This loan was granted subsequent to National
Securities signing a clearing agreement with Legent to clear a portion of the
business.  This loan is scheduled to begin principal repayment at a
minimum of $10,000 per month or $10 per transaction, whichever is greater,
starting July 31, 2010.  Some or all of this repayment may be funded
by transactional credits depending on the amount of business conducted through
Legent on a monthly basis.




20





NOTE 13. COMMITMENTS AND CONTINGENCIES





During
the quarter ended December 31, 2009, there were no significant developments in
the Company’s legal proceedings.  For a detailed discussion of the
Company’s legal proceedings, please refer to the Company’s Annual Report on Form
10-K for the fiscal year ended September 30, 2009.




The
Company’s subsidiaries are defendants in various arbitrations and administrative
proceedings, lawsuits and claims together alleging damages of approximately
$12,531,000.  The
Company believes most of such claims are substantially without merit and
estimates, to the extent that it can, that its aggregate liability from these
pending actions is less than $750,000 (exclusive of fees, costs and unspecified
punitive damages related to certain claims and inclusive of expected insurance
coverage).  These matters arise in the normal course of
business.  The Company intends to vigorously defend itself in these
actions, and 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 December 31, 2009 and 2008, is $265,000 and $228,000 (primarily legal
fees), respectively, and have been included in “Accounts Payable, Accrued
Expenses and Other Liabilities” in the accompanying consolidated statements of
financial condition.  The Company has included in “Professional fees”
litigation and FINRA related expenses of $187,000 and $41,000 for the first
quarter of fiscal year 2010 and 2009, respectively.




NOTE
14. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK





The
holders of the Company’s Series A convertible preferred stock, that are
convertible into the Company’s common stock at $1.25 per share, are entitled to
receive dividends on a quarterly basis at a rate of 9% per annum, per
share.  Such dividends are cumulative and accumulate whether or not
declared by the Company’s Board of Directors, but are payable only when and if
declared by the Company’s Board of Directors.  In the quarter ended
December 31, 2009, the Company recognizes approximately $97,000 of dividends on
its Series A preferred stock, and at December 31, 2009, the total amount of
accumulated dividends on the Company’s 42,957 issued and outstanding shares of
Series A preferred stock was approximately $291,000.





NOTE
15. NET CAPITAL REQUIREMENTS





National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net
capital.  National Securities has elected to use the alternative
standard method permitted by the rule.  This requires that National
Securities maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security for which
National Securities is a market maker.  At December 31, 2009, National
Securities had net capital of approximately $343,000 which exceeded its
requirement by approximately $93,000





In
addition to the net capital requirements, each of vFinance Investments and
EquityStation are required to maintain a ratio of aggregate indebtedness to net
capital, as defined, of not more than 15 to 1 (and the rule of the “applicable”
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to
1).  At December 31, 2009, vFinance Investments had net capital of
approximately $1,233,000 which was approximately $233,000 in excess of its
required net capital of $1,000,000 and its percentage of aggregate indebtedness
to net capital was 393%.  At December 31, 2009, EquityStation had net
capital of approximately $190,000 which was approximately $90,000 in excess of
its required net capital of $100,000 and its percentage of aggregate
indebtedness to net capital was 276%.  Each of the Broker Dealer
subsidiaries qualifies under the exemptive provisions of Rule 15c3-3 under
Section (k)(2)(ii) of the Rule, as none of them carry the accounts of their
customers on their books nor perform custodial functions related to customer
securities.




21





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





NOTE
16: SUBSEQUENT EVENTS





On
February 1, 2010, National Securities Corporation and vFinance Investments, Inc.
entered into separate but coterminous clearing agreements with National
Financial Services, LLC.  NFS remains our primary clearing firm, and
as a result of these agreements, National Securities Corporation’s existing
agreement, which was not due to expire until April 2013, has been terminated and
is replaced by this new agreement with a termination date of February 1,
2015.  vFinance Investments, Inc. clearing agreement ended on March
14, 2009, but the Company has been operating under that agreement while
negotiating this new agreement.  The Company expects these new
agreements to have a favorable effect on its clearing costs.




22


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





The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements.  This Quarterly Report may contain certain
statements of a forward-looking nature relating to future events or future
business performance.  Any such statements that refer to the Company’s
estimated or anticipated future results or other non-historical facts are
forward-looking and reflect the Company’s current perspective of existing trends
and information.  These statements involve risks and uncertainties
that cannot be predicted or quantified and, consequently, actual results may
differ materially from those expressed or implied by such forward-looking
statements.  Such risks and uncertainties include, among others, risks
and uncertainties detailed in the Company’s Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on December 29, 2009.  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 December
31, 2009 Compared to Three Months Ended December 31, 2008





The
Company’s first quarter of fiscal year 2010 resulted in an increase in revenues,
with a lower increase in expenses compared to the same period last
year.  As a result, the Company reported a net loss of $488,000
compared with a net loss of $1,142,000 for the first quarters of fiscal years
2010 and 2009, respectively.


Three
      Months EndedDecember
      31,
              
              
              Increase
      (Decrease)2009
              
              
              2008
              
              
              Amount
              
              
              PercentCommissions
              
              $
              17,987,000
              
              
              $
              12,273,000
              
              
              $
              5,714,000
              
              
              
              47
              %Net
      dealer inventory gains
              
              
              3,954,000
              
              
              
              10,229,000
              
              
              
              (6,275,000
              )
              
              
              -61
              %Investment
      banking
              
              
              1,653,000
              
              
              
              667,000
              
              
              
              986,000
              
              
              
              148
              %Interest
      and dividends
              
              
              500,000
              
              
              
              697,000
              
              
              
              (197,000
              )
              
              
              -28
              %Transfer
      fees and clearance services
              
              
              2,906,000
              
              
              
              2,750,000
              
              
              
              156,000
              
              
              
              6
              %Other
              
              
              1,388,000
              
              
              
              1,236,000
              
              
              
              152,000
              
              
              
              12
              %$
              28,388,000
              
              
              $
              27,852,000
              
              
              $
              536,000
              
              
              
              2
              %
  Total
revenues increased $536,000, or 2%, in the first quarter of fiscal year 2010 to
$28,388,000 from $27,852,000 in the first quarter of fiscal year
2010.  The increase in revenues is primarily due to slightly more
favorable market conditions.  Commission revenue increased $2,577,000,
or 17%, to $17,987,000 from $15,410,000 during the first quarter of fiscal year
2010 compared with the same period in fiscal year 2009, which is attributable to
generally more favorable market conditions.  Net dealer inventory
gains, which includes profits on proprietary trading, market making activities
and customer mark-ups and mark-downs, decreased $3,138,000, or 44%, to
$3,954,000 from $7,092,000 during the first quarter of fiscal year 2010 compared
with the same period in fiscal year 2009.  The decrease is primarily
due to less favorable trading conditions affecting our foreign trading
activities in the quarter ended December 31, 2009 as compared to the same
quarter in 2008.





23





Investment
banking revenue increased $986,000, or 148% to $ 1,653,000 from $667,000 during
the first quarter of 2010 compared to the same period in fiscal year
2009.  This increase was attributable to greater success, advisory and
consulting services provided during the quarter.  The Company did not
complete any investment banking transactions in the first quarter of fiscal year
2009.  Interest and dividend income decreased by $197,000 or 28%, to $
500,000 from $697,000 in the first quarter of fiscal year 2010 compared with the
same period in fiscal year 2009.  The decrease in interest income is
attributable to generally lower customer margin account balances, lower customer
free cash balances and lower prevailing interest rates during the
quarter.  Transfer fees increased $156,000 or 6%, to $2,906,000 in the
first quarter of fiscal year 2010 from $2,750,000 in the first quarter of fiscal
year 2009.  The increase is due primarily to slightly more favorable
business conditions.





Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees and other investment income, increased $152,000, or 12%, to
$1,388,000 from $1,236,000 during the first quarter of fiscal year 2010 compared
to the first quarter of fiscal year 2009.  The increase is due
primarily to slightly more favorable business conditions.





In
comparison with the 2% increase in total revenues, total expenses remained
virtually unchanged, down by $118,000 to $28,876,000 for the first quarter of
fiscal year 2010 compared to $28,994,000 in the first quarter of fiscal year
2009.  This decrease in total expenses is primarily a result of the
management's focus on cost cutting.


Three
      Months EndedDecember
      31,
              
              
              Increase
      (Decrease)2009
              
              
              2008
              
              
              Amount
              
              
              PercentCommissions
              
              $
              21,387,000
              
              
              $
              21,067,000
              
              
              $
              320,000
              
              
              
              2
              %Employee
      compensation
              
              
              3,084,000
              
              
              
              3,074,000
              
              
              
              10,000
              
              
              
              0
              %Clearing
      fees
              
              
              449,000
              
              
              
              1,193,000
              
              
              
              (744,000
              )
              
              
              -62
              %Communications
              
              
              1,020,000
              
              
              
              862,000
              
              
              
              158,000
              
              
              
              18
              %Occupancy
      and equipment costs
              
              
              1,296,000
              
              
              
              1,381,000
              
              
              
              (85,000
              )
              
              
              -6
              %Professional
      fees
              
              
              505,000
              
              
              
              763,000
              
              
              
              (258,000
              )
              
              
              -34
              %Interest
              
              
              294,000
              
              
              
              325,000
              
              
              
              (31,000
              )
              
              
              -10
              %Taxes,
      licenses and registration
              
              
              350,000
              
              
              
              259,000
              
              
              
              91,000
              
              
              
              35
              %Other
      administrative expenses
              
              
              491,000
              
              
              
              70,000
              
              
              
              421,000
              
              
              
              601
              %$
              28,876,000
              
              
              $
              28,994,000
              
              
              $
              (118,000
              )
              
              
              0
              %
  Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $320,000, or 2%, to $
21,387,000 in the first quarter of fiscal year 2010 from $21,067,000 in the
first quarter of fiscal year 2009.  The increase is primarily
attributable to an increase in the related commission
revenues.  Commission expense also includes the amortization of
advances to registered representatives of $286,000 and $402,000 for the first
quarter of fiscal years 2010 and 2009, 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 $10,000, or 0%, to $3,084,000 in the first
quarter of fiscal year 2010 from $3,074,000 in the first quarter of fiscal year
2009.  Employee compensation includes the amortization of the fair
value associated with stock based compensation of $182,000 and $237,000 in first
quarter of fiscal years 2010 and 2009, respectively.  Overall,
combined commission and employee compensation expense, as a percentage of
revenue decreased to 86% from 87% in the first quarter of fiscal year 2010 and
2009, respectively.





Clearing
fees decreased $744,000 or 62%, to $449,000 in the first quarter of fiscal year
2010 from $1,193,000 in the first quarter of fiscal year 2009.  The
decrease in clearing fees is due to a change in the Company’s methodology of
applying fees charged to brokers for their transactions as a reduction of its
own costs in the quarter ended December 31, 2009 as compared with recording
these fees as income in the quarter ended December 31, 2008.





24


Communication
expenses increased $158,000 or 18%, to $1,020,000 from $862,000 in the first
quarter of fiscal year 2010 compared to the first quarter of fiscal year
2009.  The increase is due to the Company applying much of its IT
infrastructure design across all of its locations due to the
merger.  Occupancy costs decreased $85,000, or 6%, to $1,296,000 from
$1,381,000 in the first quarter of fiscal year 2010 compared to the first
quarter of fiscal year 2009.  The decrease in occupancy expense is due
to the Company reducing its square footage rented as well as negotiating
slightly better rental agreements since the merger.





Professional
fees decreased $258,000, or 34%, to $505,000 from $763,000 in the first quarter
of fiscal year 2010 compared to the first quarter of fiscal year
2009.  The decrease in professional fees is primarily a result of the
filing of a registration statement and generally higher legal costs associated
with the merger with vFinance in fiscal year 2009, that were not incurred in the
first quarter of fiscal year 2010.


Interest
expense decreased $31,000, or 10%, to $294,000 from $325,000 in the first
quarter of fiscal year 2010 compared to the first quarter of fiscal year
2009.  The decrease in interest expense is attributable to the Company
having paid down $500,000 of its notes and renegotiating lower interest on its
note with Christopher Dewey from an interest rate of 10% to
7%.   Included in interest expense is the amortization of
deferred financing costs of $11,000 and $14,000 the first quarter of fiscal
years 2010 and 2009, respectively.  Taxes, licenses and registration
increased $91,000, or 35%, to $350,000 from $259,000 in the first quarter of
fiscal year 2010 compared to the first quarter of fiscal year
2009.  The increase in taxes, licenses and registration is due to a
general increase in fees paid to regulators and other governmental
agencies.  Other administrative expenses increased $421,000 or 601% to
$491,000 from $70,000 in the first quarter of fiscal year 2010 compared to the
first quarter of fiscal year 2009. The increase is due to a finders fee paid in
connection with an investment banking deal in the quarter ended December 31,
2009.  No such fee was paid in the quarter ended December 31,
2008.





The
Company reported a net loss of $488,000 in the first quarter of fiscal year 2010
compared to a net loss of $1,142,000 in the first quarter of fiscal year
2009.  The net loss attributable to common stockholders in the first
quarter of fiscal year 2010 was $585,000, or $.03 per common share, as compared
to a net loss attributable to common stockholders in the first quarter of fiscal
year 2009 of $1,227,000, or $.07 per common share.  The net loss
attributable to common stockholders for the first quarter of fiscal year 2010
and 2009 reflects $97,000 and $85,000, respectively of cumulative preferred
stock dividends on the Company’s preferred stock.





NON-G.A.A.P.
INFORMATION





Management
considers EBITDA, as adjusted, an important indicator in evaluating our business
on a consistent basis across various periods. Due to the significance of
non-recurring items, EBITDA, as adjusted, enables our board of directors and
management to monitor and evaluate our business on a consistent basis. We use
EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate
financial and strategic planning decisions regarding future operating
investments and potential acquisitions. We believe that EBITDA, as adjusted,
eliminates items that are not part of our core operations, such as interest
expense and amortization expense associated with intangible assets, or do not
involve a cash outlay, such as stock-related compensation. EBITDA, as adjusted
should be considered in addition to, rather than as a substitute for, pre-tax
income, net income and cash flows from operating activities.  For the
three months ended December 31, 2009 and December 31, 2008, EBITDA, as adjusted,
was $659,000 and $190,000 respectively.  This improvement of $469,000
in the three months ended December 31, 2009 over 2008 resulted from a general
decrease in operating costs focused on a decrease in occupancy costs and
professional fees





25





The
following table presents a reconciliation of EBITDA, as adjusted, to net income
as reported.





Three
      Months EndedDecember
      31,2009
            
            
            2008Net
      income (loss), as reported
            
            $
            (488,000
            )
            
            $
            (1,142,000
            )Interest
      expense
            
            
            294,000
            
            
            
            325,000Taxes
            
            
            48,000
            
            
            
            44,000Depreciation
            
            
            174,000
            
            
            
            162,000Amortization
            
            
            155,000
            
            
            
            162,000EBITDA
            
            
            183,000
            
            
            
            (449,000
            )Non-cash
      compensation expense
            
            
            182,000
            
            
            
            237,000Forgivable
      loan write down
            
            
            286,000
            
            
            
            402,000EBITDA,
      as adjusted
            
            $
            651,000
            
            
            $
            190,000




Earnings
before interest, taxes, depreciation and amortization, or EBITDA, adjusted for
gains or losses on sales of assets, non-cash compensation expense and loss on
extinguishment of debt, is a key metric the Company uses in evaluating its
business. EBITDA is considered a non-GAAP financial measure as defined by
Regulation G promulgated by the SEC under the Securities Act of 1933, as
amended.





Liquidity
and Capital Resources





Our
Broker Dealer Subsidiaries are subject to the SEC's Uniform Net Capital Rule
15c3-1, which is designed to measure the general financial integrity and
liquidity of a broker-dealer and requires the maintenance of minimum net
capital.  Net capital is defined as the net worth of a broker-dealer
subject to certain adjustments.  In computing net capital, various
adjustments are made to net worth that exclude assets not readily convertible
into cash.  Additionally, the regulations require that certain assets,
such as a broker-dealer's position in securities, be valued in a conservative
manner so as to avoid over-inflation of the broker-dealer's net
capital.  National Securities has elected to use the alternative
standard method permitted by the rule.  This requires that National
Securities maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security for which
National Securities is a market maker.  At December 31, 2009, National
Securities’ net capital exceeded the requirement by $93,000.  Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain $100,000,
and at December 31, 2009 the firms had excess net capital of $233,000 and
$90,000 respectively.





Advances,
dividend payments and other equity withdrawals from the Company’s subsidiary are
restricted by the regulations of the SEC and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.  During the quarter
ended December 31, 2009 the Company did not have any equity
withdrawals.





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





26





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.




Our
primary sources of liquidity include our cash flow from operations, the sale of
our securities and other financing activities. We believe that we have
sufficient funds from operations to fund our ongoing operating requirements
through at least fiscal year 2010.  If market conditions should
weaken, the Company would need to consider curtailing certain of its business
activities, reducing its fixed overhead costs and/or seek additional sources of
financing.





Cash used
in operating activities for the first quarter of fiscal year 2010 amounted to
$1,288,000, which was primarily due to our net loss of $488,000, reduced by non
cash adjustments of $329,000 in depreciation and amortization, $286,000 in
amortization of forgivable loans to brokers, $182,000 in stock compensation
expense and $87,000 in amortization of note discount.  A decrease in
receivables from our clearing firms of $2,243,000, a decrease in securities
owned at market value of $258,000, offset by a decrease in accounts payable and
accrued expenses of $4,000,000 and an increase in other assets of $128,000
further contributed to the reduction in cash used in operations.





Cash used
in investing activities for the first quarter of fiscal year 2010 amounted to
$134,000, which was due to the need to purchase fixed assets under mostly
capital leases due to the move of our vFinance Boca Raton data center into a
co-location facility in Miami, Florida, the move of our Boca Raton office to a
new location and the ongoing upgrade of technology in our Downtown Manhattan
office.





Cash
provided by operating activities for the first quarter of fiscal year 2009
amounted to $132,000, which was primarily due to our net loss of $1,142,000,
reduced by non cash adjustments of $324,000 in depreciation and amortization,
$237,000 in stock compensation expense and $123,000 in amortization of note
discount.  A decrease in receivables from our clearing firms of
$987,000 and an increase in accounts payable and accrued expenses of $723,000,
offset by an increase in securities owned at market value of $1,075,000 further
contributed to the increase in cash provided by operations.





Cash
provided by investing activities for the first quarter of fiscal year 2009
amounted to $167,000, which was due to the purchase of fixed
assets.







27





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.





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





The
following table shows the quoted market values of marketable securities owned
("long") by the Company, securities sold but not yet purchased ("short") the
Company, and net positions as of December 31, 2009:





Long
            
            
            Short
            
            
            NetCorporate
      stocks
            
            $
            117,000
            
            
            $
            77,000
            
            
            $
            40,000Corporate
      bonds
            
            
            8,000
            
            
            
            -
            
            
            
            8,000Government
      obligations
            
            
            248,000
            
            
            
            -
            
            
            
            248,000$
            373,000
            
            
            $
            77,000
            
            
            $
            296,000




ITEM
4T. CONTROLS AND PROCEDURES


Evaluation of disclosure
controls and procedures.
 
 Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure and control
procedures are also designed to ensure that such information is accumulated and
communicated to management, including the chief executive officer and principal
accounting officer, to allow timely decisions regarding required
disclosures.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act, is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding disclosure.
 
 Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange
Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the period covered
by this report, the Company’s disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this quarterly report on Form
10-Q was being prepared.
 
 Changes in internal
controls.
 
 We have
continually had in place systems relating to internal control over financial
reporting.  There were no significant changes in the Company’s
internal controls over financial reporting or in other factors during the last
fiscal quarter to which this Quarterly Report on Form 10-Q relates that could
significantly affect those controls and procedures subsequent to the date of our
evaluation nor any significant deficiencies or material weaknesses in such
internal controls and procedures requiring corrective
actions.





28





PART
II – OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





During
the quarter ended December 31, 2009, there were no significant developments in
the Company’s legal proceedings.  For a detailed discussion of the
Company’s legal proceedings, please refer to Note 6 herein, and the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2009.





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, 2009.





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





None.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





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





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.


29


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 SUBSIDIARIES









February
      16, 2009
            By:
            /s/ Mark
      GoldwasserMark
      GoldwasserChief
      Executive Officer











February
      16, 2009
              By:
              /s/ Alan
      B. LevinAlan
      B. LevinChief
      Financial Officer