UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q








QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934




For the Quarter Ended March
              31, 2007
            Commission
                File Number 001-12629





NATIONAL
      HOLDINGS CORPORATION


(Exact
      name of registrant as specified in its charter)


Delaware
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              36-4128138
                (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 is a large accelerated filer, an
      accelerated filer or a non-accelerated filer (see definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one)). Large
      Accelerated Filer o Accelerated
      Filer o Non-Accelerated
      Filer x





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





As
      of May
      7, 2007 there were 5,410,038 shares of the registrant's common stock
      outstanding.





1


**NATIONAL
                  HOLDINGS CORPORATION AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION****ASSETS**
  March
                  31,
              
              September
                  30,2007
              
              2006(unaudited)
              
              (see
                  note below)CASH
              
              $
              1,536,000
              
              $
              1,441,000DEPOSITS
                  WITH CLEARING ORGANIZATIONS
              
              
              301,000
              
              
              300,000RECEIVABLES
                  FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
              
              
              4,478,000
              
              
              3,548,000OTHER
                  RECEIVABLES, net of allowance for uncollectible accounts of
                  $467,000at
                  March 31, 2007 and September 30, 2006, respectively
              
              
              664,000
              
              
              380,000ADVANCES
                  TO REGISTERED REPRESENTATIVES
              
              
              2,318,000
              
              
              1,556,000SECURITIES
                  OWNEDMarketable,
                  at
                  market value
              
              
              890,000
              
              
              475,000Non-marketable,
                  at fair value
              
              
              -
              
              
              402,000FIXED
                  ASSETS, net
              
              
              289,000
              
              
              305,000SECURED
                  DEMAND NOTE
              
              
              1,000,000
              
              
              1,000,000OTHER
                  ASSETS
              
              
              446,000
              
              
              300,000TOTAL
                  ASSETS
              
              $
              11,922,000
              
              $
              9,707,000**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**PAYABLE
                  TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
              
              $
              714,000
              
              $
              113,000SECURITIES
                  SOLD, BUT NOT YET PURCHASED, at market
              
              
              176,000
              
              
              162,000ACCOUNTS
                  PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
              
              
              4,707,000
              
              
              3,943,000CONVERTIBLE
                  NOTES PAYABLE, net of debt discounts of $140,000 and
                  $159,000at
                  March 31, 2007 and September 30, 2006, respectively
              
              
              860,000
              
              
              841,000NOTES
                  PAYABLE, net of debt discounts of $187,000 and $45,000at
                  March 31, 2007 and September 30, 2006, respectively
              
              
              813,000
              
              
              805,000TOTAL
                  LIABILITIES
              
              
              7,270,000
              
              
              5,864,000SUBORDINATED
                  BORROWINGS
              
              
              1,000,000
              
              
              1,000,000COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS'
                  EQUITYPreferred
                  stock, $.01 par value, 200,000 shares authorized; 50,000
                  sharesdesignated
                  as
                  Series A and 20,000 shares designated as Series B
              
              
              -
              
              
              -Series
                  A 9% cumulative convertible preferred stock, $.01 par value,
                  50,000shares
                  authorized; 37,550 shares issued and outstanding
                  (liquidationpreference:
                  $3,755,000) at March 31, 2007 and 35,316 shares issued andoutstanding
                  (liquidation preference: $3,531,600) at September 30, 2006
              
              
              -
              
              
              -Series
                  B 10% cumulative convertible preferred stock, $.01 par value,
                  20,000shares
                  authorized; 10,000 shares issued and outstanding
                  (liquidationpreference:
                  $1,000,000) at March 31, 2007 and September 30, 2006,respectively
              
              
              -
              
              
              -Common
                  stock, $.02 par value, 30,000,000 shares authorized;5,402,851
                  and
                  5,223,968 shares issued and outstanding,at
                  March 31, 2007 and September 30, 2006, respectively
              
              
              108,000
              
              
              104,000Additional
                  paid-in capital
              
              
              17,639,000
              
              
              16,956,000Accumulated
                  deficit
              
              
              (14,095,000
              )
              
              (14,217,000
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              3,652,000
              
              
              2,843,000TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              11,922,000
              
              $
              9,707,000Note:
                  The balance sheet at September 30, 2006 has been derived from the
                  audited
                  consolidated financial statements at that
                  date.




2


**NATIONAL
                    HOLDINGS CORPORATION AND SUBSIDIARIES****CONDENSED
                    CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**
  Three
                    Months Ended
                
                Six
                    Months EndedMarch
                    31,
                
                March
                    31,
                
                March
                    31,
                
                March
                    31,2007
                
                2006
                
                2007
                
                2006
                
                Three
                    Months Ended
                
                
                Six
                    Months EndedREVENUES:Commissions
                
                $
                8,522,000
                
                $
                10,714,000
                
                $
                16,944,000
                
                $
                17,871,000
                
                $
                (2,192,000
                )
                
                -20
                %
                
                $
                (927,000
                )
                
                -5
                %Net
                    dealer inventory gains
                
                
                3,760,000
                
                
                2,191,000
                
                
                7,059,000
                
                
                4,052,000
                
                
                1,569,000
                
                
                72
                %
                
                
                3,007,000
                
                
                74
                %Investment
                    banking
                
                
                3,112,000
                
                
                4,042,000
                
                
                3,667,000
                
                
                7,093,000
                
                
                (930,000
                )
                
                -23
                %
                
                
                (3,426,000
                )
                
                -48
                %Total
                    commission and fee revenues
                
                
                15,394,000
                
                
                16,947,000
                
                
                27,670,000
                
                
                29,016,000Interest
                    and dividends
                
                
                796,000
                
                
                696,000
                
                
                1,361,000
                
                
                1,382,000
                
                
                100,000
                
                
                14
                %
                
                
                (21,000
                )
                
                -2
                %Transfer
                    fees and clearing services
                
                
                1,005,000
                
                
                969,000
                
                
                2,015,000
                
                
                1,730,000
                
                
                36,000
                
                
                4
                %
                
                
                285,000
                
                
                16
                %Other
                
                
                420,000
                
                
                175,000
                
                
                853,000
                
                
                347,000
                
                
                245,000
                
                
                140
                %
                
                
                506,000
                
                
                146
                %TOTAL
                    REVENUES
                
                
                17,615,000
                
                
                18,787,000
                
                
                31,899,000
                
                
                32,475,000
                
                
                (1,172,000
                )
                
                -6
                %
                
                
                (576,000
                )
                
                -2
                %EXPENSES:Commissions
                
                
                12,392,000
                
                
                14,043,000
                
                
                22,176,000
                
                
                23,731,000
                
                
                (1,651,000
                )
                
                -12
                %
                
                
                (1,555,000
                )
                
                -7
                %Employee
                    compensation and related expenses
                
                
                1,749,000
                
                
                1,592,000
                
                
                3,262,000
                
                
                2,884,000
                
                
                157,000
                
                
                10
                %
                
                
                378,000
                
                
                13
                %Clearing
                    fees
                
                
                343,000
                
                
                436,000
                
                
                718,000
                
                
                800,000
                
                
                (93,000
                )
                
                -21
                %
                
                
                (82,000
                )
                
                -10
                %Communications
                
                
                426,000
                
                
                546,000
                
                
                828,000
                
                
                1,033,000
                
                
                (120,000
                )
                
                -22
                %
                
                
                (205,000
                )
                
                -20
                %Occupancy
                    and equipment costs
                
                
                741,000
                
                
                633,000
                
                
                1,476,000
                
                
                1,308,000
                
                
                108,000
                
                
                17
                %
                
                
                168,000
                
                
                13
                %Professional
                    fees
                
                
                559,000
                
                
                246,000
                
                
                1,517,000
                
                
                584,000
                
                
                313,000
                
                
                127
                %
                
                
                933,000
                
                
                160
                %Interest
                
                
                105,000
                
                
                176,000
                
                
                209,000
                
                
                285,000
                
                
                (71,000
                )
                
                -40
                %
                
                
                (76,000
                )
                
                -27
                %Taxes,
                    licenses, registration
                
                
                164,000
                
                
                169,000
                
                
                342,000
                
                
                314,000
                
                
                (5,000
                )
                
                -3
                %
                
                
                28,000
                
                
                9
                %Other
                    administrative expenses
                
                
                560,000
                
                
                522,000
                
                
                880,000
                
                
                854,000
                
                
                38,000
                
                
                7
                %
                
                
                26,000
                
                
                3
                %TOTAL
                    EXPENSES
                
                
                17,039,000
                
                
                18,363,000
                
                
                31,408,000
                
                
                31,793,000
                
                
                (1,324,000
                )
                
                -7
                %
                
                
                (385,000
                )
                
                -1
                %NET
                    INCOME
                
                
                576,000
                
                
                424,000
                
                
                491,000
                
                
                682,000
                
                
                152,000
                
                
                36
                %
                
                
                (191,000
                )
                
                -28
                %Preferred
                    stock dividends
                
                
                (103,000
                )
                
                (95,000
                )
                
                (208,000
                )
                
                (171,000
                )
                
                (8,000
                )
                
                8
                %
                
                
                (37,000
                )
                
                22
                %Net
                    income attributable to common stockholders
                
                $
                473,000
                
                $
                329,000
                
                $
                283,000
                
                $
                511,000
                
                $
                144,000
                
                
                44
                %
                
                $
                (228,000
                )
                
                -45
                %NET
                    INCOME PER COMMON SHAREBasic:Net
                    income attributable to common stockholders
                
                $
                0.09
                
                $
                0.06
                
                $
                0.05
                
                $
                0.10Diluted:Net
                    income attributable to common stockholders
                
                $
                0.05
                
                $
                0.04
                
                $
                0.05
                
                $
                0.07Weighted
                    average number of shares outstandingBasic
                
                
                5,370,917
                
                
                5,089,625
                
                
                5,310,762
                
                
                5,068,451Diluted
                
                
                11,193,816
                
                
                10,383,571
                
                
                10,909,161
                
                
                10,283,235
 3


**NATIONAL
                  HOLDINGS CORPORATION AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**
  Six
                  Months EndedMarch
                  31, 2007
              
              March
                  31, 2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              $
              491,000
              
              $
              682,000Adjustments
                  to reconcile net income to netcash
                  provided by (used in) operating activitiesDepreciation
                  and amortization
              
              
              74,000
              
              
              68,000Amortization
                  of deferred financing costs
              
              
              4,000
              
              
              1,000Amortization
                  of note discount
              
              
              61,000
              
              
              130,000Compensatory
                  element of common stock issuance
              
              
              -
              
              
              12,000Compensatory
                  element of common stock option issuances
              
              
              29,000
              
              
              5,000Changes
                  in assets and liabilitiesDeposits
                  with clearing organizations
              
              
              (1,000
              )
              
              -Receivables
                  from broker-dealers, clearing organizations and others
              
              
              (1,976,000
              )
              
              (1,198,000
              )Securities
                  owned: marketable, at market value
              
              
              (415,000
              )
              
              (300,000
              )Securities
                  owned: non-marketable, at fair value
              
              
              402,000
              
              
              -Other
                  assets
              
              
              (146,000
              )
              
              (96,000
              )Payables
              
              
              1,392,000
              
              
              1,678,000Securities
                  sold, but not yet purchased, at market
              
              
              14,000
              
              
              29,000Net
                  cash (used in) provided by operating activities
              
              
              (71,000
              )
              
              1,011,000CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of fixed assets
              
              
              (58,000
              )
              
              (117,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESNet
                  proceeds from issuance of common stock
              
              
              -
              
              
              175,000Net
                  proceeds from issuance of preferred stock
              
              
              -
              
              
              972,000Net
                  proceeds from issuance of convertible notes payable
              
              
              -
              
              
              1,000,000Net
                  proceeds from issuance of notes payable
              
              
              1,000,000
              
              
              -Cash
                  payment of deferred financing costs
              
              
              (22,000
              )
              
              (28,000
              )Payment
                  of notes payable
              
              
              (850,000
              )
              
              (1,175,000
              )Dividends
                  paid
              
              
              (50,000
              )
              
              -Exercise
                  of stock options and warrants
              
              
              146,000
              
              
              -Net
                  cash provided by financing activities
              
              
              224,000
              
              
              944,000NET
                  INCREASE IN CASH
              
              
              95,000
              
              
              1,838,000CASH
                  BALANCEBeginning
                  of the period
              
              
              1,441,000
              
              
              398,000End
                  of the period
              
              $
              1,536,000
              
              $
              2,236,000SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during the period for:Interest
              
              $
              163,000
              
              $
              165,000Series
                  B preferred stock dividends
              
              $
              50,000
              
              $
              -SUPPLEMENTAL
                  DISCLOSURES OF NONCASH INVESTING ANDFINANCING
                  ACTIVITIESWarrants
                  issued in connection with debt
              
              $
              195,000
              
              $
              187,000Preferred
                  stock dividends
              
              $
              317,000
              
              $
              300,000Interest
                  EqualsInterest
                  expense on operating statement
              
              
              209,000increased
                  by accrued interest payable at NHLD at beginning of period
                  and
              
              
              56,082decreased
                  by accrued interest payable at NHLD at end of period
              
              
              37,260




4


**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007**


**(UNAUDITED)**





**NOTE
      1. BASIS OF PRESENTATION**





The
      accompanying condensed consolidated financial statements of National Holdings
      Corporation (“National Holdings” or the “Company”) have been prepared in
      accordance with generally accepted accounting principles for interim financial
      statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation
      S-X. Accordingly, they do not include all of the information and disclosures
      required for annual financial statements. In the opinion of management, all
      adjustments (consisting of normal recurring accruals) considered necessary
      for a
      fair presentation have been included. The condensed consolidated financial
      statements as of March 31, 2007 and for the periods ended March 31, 2007 and
      March 31, 2006 are unaudited. The results of operations for the interim periods
      are not necessarily indicative of the results of operations for the fiscal
      year.
      These condensed consolidated financial statements should be read in conjunction
      with the consolidated financial statements and related footnotes included
      thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended
      September 30, 2006.





**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the FASB released Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which
      clarifies the accounting and reporting for uncertainty in income tax law. FIN
      48
      prescribes a comprehensive model for the financial statement recognition,
      measurement, presentation and disclosure of uncertain tax positions taken or
      expected to be taken in income tax returns. The provisions of FIN 48 are
      effective after December 15, 2006. Earlier adoption is permitted as of the
      beginning of an enterprise's fiscal year, provided the enterprise has not yet
      issued financial statements, including financial statements for any interim
      period for that fiscal year. The cumulative effects, if any, of applying FIN
      48
      will be recorded as an adjustment to accumulated deficit as of the beginning
      of
      the period of adoption. The Company is evaluating the impact that the adoption
      of this pronouncement will have on the consolidated financial position,
      results of operations, or cash flows of the Company.




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




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





5


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





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




**NOTE
      3.**  **STOCK
      BASED COMPENSATION**





Effective
      October 1, 2005, the Company adopted FASB Statement of Financial Accounting
      Standard (“SFAS”) No. 123R “Share Based Payment”.  This statement is a
      revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
      and its related implementation guidance. SFAS 123R addresses all forms of share
      based payment (“SBP”) awards including shares issued under employee stock
      purchase plans, stock options, restricted stock and stock appreciation rights.
      Under SFAS 123R, SBP awards will result in a charge to operations that will
      be
      measured at fair value on the awards grant date, based on the estimated number
      of awards expected to vest over the service period.  During the three and
      six months ended March 31, 2006, the Company granted 70,000 and 170,000
      stock options, respectively, with a fair value of approximately $55,000 and
      $88,000, respectively. A charge of approximately $4,000 was recorded in the
      three and six months ended March 31, 2006, relating to the amortization of
      the fair value associated with these grants. During the three and six months
      ended March 31, 2007, the Company granted 570,000 and 720,000 stock
      options, respectively, with a fair value of approximately $478,000 and $574,000,
      respectively. A charge of approximately $22,000 and $29,000 was recorded in
      the
      three and six months ended March 31, 2007, respectively, relating to the
      amortization of the fair value associated with stock option grants.




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





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


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





6





A
      summary
      of the stock option activity as of March 31, 2007, and changes during the six
      month period then ended is presented below:


WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              IntrinsicShares
              
              Price
              
              Term
              
              ValueOutstanding
                  at September 30, 2006
              
              
              932,000
              
              $
              1.30
              
              
              3.31Granted
              
              
              720,000
              
              $
              1.60
              
              
              4.91Exercised
              
              
              (20,000
              )
              $
              0.72Expired
              
              
              (25,000
              )
              $
              2.00Outstanding
                  at March 31, 2007
              
              
              1,607,000
              
              $
              1.43
              
              
              3.83
              
              $
              425,000Exerciseable
                  at March 31, 2007
              
              
              962,000
              
              $
              1.33
              
              
              3.17
              
              $
              333,000


As
      of
      March 31, 2007, there was $613,000 of total deferred compensation costs related
      to share-based compensation arrangements.





7


A
      summary
      of the status of the Company’s nonvested shares as of March
      31 ,
      2007,
      and changes during the six month period then ended is presented
      below:


WeightedAverageGrant
                  DateNonvested
                  Shares
              
              Shares
              
              Fair
                  ValueNonvested
                  at September 30, 2006
              
              75,000
              
              $
                  0.33Granted
              
              595,000
              
              $
                  0.81Vested
              
              (25,000)
              
              $
                  0.33Expired
              
              -Nonvested
                  at March 31, 2007
              
              645,000
              
              $
                  0.78




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





The
      following table shows the quoted market values of the Company's marketable
      securities owned and securities sold, but not yet purchased as of March 31,
      2007:




Securities
                  held
              
              Securities
                  sold, butfor
                  resale
              
              not
                  yet purchasedCorporate
                  stocks
              
              $
              868,000
              
              $
              176,000Corporate
                  bonds
              
              
              6,000
              
              
              -Government
                  obligations
              
              
              16,000
              
              
              -$
              890,000
              
              $
              176,000





**NOTE
      5. CLEARING AGREEMENTS**





In
      April
      2005, the Company’s wholly-owned subsidiary, National Securities Corporation
      (“National Securities”) entered into a clearing agreement with National
      Financial Services LLC (“NFS”) that became effective in June 2005. In the first
      quarter of fiscal year 2007, NFS paid National Securities a $750,000 business
      credit, that is being amortized over an eight year period, the net amount of
      which has been included in “Accounts Payable, Accrued Expenses and Other
      Liabilities” in the accompanying consolidated statements of financial condition
      as of March 31, 2007. In the second quarter of fiscal year 2007, NFS agreed
      to
      provide National Securities a $250,000 clearing fee waiver that is being
      amortized over a two year period, the net amount of which has been included
      in
“Accounts Payable, Accrued Expenses and Other Liabilities” in the accompanying
      consolidated statements of financial condition as of March 31, 2007. The
      clearing agreement includes a termination fee if National Securities terminates
      the agreement without cause. Additionally, in June 2005, National Securities
      entered into a clearing agreement with Penson Financial Services, Inc.
      (“Penson”) for the purpose of providing clearing services that are not provided
      by NFS. The Company believes that the overall effect of these clearing
      relationships is beneficial to the Company’s cost structure, liquidity and
      capital resources.





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





In
      September 2006, the former
      chairman and chief executive officer of the Company, Steven A. Rothstein,
      commenced an arbitration against the current chairman and chief executive
      officer of the Company, Mark Goldwasser, in the matter *Rothstein
      et al. vs. Goldwasser* ,
      NASD
      No. 06-04000.  Rothstein is alleging fraud and inequitable conduct relating
      to his attempts to sell his investment in the Company in calendar year
      2001, and is seeking approximately $5,750,000 in damages.  The
      Company is indemnifying Mr. Goldwasser in this action.  The Company
      and Mr. Goldwasser believe this action is without merit, and intend to
      vigorously defend this action.





8


The
      Company is a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims seeking
      in the aggregate damages of approximately $1,200,000. The Company believes
      such claims are substantially without merit, and estimates that its liability,
      primarily for defense costs, will approximate $200,000 (exclusive of unspecified
      punitive damages related to certain claims and inclusive of expected insurance
      coverage). These matters arise in the normal course of business. The Company
      intends to vigorously defend itself in these actions, and believes that the
      eventual outcome of these matters will not have a material adverse effect on
      the
      Company. However,
      the ultimate outcome of these matters cannot be determined at this time. The
      amounts related to such matters that are reasonably estimable and which have
      been accrued at March 31, 2007 and 2006, is $331,000 and $228,000, respectively,
      and have
      been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
      the accompanying consolidated statements of financial condition . The
      Company has included in “Professional fees” litigation and NASD related expenses
      of $344,000 and $155,000 for the second quarter of fiscal year 2007 and 2006,
      respectively, and $1,133,000 and $400,000 for the first six months of fiscal
      year 2007 and 2006, respectively.





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





The
      holders of the Company’s Series A convertible preferred stock, 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 accrue whether or not declared by the
      Company’s Board of Directors, but are payable only when, as and if declared by
      the Company’s Board of Directors. In March 2007, the Company’s Board of
      Directors declared an in-kind dividend in the aggregate of 2,537 shares of
      Series A preferred stock, in payment of approximately $317,000 of dividends
      accrued through March 31, 2007. Such shares were issued on April 30, 2007.
      At
      March 31, 2007, the accumulated dividend on the Company’s 37,550 issued and
      outstanding shares of Series A preferred stock was $0.





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





**NOTE
      8. INCOME PER COMMON SHARE**





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





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








9




Three
                  Months Ended
              
              Six
                  Months EndedMarch
                  31, 2007
              
              March
                  31, 2006
              
              March
                  31, 2007
              
              March
                  31, 2006Numerator:Net
                  income
              
              $
              576,000
              
              $
              424,000
              
              $
              491,000
              
              $
              682,000Preferred
                  stock
                  dividends
              
              
              (103,000
              )
              
              (95,000
              )
              
              (208,000
              )
              
              (171,000
              )Numerator
                  for basic earnings per share--
                  net income
                  attributable tocommon
                  stockholders
                  - as reported
              
              
              473,000
              
              
              329,000
              
              
              283,000
              
              
              511,000Effect
                  of dilutive
                  securities:Interest
                  on
                  convertible notes
              
              
              27,000
              
              
              24,000
              
              
              54,000
              
              
              24,000Preferred
                  stock dividends
              
              
              103,000
              
              
              95,000
              
              
              208,000
              
              
              171,000Numerator
                  for basic earnings per share--
                  net income
                  attributable tocommon
                  stockholders
                  - as adjusted
              
              $
              603,000
              
              $
              448,000
              
              $
              545,000
              
              $
              706,000Denominator:Denominator
                  for
                  basic earnings pershare--weighted
                  average shares
              
              
              5,370,917
              
              
              5,089,625
              
              
              5,310,762
              
              
              5,068,451Effect
                  of dilutive
                  securities:Stock
                  options
              
              
              207,934
              
              
              37,372
              
              
              104,786
              
              
              17,905Warrants
              
              
              277,632
              
              
              97,961
              
              
              156,280
              
              
              38,266Assumed
                  conversion of:Series
                  A Preferred
                  Stock
              
              
              3,004,000
              
              
              2,825,280
              
              
              3,004,000
              
              
              2,825,280Series
                  B Preferred
                  Stock
              
              
              1,333,333
              
              
              1,333,333
              
              
              1,333,333
              
              
              1,333,333Notes
              
              
              1,000,000
              
              
              1,000,000
              
              
              1,000,000
              
              
              1,000,000Dilutive
                  potential
                  common shares
              
              
              5,822,899
              
              
              5,293,946
              
              
              5,598,399
              
              
              5,214,784Denominator
                  for diluted earnings pershare--adjusted
                  weighted-averageshares
                  and assumed
                  conversions
              
              
              11,193,816
              
              
              10,383,571
              
              
              10,909,161
              
              
              10,283,235Net
                  income available tocommon
                  stockholdersBasic:
              
              $
              0.09
              
              $
              0.06
              
              $
              0.05
              
              $
              0.10Diluted:
              
              $
              0.05
              
              $
              0.04
              
              $
              0.05
              
              $
              0.07


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





Accounts
      payable, accrued expenses and other liabilities as of March 31, 2007 and
      September 30, 2006, respectively, consist of the following:





10




March
                  31, 2007
              
              September
                  30, 2006Commissions
                  payable
              
              $
              1,975,000
              
              $
              1,993,000Legal
                  payable
              
              
              348,000
              
              
              325,000Other
              
              
              2,384,000
              
              
              1,625,000Total
              
              $
              4,707,000
              
              $
              3,943,000




**NOTE
      10. NOTES PAYABLE**





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





In
      February 2007, National Securities and the holder of a $1.0 million secured
      demand note that was scheduled to mature on March 1, 2007, extended the term
      of
      the secured demand note to March 1, 2008.




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





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





The
      Company and the investors entered into a registration rights agreement, wherein
      the investors received unlimited piggyback registration rights and one demand
      registration right for the shares of common stock issuable upon exercise of
      the
      warrants. The investors can make such demand one year after the date of issuance
      of the warrants, and the Company has agreed to file the registration statement
      within 90 days of such demand. The Company has agreed to use commercially
      reasonable efforts to have the registration statement declared effective. There
      are no penalties for failure to have the registration statement declared
      effective.





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





**NOTE
      12. STOCKHOLDERS’ EQUITY**





In
      the
      three and six months ended March 31, 2007 the Company received proceeds of
      approximately $14,000 and $146,000, respectively, from the exercise of 20,000
      and 154,643, respectively, outstanding warrants and stock options. In the second
      quarter ended March 31, 2007, a holder of Series A preferred stock converted
      303
      shares of Series A preferred stock into 24,240 share of the Company’s common
      stock. In April 2007, the Company received proceeds of approximately $5,700
      from
      the exercise of outstanding warrants to purchase 7,187 shares of the Company’s
      common stock.





11


**NOTE
      13. NEW SUBSIDIARIES**





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





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





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





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





**RESULTS
      OF OPERATIONS**





Three
      Months Ended March 31, 2007 Compared to Three Months Ended March 31,
      2006





The
      Company’s second quarter of fiscal year 2007 resulted in a decrease in revenues,
      and a comparatively greater decrease in expenses compared
      to the same period last year. As
      a
      result, the Company reported net income of $576,000 compared with net income
      of
      $424,000 for the second quarter of fiscal years 2007 and 2006, respectively.
      This represents an improvement of $152,000 from the prior period.




Three
                  Months EndedMarch
                  31,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommissions
              
              $
              8,522,000
              
              $
              10,714,000
              
              $
              (2,192,000
              )
              
              (20%)Proprietary
                  trading
              
              
              3,498,000
              
              
              2,062,000
              
              
              1,436,000
              
              
              70%Market
                  making
              
              
              168,000
              
              
              76,000
              
              
              92,000
              
              
              121%Mark-ups
                  and mark-downs
              
              
              94,000
              
              
              53,000
              
              
              41,000
              
              
              77%Net
                  dealer inventory gains
              
              
              3,760,000
              
              
              2,191,000
              
              
              1,569,000
              
              
              72%Investment
                  banking
              
              
              3,112,000
              
              
              4,042,000
              
              
              (930,000
              )
              
              (23%)Interest
                  and dividends
              
              
              796,000
              
              
              696,000
              
              
              100,000
              
              
              14%Transfer
                  fees and clearance services
              
              
              1,005,000
              
              
              969,000
              
              
              36,000
              
              
              4%Other
              
              
              420,000
              
              
              175,000
              
              
              245,000
              
              
              140%$
              17,615,000
              
              $
              18,787,000
              
              $
              (1,172,000
              )
              
              (6%)
  12


Total
        revenues decreased $1,172,000, or 6%, in the second quarter of fiscal year
        2007
        to $17,615,000 from $18,787,000 in the second quarter of fiscal year 2006.
        This
        decrease is due to a decline in commissions and the completion of fewer and
        relatively smaller investment banking transactions, partially offset by an
        increase in net dealer inventory gains. During the second quarter of fiscal
        year
        2007, total trading volume decreased 8%, compared to the second quarter of
        fiscal year 2006. The greater decrease in trading volume compared to revenues
        reflects an increase in the average revenue per trade, partially offset by
        the
        Company’s re-entry into market making activities. Trading volume in this period
        related to retail brokerage decreased 15%. Commission revenue decreased
        $2,192,000, or 20%, to $8,522,000 from $10,714,000 during the second quarter
        of
        fiscal year 2007 compared with the same period in fiscal year 2006. Net dealer
        inventory gains, which includes profits on proprietary trading, market making
        activities and customer mark-ups and mark-downs, increased $1,569,000, or
        72%,
        to $3,760,000 from $2,191,000 during the second quarter of fiscal year 2007
        compared with the same period in fiscal year 2006. The increase is primarily
        due
        to an increase in proprietary trading in the bond market, and reflects the
        Company’s re-entry into market making activities. During the second quarter of
        fiscal year 2007, revenues from proprietary trading increased $1,436,000,
        or
        70%, to $3,498,000 from $2,062,000 in the same period of fiscal year 2006,
        revenues from market making activities increased $92,000, or 121%, to $168,000
        from $76,000 in the second quarter of fiscal year 2006, and revenues from
        customer mark-ups and mark-downs increased $41,000, or 77%, to $94,000 from
        $53,000 in the second quarter of fiscal year 2006. ****
 
 Investment
        banking revenue decreased $930,000, or 23%, to $3,112,000 from $4,042,000
        in the
        second quarter of fiscal year 2007 compared with the second quarter of fiscal
        year 2006. The decrease in investment banking revenues is attributable to
        the
        Company having completed fewer and relatively smaller investment banking
        transactions in the second quarter of fiscal year 2007. Interest and dividend
        income increased $100,000, or 14%, to $796,000 from $696,000 in the second
        quarter of fiscal year 2007 compared with the same period last year. The
        increase in interest income is attributable to an increase in the amount
        of
        debit balances in National Securities’ customer accounts from the same period
        last year. Transfer fees increased $36,000, or 4%, to $1,005,000 in the second
        quarter of fiscal year 2007 from $969,000 in the second quarter of fiscal
        year
        2006. The increase reflects higher transfer fees for trades generated from
        the
        retail brokerage business of brokers recently associated with the
        Company.
 
 Other
        revenue, consisting of asset management fees, and miscellaneous transaction
        fees
        and trading fees, increased $245,000, or 140%, to $420,000 from $175,000
        during
        the second quarter of fiscal year 2007 compared to the second quarter of
        fiscal
        year 2006. The increase is due to an increase in fee based assets under
        management.
  13


Three
                  Months EndedMarch
                  31,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommission
                  expense related to:Commission
                  revenue
              
              $
              7,629,000
              
              $
              9,449,000
              
              $
              (1,820,000
              )
              
              (19%)Net
                  dealer inventory gains
              
              
              2,927,000
              
              
              1,644,000
              
              
              1,283,000
              
              
              78%Investment
                  banking
              
              
              1,836,000
              
              
              2,950,000
              
              
              (1,114,000
              )
              
              38%Commissions
              
              
              12,392,000
              
              
              14,043,000
              
              
              (1,651,000
              )
              
              (12%)Employee
                  compensation
              
              
              1,749,000
              
              
              1,592,000
              
              
              157,000
              
              
              10%Clearing
                  fees
              
              
              343,000
              
              
              436,000
              
              
              (93,000
              )
              
              (21%)Communications
              
              
              426,000
              
              
              546,000
              
              
              (120,000
              )
              
              (22%)Occupancy
                  and equipment costs
              
              
              741,000
              
              
              633,000
              
              
              108,000
              
              
              17%Professional
                  fees
              
              
              559,000
              
              
              246,000
              
              
              313,000
              
              
              127%Interest
              
              
              105,000
              
              
              176,000
              
              
              (71,000
              )
              
              (40%)Taxes,
                  licenses and registration
              
              
              164,000
              
              
              169,000
              
              
              (5,000
              )
              
              (3%)Other
                  administrative expenses
              
              
              560,000
              
              
              522,000
              
              
              38,000
              
              
              7%$
              17,039,000
              
              $
              18,363,000
              
              $
              (1,324,000
              )
              
              (7%)




In
      comparison with the 6% decrease in total revenues, total expenses decreased
      7%,
      or $1,324,000, to $17,039,000 for the second quarter of fiscal year 2007
      compared to $18,363,000 in the second quarter of fiscal year 2006. The decrease
      in total expenses is primarily the result of lower commission expenses directly
      associated with commission revenues.





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, decreased $1,651,000, or 12%, to
      $12,392,000 in the second quarter of fiscal year 2007 from $14,043,000 in the
      second quarter of fiscal year 2006. Commission expense related to commission
      revenue decreased $1,820,000, or 19%, to $7,629,000 in the second quarter of
      fiscal year 2007 from $9,449,000 in the second quarter of fiscal year 2006;
      commission expense related to net dealer inventory gains increased $1,283,000,
      or 78%, to $2,927,000 in the second quarter of fiscal year 2007 from $1,644,000
      in the second quarter of fiscal year 2006; and commission expense related to
      investment banking decreased $1,114,000, or 38%, to $1,836,000 in the second
      quarter of fiscal year 2007 from $2,950,000 in the second quarter of fiscal
      year
      2006. Commission expense as a percentage of commission revenues increased to
      90%
      in the second quarter of fiscal year 2007 from 88% in the second quarter of
      fiscal year 2006. This increase is attributable to changes in the production
      of
      particular brokers, not all of who are paid at the same commission rate and
      an
      increase in the amortization of advances to registered representatives.
      Commission expense as a percentage of net dealer inventory gains increased
      to
      78% in the second quarter of fiscal year 2007 from 75% in the second quarter
      of
      fiscal year 2006. This increase is attributable to changes in the production
      of
      particular brokers and traders, not all of who are paid at the same commission
      rate. Commission expense as a percentage of investment banking revenues
      decreased to 59% in the second quarter of fiscal year 2007 from 73% in the
      second quarter of fiscal year 2006. This decrease is attributable to the type
      and size of the particular investment banking transactions completed in the
      current year’s quarter. Commission expense includes the amortization of advances
      to registered representatives of $346,000 and $305,000 for the second quarter
      of
      fiscal years 2007 and 2006, respectively. These amounts fluctuate based upon
      the
      amounts of advances outstanding and the time period for which the registered
      representatives have agreed to be affiliated with National
      Securities.





Employee
      compensation expense increased $157,000, or 10%, to $1,749,000 in the second
      quarter of fiscal year 2007 from $1,592,000 in the second quarter of fiscal
      year
      2006. The increase is attributable to new employees hired during fiscal years
      2007 and 2006. Overall, combined commission and employee compensation expense,
      as a percentage of revenue decreased to 80% from 83% in the second quarter
      of
      fiscal years 2007 and 2006, respectively. The decrease is attributable to an
      overall lower payout percentage related to commission revenues.





14


Clearing
      fees decreased $93,000, or 21%, to $343,000 in the second quarter of fiscal
      year
      2007 from $436,000 in
      the
      second quarter of fiscal year 2006. The decrease in clearing fees is
      attributable to the reduction in commission revenues in the second quarter
      of
      fiscal year 2007 compared to the second quarter of fiscal year 2006, and the
      amortization of credits received from one of the Company’s clearing
      firms.





Communications
      expense decreased $120,000, or 22%, to $426,000 from $546,000 in the second
      quarter of fiscal year 2007 compared to the second quarter of fiscal year 2006.
      The decrease is primarily due to the Company’s ability to acquire certain of
      these services at a lower price. Occupancy costs increased $108,000, or 17%,
      to
      $741,000 from $633,000 in the second quarter of fiscal year 2007 compared to
      the
      second quarter of fiscal year 2006. The increase in occupancy expense is due
      to
      costs incurred to transfer certain of the Company’s paper files to a digital
      system, and annual rent increases contained in the Company’s office leases.
      Professional fees increased $313,000, or 127%, to $559,000 from $246,000 in
      the
      second quarter of fiscal year 2007 compared to the second quarter of fiscal
      year
      2006. The increase in professional fees is primarily a result of legal fees
      and
      costs incurred to settle certain arbitrations.





Interest
      expense decreased $71,000, or 40%, to $105,000 from $176,000 in the second
      quarter of fiscal year 2007 compared to the second quarter of fiscal year 2006.
      The decrease in interest expense is primarily attributable to the acceleration
      of amortization on notes that were paid prior to maturity in the second quarter
      of fiscal year 2006. Included in interest expense is the amortization of $34,000
      and $99,000 for the second quarter of fiscal years 2007 and 2006, respectively.
      Taxes, licenses and registration decreased $5,000, or 3%, to $164,000 from
      $169,000 in the second quarter of fiscal year 2007 compared to the second
      quarter of fiscal year 2006. Other administrative expenses increased $38,000,
      or
      7%, to $560,000 from $522,000 in the second quarter of fiscal year 2007 compared
      to the second quarter of fiscal year 2006. The increase in other administrative
      expenses is attributable to incentives provided to new registered
      representatives.





The
      Company reported net income of $576,000 in the second quarter of fiscal year
      2007 compared to net income of $424,000 in
      the
      second quarter of fiscal year 2006 .
      Overall, the diluted earnings attributable to common stockholders in the second
      quarter of fiscal year 2007 was $473,000, or $.05 per common share, as compared
      to the diluted earnings attributable to common stockholders of $329,000, or
      $.04
      per common share in the second quarter of fiscal year 2006. The net income
      attributable to common stockholders reflects $103,000 and $95,000 of cumulative
      preferred stock dividends on the Company’s preferred stock for the second
      quarter of fiscal years 2007 and 2006, respectively.





Six
      Months Ended March 31, 2007 Compared to Six Months Ended March 31,
      2006





The
      Company’s first six months of fiscal year 2007 resulted in a decrease in
      revenues, and a relatively similar decrease in expenses compared
      to the same period last year. As
      a
      result, the Company reported net income of $491,000 compared with net income
      of
      $682,000 for the first six months of fiscal years 2007 and 2006, respectively.
      This represents a decline of $191,000 from the prior period.





15




Six
                  Months EndedMarch
                  31,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommissions
              
              $
              16,944,000
              
              $
              17,871,000
              
              $
              (927,000
              )
              
              (5%)Proprietary
                  trading
              
              
              6,299,000
              
              
              3,895,000
              
              
              2,404,000
              
              
              62%Market
                  making
              
              
              615,000
              
              
              84,000
              
              
              531,000
              
              
              632%Mark-ups
                  and mark-downs
              
              
              145,000
              
              
              73,000
              
              
              72,000
              
              
              99%Net
                  dealer inventory gains
              
              
              7,059,000
              
              
              4,052,000
              
              
              3,007,000
              
              
              74%Investment
                  banking
              
              
              3,667,000
              
              
              7,093,000
              
              
              (3,426,000
              )
              
              (48%)Interest
                  and dividends
              
              
              1,361,000
              
              
              1,382,000
              
              
              (21,000
              )
              
              (2%)Transfer
                  fees and clearance services
              
              
              2,015,000
              
              
              1,730,000
              
              
              285,000
              
              
              16%Other
              
              
              853,000
              
              
              347,000
              
              
              506,000
              
              
              146%$
              31,899,000
              
              $
              32,475,000
              
              $
              (576,000
              )
              
              (2%)
  Total
        revenues decreased $576,000, or 2%, in the first six months of fiscal year
        2007
        to $31,899,000 from $32,475,000 in the first six months of fiscal year 2006.
        This decrease is due to a decline in commissions and the completion of fewer
        and
        relatively smaller investment banking transactions, partially offset by an
        increase in net dealer inventory gains. During the first six months of fiscal
        year 2007, total trading volume increased less than 1%, compared to the first
        six months of fiscal year 2006. This slight increase reflects an increase
        in the
        average revenue per trade. Trading volume in this period related to retail
        brokerage decreased 10%. Commission revenue decreased $927,000, or 5%, to
        $16,944,000 from $17,871,000 during the first six months of fiscal year 2007
        compared with the same period in fiscal year 2006. Net dealer inventory gains,
        which includes profits on proprietary trading, market making activities and
        customer mark-ups and mark-downs, increased $3,007,000, or 74%, to $7,059,000
        from $4,052,000 during the first six months of fiscal year 2007 compared
        with
        the same period in fiscal year 2006. The increase is primarily due to an
        increase in proprietary trading in the bond market, and reflects the Company’s
        re-entry into market making activities. During the first six months of fiscal
        year 2007, revenues from proprietary trading increased $2,404,000, or 62%,
        to
        $6,299,000 from $3,895,000 in the same period of fiscal year 2006, revenues
        from
        market making activities increased $531,000, or 632%, to $615,000 from $84,000
        in the first six months of fiscal year 2007, and revenues from customer mark-ups
        and mark-downs increased $72,000, or 99%, to $145,000 from $73,000 in the
        first
        six months of fiscal year 2006. ****





Investment
      banking revenue decreased $3,426,000, or 48%, to $3,667,000 from $7,093,000
      in
      the first six months of fiscal year 2007 compared with the first six months
      of
      fiscal year 2006. The decrease in investment banking revenues is attributable
      to
      the Company having completed fewer and relatively smaller investment banking
      transactions in the first six months of fiscal year 2007. Interest and dividend
      income decreased $21,000, or 2%, to $1,361,000 from $1,382,000 in the first
      six
      months of fiscal year 2007 compared with the same period last year. The
      decrease in interest income is attributable to lower margin debit balances
      in
      the first quarter of fiscal year 2007 resulting from a stricter margin policy
      imposed by our clearing firms .
      Transfer fees increased $285,000, or 16%, to $2,015,000 in the first six months
      of fiscal year 2007 from $1,730,000 in the first six months of fiscal year
      2006.
      The increase reflects higher transfer fees for trades generated from the retail
      brokerage business of brokers recently associated with the Company.




Other
      revenue, consisting of asset management fees and miscellaneous transaction
      fees
      and trading fees, increased $506,000, or 146%, to $853,000 from $347,000 during
      the first six months of fiscal year 2007 compared to the first six months of
      fiscal year 2006. The increase is due to an increase in fee based assets under
      management.




16




Six
                  Months EndedMarch
                  31,
              
              Increase
                  (Decrease)2007
              
              2006
              
              Amount
              
              PercentCommission
                  expense related to:Commission
                  revenue
              
              $
              14,962,000
              
              $
              15,722,000
              
              $
              (760,000
              )
              
              (5%)Net
                  dealer inventory gains
              
              
              5,368,000
              
              
              2,984,000
              
              
              2,384,000
              
              
              80%Investment
                  banking
              
              
              1,846,000
              
              
              5,025,000
              
              
              (3,179,000
              )
              
              (63%)Commissions
              
              
              22,176,000
              
              
              23,731,000
              
              
              (1,555,000
              )
              
              (7%)Employee
                  compensation
              
              
              3,262,000
              
              
              2,884,000
              
              
              378,000
              
              
              13%Clearing
                  fees
              
              
              718,000
              
              
              800,000
              
              
              (82,000
              )
              
              (10%)Communications
              
              
              828,000
              
              
              1,033,000
              
              
              (205,000
              )
              
              (20%)Occupancy
                  and equipment costs
              
              
              1,476,000
              
              
              1,308,000
              
              
              168,000
              
              
              13%Professional
                  fees
              
              
              1,517,000
              
              
              584,000
              
              
              933,000
              
              
              160%Interest
              
              
              209,000
              
              
              285,000
              
              
              (76,000
              )
              
              (27%)Taxes,
                  licenses and registration
              
              
              342,000
              
              
              314,000
              
              
              28,000
              
              
              9%Other
                  administrative expenses
              
              
              880,000
              
              
              854,000
              
              
              26,000
              
              
              3%$
              31,408,000
              
              $
              31,793,000
              
              $
              (385,000
              )
              
              (1%)




In
      comparison with the 2% decrease in total revenues, total expenses decreased
      1%,
      or $385,000, to $31,408,000 for the first six months of fiscal year 2007
      compared to $31,793,000 in the first six months of fiscal year 2006. The
      decrease in total expenses is the result of lower commission expenses directly
      associated with commission revenues.





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, decreased $1,555,000, or 7%, to
      $22,176,000 in the first six months of fiscal year 2007 from $23,731,000 in
      the
      first six months of fiscal year 2006. Commission expense related to commission
      revenue decreased $760,000, or 5%, to $14,962,000 in the first six months of
      fiscal year 2007 from $15,722,000 in the first six months of fiscal year 2006;
      commission expense related to net dealer inventory gains increased $2,384,000,
      or 80%, to $5,368,000 in the first six months of fiscal year 2007 from
      $2,984,000 in the first six months of fiscal year 2006; and commission expense
      related to investment banking decreased $3,179,000, or 63%, to $1,846,000 in
      the
      first six months of fiscal year 2007 from $5,025,000 in the first six months
      of
      fiscal year 2006. Commission expense as a percentage of commission revenues
      remained relatively constant at 88% in the first six months of fiscal years
      2007
      and 2006. Commission expense as a percentage of net dealer inventory gains
      increased to 76% in the first six months of fiscal year 2007 from 74% in the
      first six months of fiscal year 2006. This increase is attributable to changes
      in the production of particular brokers and traders, not all of who are paid
      at
      the same commission rate. Commission expense as a percentage of investment
      banking revenues decreased to 50% in the second quarter of fiscal year 2007
      from
      71% in the second quarter of fiscal year 2006. This decrease is attributable
      to
      the type and size of the particular investment banking transactions completed
      in
      the current year’s quarter. Commission expense includes the amortization of
      advances to registered representatives of $576,000 and $617,000 for the first
      six months of fiscal years 2007 and 2006, respectively. These amounts fluctuate
      based upon the amounts of advances outstanding and the time period for which
      the
      registered representatives have agreed to be affiliated with National
      Securities.




Employee
      compensation expense increased $378,000, or 13%, to $3,262,000 in the first
      six
      months of fiscal year 2007 from $2,884,000 in the first six months of fiscal
      year 2006. The increase is attributable to new employees hired during fiscal
      years 2007 and 2006, and year-end bonuses that were paid to certain staff
      employees in the first quarter of fiscal year 2007. Overall, combined commission
      and employee compensation expense, as a percentage of revenue decreased to
      80%
      from 82% in the first six months of fiscal years 2007 and 2006, respectively.
      The decrease is attributable to an overall lower payout percentage related
      to
      commission revenues.





17


Clearing
      fees decreased
      $82,000, or 10%, to $718,000 in the first six months of fiscal year 2007 from
      $800,000 in the first six months of fiscal year 2006. The decrease in clearing
      fees is attributable to the reduction in commission revenues in the first six
      months of fiscal year 2007 compared to the first six months of fiscal year
      2006,
      and the amortization of credits received from one of the Company’s clearing
      firms.





Communications
      expense decreased $205,000, or 20%, to $828,000 from $1,033,000 in the first
      six
      months of fiscal year 2007 compared to the first six months of fiscal year
      2006.
      The decrease is primarily due to the Company’s ability to acquire certain of
      these services at a lower price. Occupancy costs increased $168,000, or 13%,
      to
      $1,476,000 from $1,308,000 in the first six months of fiscal year 2007 compared
      to the first six months of fiscal year 2006. The increase in occupancy expense
      is due to costs incurred to transfer certain of the Company’s paper files to a
      digital system, and annual rent increases contained in the Company’s office
      leases. Professional fees increased $933,000, or 160%, to $1,517,000 from
      $584,000 in the first six months of fiscal year 2007 compared to the first
      six
      months of fiscal year 2006. The increase in professional fees is primarily
      a
      result of legal fees and costs incurred to settle certain
      arbitrations.





Interest
      expense decreased $76,000, or 27%, to $209,000 from $285,000 in the first six
      months of fiscal year 2007 compared to the first six months of fiscal year
      2006.
      The decrease in interest expense is primarily attributable to the acceleration
      of amortization on notes that were paid prior to maturity in the second quarter
      of fiscal year 2006. Included in interest expense is the amortization of $65,000
      and $131,000 for the first six months of fiscal years 2007 and 2006,
      respectively. Taxes, licenses and registration increased $28,000, or 9%, to
      $342,000 from $314,000 in the first six months of fiscal year 2007 compared
      to
      the first six months of fiscal year 2006. The increase is due to registration
      incentives provided to certain brokers who became affiliated with the Company
      in
      the first quarter of fiscal year 2007. Other administrative expenses increased
      $26,000, or 3%, to $880,000 from $854,000 in the first six months of fiscal
      year
      2007 compared to the first six months of fiscal year 2006. The increase in
      other
      administrative expenses is attributable to incentives provided to new registered
      representatives.





The
      Company reported net income of $491,000 in the first six months of fiscal year
      2007 compared to net income of $682,000 in
      the
      first six months of fiscal year 2006 .
      Overall, the diluted earnings attributable to common stockholders in the first
      six months of fiscal year 2007 was $283,000, or $.05 per common share, as
      compared to diluted earnings attributable to common stockholders of $511,000,
      or
      $.07 per common share in the first six months of fiscal year 2006. The net
      income attributable to common stockholders reflects $208,000 and $171,000 of
      cumulative preferred stock dividends on the Company’s preferred
      stock for the
      first six months of fiscal years 2007 and 2006, respectively .





**Liquidity
      and Capital Resources**





National
      Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
      Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
      National Securities has elected to use the alternative standard method permitted
      by the rule. This requires that National Securities maintain minimum net capital
      equal to the greater of $250,000 or a specified amount per security based on
      the
      bid price of each security for which National Securities is a market maker. At
      March
      31, 2007, National Securities’ net capital exceeded the requirement by
      $2,174,000.





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





18


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





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





In
      April
      2005, National Securities entered into a clearing agreement with NFS that became
      effective in June 2005. In the first quarter of fiscal year 2007, NFS paid
      National Securities a $750,000 business credit, that is being amortized over
      an
      eight year period, the net amount of which has been included in “Accounts
      Payable, Accrued Expenses and Other Liabilities” in the accompanying
      consolidated statements of financial condition as of March 31, 2007. In the
      second quarter of fiscal year 2007, NFS agreed to provide National Securities
      a
      $250,000 clearing fee waiver, that is being amortized over a two year period,
      the net amount of which has been included in “Accounts Payable, Accrued Expenses
      and Other Liabilities” in the accompanying consolidated statements of financial
      condition as of March 31, 2007. The clearing agreement includes a termination
      fee if National Securities terminates the agreement without cause. Additionally,
      in June 2005, National Securities entered into a clearing agreement with Penson
      for the purpose of providing clearing services that are not provided by NFS.
      The
      Company believes that the overall effect of these clearing relationships is
      beneficial to the Company’s cost structure, liquidity and capital
      resources.





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





The
      investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud.
      Mr. Dewey, and Marshall S. Geller, the Co-Founder and Senior Managing Partner
      of
      St. Cloud, are each members of the Company’s board of directors. The
      Company incurred legal fees and other costs related to this capital transaction
      in the amount of $22,000 that were capitalized and will be amortized to interest
      expense over the life of the promissory notes. The Company
      used $850,000 of the proceeds to pay in full promissory notes that had maturity
      dates in February 2007.





In
      February 2007, National Securities and the holder of a $1.0 million secured
      demand note that was scheduled to mature on March 1, 2007, extended the term
      of
      the secured demand note to March 1, 2008.





In
      the
      quarter and six months ended March 31, 2007 the Company received proceeds of
      approximately $14,000 and $146,000, respectively, from the exercise of
      outstanding warrants and stock options.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





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





19


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 the Company's marketable
      securities owned ("long"), securities sold, but not yet purchased ("short")
      and
      net positions as of March 31, 2007:




Long
              
              Short
              
              NetCorporate
                  stocks
              
              $
              868,000
              
              $
              176,000
              
              $
              692,000Corporate
                  bonds
              
              
              6,000
              
              
              -
              
              
              6,000Government
                  obligations
              
              
              16,000
              
              
              -
              
              
              16,000$
              890,000
              
              $
              176,000
              
              $
              714,000





**ITEM
      4. CONTROLS AND PROCEDURES**





Evaluation
      of disclosure controls and procedures. Based on
      the evaluation of the Company’s disclosure controls and procedures (as defined
      in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))
      required by the Exchange Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief
      Executive Officer and Chief Financial Officer have concluded that, as of the
      end
      of the period covered by this report, the Company’s disclosure controls and
      procedures were adequate and effective to ensure that material information
      relating to the Company and its consolidated subsidiaries would be made known
      to
      them by others within those entities, particularly during the period in which
      this quarterly report on Form 10-Q was being prepared.





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








20







**PART
      II - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





During
      the quarter ended March 31, 2007, there were no significant developments in
      the
      Company’s legal proceedings. For a detailed discussion of the Company’s legal
      proceedings, please refer to Note 6 herein, and the Company’s Annual Report on
      Form 10-K for the fiscal year ended September 30, 2006.





**ITEM
      1A. RISK FACTORS**





There
      are
      no material changes from the risk factors previously disclosed in the Company’s
      Form 10-K for the year ended September 30, 2006.





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





Previously
      reported in the Company’s Current Report on Form 8-K filed with the SEC on
      February 23, 2007.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





The
      Company held its annual meeting of shareholders on March 13, 2007. Proxies
      were
      solicited by the Company pursuant to Regulation 14A under the Exchange Act
      of
      1934, as amended. At the annual meeting, the Company’s shareholders approved the
      following proposals:





1.  The
      number of shares voted “for” and “withhold authority” in connection with the
      election of Mark Goldwasser as a Class III Director to the Board of Directors
      of
      the Company was as follows:


WithholdFor
              
              AuthorityIn
                  Person
              
              
              -
              
              
              -By
                  Proxy
              
              
              6,597,649
              
              
              8,833Total
              
              
              6,597,649
              
              
              8,833





The
      number of shares voted “for” and “withhold authority” in connection with the
      election of Gary A. Rosenberg as a Class III Director to the Board of Directors
      of the Company was as follows:


WithholdFor
                
                AuthorityIn
                    Person
                
                
                -
                
                
                -By
                    Proxy
                
                
                6,593,274
                
                
                13,208Total
                
                
                6,593,274
                
                
                13,208
 
 21


The
      terms
      of Marshall S. Geller and Christopher C. Dewey, Class I Directors, and Robert
      J.
      Rosan and Norman J. Kurlan, Class II Directors, continued after the annual
      meeting.





2.  The
      number of shares voted “for”, “against” and “abstain” in connection with the
      ratification of Marcum & Kliegman LLP as the Company’s independent public
      accountants for the fiscal year ending September 30, 2007 was as
      follows:


For
              
              
              Against
              
              
              AbstainIn
                  Person
              
              
              
              
              
              -
              
              
              -
              
              
              -By
                  Proxy
              
              
              
              
              
              6,605,182
              
              
              1,300
              
              
              -Total
              
              
              
              
              
              6,605,182
              
              
              1,300
              
              
              -





**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.




22





**SIGNATURES**





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








**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARY**








May 8, 2007
            By: /s/
                Mark Goldwasser
              Mark
                Goldwasser
              President
                and Chief Executive OfficerMay 8, 2007
            By: /s/
              Robert H. Daskal
              Robert
                H. Daskal
              Chief
                Financial Officer





23