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 EndedDecember
                31, 2006
            Commission
                File Number001-12629





**NATIONAL
      HOLDINGS CORPORATION**


(Exact
      name of registrant as specified in its charter)





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





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


(Address
      including zip code of principal executive offices)


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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant 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
      February 7, 2007 there were 5,358,611 shares of the registrant's common stock
      outstanding.









**NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
  **CONDENSED
        CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**
  December
                    31,
                
                September
                    30,2006
                
                2006(unaudited)
                
                (see
                    note below)**ASSETS**CASH
                
                $
                243,000
                
                $
                1,441,000DEPOSITS
                    WITH CLEARING ORGANIZATIONS
                
                
                301,000
                
                
                300,000RECEIVABLES
                    FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
                
                
                5,434,000
                
                
                3,548,000OTHER
                    RECEIVABLES, net of allowance for uncollectible accounts of
                    $467,000at
                    December 31, 2006 and September 30, 2006, respectively
                
                
                464,000
                
                
                380,000ADVANCES
                    TO REGISTERED REPRESENTATIVES
                
                
                1,806,000
                
                
                1,556,000SECURITIES
                    OWNEDMarketable,
                    at market value
                
                
                1,937,000
                
                
                475,000Non-marketable,
                    at fair value
                
                
                32,000
                
                
                402,000FIXED
                    ASSETS, net
                
                
                270,000
                
                
                305,000SECURED
                    DEMAND NOTE
                
                
                1,000,000
                
                
                1,000,000OTHER
                    ASSETS
                
                
                438,000
                
                
                300,000TOTAL
                    ASSETS
                
                $
                11,925,000
                
                $
                9,707,000**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**PAYABLE
                    TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
                
                $
                1,662,000
                
                $
                113,000SECURITIES
                    SOLD, BUT NOT YET PURCHASED, at market
                
                
                275,000
                
                
                162,000ACCOUNTS
                    PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
                
                
                4,441,000
                
                
                3,943,000CONVERTIBLE
                    NOTES PAYABLE, net of debt discounts of $150,000 and$159,000
                    at December 31, 2006 and September 30, 2006, respectively
                
                
                850,000
                
                
                841,000NOTES
                    PAYABLE, net of debt discounts of $25,000 and $45,000 atDecember
                    31, 2006 and September 30, 2006, respectively
                
                
                825,000
                
                
                805,000TOTAL
                    LIABILITIES
                
                
                8,053,000
                
                
                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 BSeries
                    A 9% cumulative convertible preferred stock, $.01 par value,
                    50,000shares
                    authorized; 35,316 shares issued and outstanding
                    (liquidationpreference:
                    $3,531,600) at December 31, 2006 and September 30, 2006
                
                
                -
                
                
                -Series
                    B 9% cumulative convertible preferred stock, $.01 par value,
                    20,000shares
                    authorized; 10,000 shares issued and outstanding
                    (liquidationpreference:
                    $1,000,000) at December 31, 2006 and September 30, 2006
                
                
                -
                
                
                -Common
                    stock, $.02 par value, 30,000,000 shares authorized;5,358,611
                    and 5,223,968 shares issued and outstanding,at
                    December 31, 2006 and September 30, 2006, respectively
                
                
                107,000
                
                
                104,000Additional
                    paid-in capital
                
                
                17,092,000
                
                
                16,956,000Accumulated
                    deficit
                
                
                (14,327,000
                )
                
                (14,217,000
                )TOTAL
                    STOCKHOLDERS' EQUITY
                
                
                2,872,000
                
                
                2,843,000TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                11,925,000
                
                $
                9,707,000




Note:
        The
        balance sheet at September 30, 2006 has been derived from the audited
        consolidated financial statements at that date.
 See
          notes
          to condensed consolidated financial statements.
  2




**NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS** ****
 **(Unaudited)**
  Three Months EndedDecember
                  31,
              
              December
                  31,2006
              
              2005REVENUES:Commissions
              
              $
              8,422,000
              
              $
              7,157,000Net
                  dealer inventory gains
              
              
              3,298,000
              
              
              1,861,000Investment
                  banking
              
              
              556,000
              
              
              3,052,000Total
                  commission and fee revenues
              
              
              12,276,000
              
              
              12,070,000Interest
                  and dividends
              
              
              566,000
              
              
              686,000Transfer
                  fees and clearing services
              
              
              1,010,000
              
              
              762,000Other
              
              
              434,000
              
              
              173,000TOTAL
                  REVENUES
              
              
              14,286,000
              
              
              13,691,000EXPENSES:Commissions
                  ad fees
              
              
              9,784,000
              
              
              9,688,000Employee
                  compensation and related expenses
              
              
              1,514,000
              
              
              1,292,000Clearing
                  fees
              
              
              375,000
              
              
              364,000Communications
              
              
              402,000
              
              
              487,000Occupancy
                  and equipment costs
              
              
              735,000
              
              
              676,000Professional
                  fees
              
              
              958,000
              
              
              338,000Interest
              
              
              104,000
              
              
              110,000Taxes,
                  licenses, registration
              
              
              179,000
              
              
              145,000Other
                  administrative expenses
              
              
              320,000
              
              
              332,000TOTAL
                  EXPENSES
              
              
              14,371,000
              
              
              13,432,000NET
                  (LOSS) INCOME
              
              
              (85,000
              )
              
              259,000Preferred
                  stock dividends
              
              
              (105,000
              )
              
              (76,000
              )Net
                  (loss) income attributable to common stockholders
              
              $
              (190,000
              )
              $
              183,000NET
                  (LOSS) INCOME PER COMMON SHAREBasic:Net
                  (loss) income attributable to common stockholders
              
              $
              (0.04
              )
              $
              0.04Diluted:Net
                  (loss) income attributable to common stockholders
              
              $
              (0.04
              )
              $
              0.04Weighted
                  average number of shares outstandingBasic
              
              
              5,251,915
              
              
              5,047,737Diluted
              
              
              5,251,915
              
              
              7,294,903


See
      notes
      to condensed consolidated financial statements.




3




**NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  Three
                  Months EndedDecember
                  31, 2006
              
              December
                  31, 2005CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  (loss) income
              
              $
              (85,000
              )
              $
              259,000Adjustments
                  to reconcile net (loss) income to netcash
                  provided by (used in) operating activitiesDepreciation
                  and amortization
              
              
              37,000
              
              
              32,000Amortization
                  of deferred financing costs
              
              
              1,000
              
              
              -Amortization
                  of note discount
              
              
              29,000
              
              
              33,000Compensatory
                  element of common stock issuance
              
              
              -
              
              
              12,000Compensatory
                  element of common stock options issuance
              
              
              7,000
              
              
              -Changes
                  in assets and liabilitiesDeposits
                  with clearing organizations
              
              
              (1,000
              )
              
              -Receivables
                  from broker-dealers, clearing organizations and others
              
              
              (2,220,000
              )
              
              (132,000
              )Securities
                  owned: marketable, at market value
              
              
              (1,462,000
              )
              
              (239,000
              )Securities
                  owned: non-marketable, at fair value
              
              
              370,000
              
              
              -Other
                  assets
              
              
              (138,000
              )
              
              95,000Payables
              
              
              2,046,000
              
              
              129,000Securities
                  sold, but not yet purchased, at market
              
              
              113,000
              
              
              40,000Net
                  cash (used in) provided by operating activities
              
              
              (1,303,000
              )
              
              229,000CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of fixed assets
              
              
              (2,000
              )
              
              (38,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESDividends
                  paid
              
              
              (25,000
              )
              
              -Exercise
                  of warrants
              
              
              132,000
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              107,000
              
              
              -NET
                  DECREASE IN CASH
              
              
              (1,198,000
              )
              
              191,000CASH
                  BALANCEBeginning
                  of the period
              
              
              1,441,000
              
              
              398,000End
                  of the period
              
              $
              243,000
              
              $
              589,000SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during the period for:Interest
              
              $
              74,000
              
              $
              77,000Series
                  B preferred stock dividends
              
              $
              25,000
              
              $
              -


See
      notes
      to condensed consolidated financial statements.




4




**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**


**(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 December 31, 2006 and for the periods ended December 31, 2006
      and December 31, 2005 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.**  **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
      months ended December 31, 2005, the Company granted 100,000 employee stock
      options with a fair value of $33,000. No charge was recorded in the quarter
      ended December 31, 2005 as the expense incurred during the period associated
      with this grant was nominal. During the three months ended December 31,
      2006, the Company granted 150,000 employee stock options with a fair value
      of
      $96,400. No charge was recorded in the quarter ended December 31, 2006 as the
      expense incurred during the period associated with this grant was
      nominal.





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:





2006
            
            2005Assumptions:Risk-free
                interest rate
            
            
            4.40
            %
            
            4.40
            %Expected
                life, in years
            
            
            3.0
            
            
            3.0Expected
                volatility
            
            
            122
            %
            
            124
            %





5





A
      summary
      of the stock option activity as of December 31, 2006, and changes during the
      three 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
            
            
            150,000
            
            $
            1.30
            
            
            4.99Expired
            
            
            -Outstanding
                at December 31, 2006
            
            
            1,082,000
            
            $
            1.30
            
            
            3.33
            
            $
            252,000Exerciseable
                at December 31, 2006
            
            
            957,000
            
            $
            1.32
            
            
            3.16
            
            $
            212,000




As
      of
      December 31, 2006, there was $158,000 of total deferred compensation costs
      related to share-based compensation arrangements.





A
      summary
      of the status of the Company’s nonvested shares as of December
      31 ,
      2006,
      and changes during the three month period then ended is presented
      below:





WeightedAverageGrant
                DateNonvested
                Shares
            
            Shares
            
            Fair
                ValueNonvested
                at September 30, 2006
            
            
            75,000
            
            $
            0.33Granted
            
            
            75,000
            
            $
            0.78Vested
            
            
            (25,000
            )
            $
            0.33Expired
            
            
            -Nonvested
                at December 31, 2006
            
            
            125,000
            
            $
            0.60




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





The
      following table shows the quoted market values of the Company's securities
      owned
      and securities sold, but not yet purchased as of December 31, 2006:




Securities
            
            Securities
                sold, butowned
            
            not
                yet purchasedCorporate
                stocks
            
            $
            1,921,000
            
            $
            230,000Corporate
                bonds
            
            
            -
            
            
            45,000Government
                obligations
            
            
            16,000
            
            
            -$
            1,937,000
            
            $
            275,000






6





Non-marketable
      securities owned at December 31, 2006 consist of non-tradable warrants
      exercisable into freely trading common stock of public companies totaling
      $32,000.





**NOTE
      4. 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 has been included in “Accounts Payable, Accrued Expenses and Other
      Liabilities” in the accompanying consolidated statements of financial condition
      as of December 31, 2006. 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 will be beneficial to the Company’s cost
      structure, liquidity and capital resources.





**NOTE
      5.**  **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.





The
      Company is a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims seeking
      in the aggregate damages of approximately $1,600,000. The Company believes
      such claims are substantially without merit, and estimates that its liability,
      primarily for defense costs, will approximate $160,000 (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 December 31, 2006 and 2005, is $762,000 and $245,000,
      respectively, and have
      been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
      the accompanying consolidated statements of financial condition .
      Approximately $575,000 of the accrued legal fees at December 31, 2006 relates
      to
      the settlement of certain arbitrations. The
      Company has included in “Professional fees” litigation and NASD related expenses
      of $789,000 and $245,000 for the first quarter of fiscal year 2007 and 2006,
      respectively.





**NOTE
      6. 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. At December 31, 2006, the amount of
      accumulated dividends on the Company’s 35,316 issued and outstanding shares of
      Series A preferred stock was approximately $239,000.





The
      holders of the Company’s Series B Convertible preferred stock, convertible into
      the Company’s common stock at $.75 per share, are entitled to receive dividends
      on a quarterly basis at a rate of 10% per annum per share. Such dividends are
      cumulative and are payable only when declared by the Company’s Board of
      Directors. In December 2006, 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 January 2007.




7





**NOTE
      7. 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:





Three
                Months EndedDecember
                31, 2006
            
            December
                31, 2005Numerator:Net
                income
            
            $
            (85,000
            )
            $
            259,000Preferred
                stock dividends
            
            
            (105,000
            )
            
            (76,000
            )Numerator
                for basic earnings per share--net incomeattributable
                to common stockholders - as reported
            
            
            (190,000
            )
            
            183,000Effect
                of dilutive securities:Preferred
                stock dividends
            
            
            -
            
            
            76,000Numerator
                for basic earnings per share--net incomeattributable
                to common stockholders - as adjusted
            
            $
            (190,000
            )
            $
            259,000Denominator:Denominator
                for basic earnings per share--weighted average shares
            
            
            5,251,915
            
            
            5,047,737Effective
                of dilutive securities:Stock
                options
            
            
            -
            
            
            11,645Warrants
            
            
            -
            
            
            14,190Assumed
                conversion of:Series
                A Preferred Stock
            
            
            -
            
            
            2,221,331Series
                B Preferred Stock
            
            
            -
            
            
            -Notes
            
            
            -
            
            
            -Dilutive
                potential common shares
            
            
            -
            
            
            2,247,166Denominator
                for diluted earnings per share--adjustedweighted-average
                shares and assumed conversions
            
            
            5,251,915
            
            
            7,294,903Net
                income available to common stockholdersBasic:
            
            $
            (0.04
            )
            $
            0.04Diluted:
            
            $
            (0.04
            )
            $
            0.04





For
      the
      three-month period ended December 31, 2006, 7,829,644 shares attributable to
      outstanding Series A and B Preferred Stock, convertible notes, stock options
      and
      warrants were excluded from the calculation of diluted net income per share
      because if included the effect would be antildilutive.




8





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





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





December
                31, 2006
            
            September
                30, 2006Commissions
                payable
            
            $
            1,974,000
            
            $
            1,993,000Legal
                payable
            
            
            768,000
            
            
            325,000Other
            
            
            1,699,000
            
            
            1,625,000Total
            
            $
            4,441,000
            
            $
            3,943,000





**NOTE
      9. STOCKHOLDERS’ EQUITY**





In
      the
      first quarter ended December 31, 2006 the Company received proceeds of
      approximately $132,000 from the exercise of outstanding warrants.





**NOTE
      10. NEW SUBSIDIARIES**





In
      the
      third quarter of fiscal year 2006, the Company formed National Insurance
      Corporation that will provide fixed insurance products to its clients, including
      life insurance, disability insurance, long term care insurance and fixed
      annuities. National Insurance is finalizing the requisite state registrations,
      and expects to commence active business operations during the current fiscal
      year.





In
      the
      first quarter of fiscal year 2007, the Company formed a new wholly owned
      subsidiary, National Holdings Mortgage Corporation 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.




9


**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 December 31, 2006 Compared to Three Months Ended December 31,
      2005





The
      Company’s first quarter of fiscal year 2007 resulted in an increase in revenues,
      and a greater increase in expenses compared
      to the same period last year. As
      a
      result, the Company reported a net loss of $85,000 compared with net income
      of
      $259,000 for the first quarters of fiscal years 2007 and 2006, respectively.
      This represents a decline of $344,000 from the prior period.





Three
                Months EndedDecember
                31,
            
            Increase
                (Decrease)2006
            
            2005
            
            Amount
            
            PercentCommissions
            
            $
            8,422,000
            
            $
            7,157,000
            
            $
            1,265,000
            
            
            18
            %Proprietary
                trading
            
            
            2,800,000
            
            
            1,841,000
            
            
            959,000
            
            
            52
            %Market
                making
            
            
            447,000
            
            
            -
            
            
            447,000
            
            
            n/aMark-ups
                and mark-downs
            
            
            51,000
            
            
            20,000
            
            
            31,000
            
            
            155
            %Net
                dealer inventory gains
            
            
            3,298,000
            
            
            1,861,000
            
            
            1,437,000
            
            
            77
            %Investment
                banking
            
            
            556,000
            
            
            3,052,000
            
            
            (2,496,000
            )
            
            (82
            %)Interest
                and dividends
            
            
            566,000
            
            
            686,000
            
            
            (120,000
            )
            
            (17
            %)Transfer
                fees and clearance services
            
            
            1,010,000
            
            
            762,000
            
            
            248,000
            
            
            33
            %Other
            
            
            434,000
            
            
            173,000
            
            
            261,000
            
            
            151
            %$
            14,286,000
            
            $
            13,691,000
            
            $
            595,000
            
            
            4
            %




Total
      revenues increased $595,000, or 4%, in the first quarter of fiscal year 2007
      to
      $14,286,000 from $13,691,000 in the first quarter of fiscal year 2006. During
      the first quarter of fiscal year 2007, total trading volume increased by
      approximately 11%, compared to the first quarter of fiscal year 2006. The
      increase in revenues and trading volume is due to the stronger securities market
      in fiscal year 2007 and the Company’s re-entry into market making activities.
      Commission revenue increased $1,265,000, or 18%, to $8,422,000 from $7,157,000
      during the first 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 $1,437,000, or 77%, to $3,298,000 from $1,861,000 during
      the first quarter of fiscal year 2007 compared with the same period in fiscal
      year 2006. The increase is due to the Company’s re-entry into market making
      activities and increased trading activity in foreign securities. During the
      first quarter of fiscal year 2007, revenues from proprietary trading increased
      $959,000, or 52%, to $2,800,000 from $1,841,000 in the first quarter of fiscal
      year 2006, revenues from market making activities increased to $447,000 from
      $0
      in the first quarter of fiscal year 2006, and revenues from customer mark-ups
      and mark-downs increased $31,000, or 155%, to $51,000 from $20,000 in the first
      quarter of fiscal year 2006. ****




10





Investment
      banking revenue decreased $2,496,000, or 82%, to $556,000 from $3,052,000 in
      the
      first quarter of fiscal year 2007 compared with the first quarter of fiscal
      year
      2006. The decrease in investment banking revenues is attributable to the Company
      having completed more investment banking transactions in the first quarter
      of
      fiscal year 2006. Interest and dividend income decreased $120,000 or 17%, to
      $566,000 from $686,000
      in the first quarter of fiscal year 2007 compared with the same period last
      year. The decrease in interest income is attributable to lower margin debit
      balances resulting from a stricter margin policy imposed by our clearing firms.
      Transfer fees increased $248,000, or 33%, to $1,010,000 in the first quarter
      of
      fiscal year 2007 from $762,000
      in the first quarter of fiscal year 2006. The increase is due to the higher
      trading volume experienced during the current year’s quarter.





Other
      revenue, consisting of asset management fees, miscellaneous transaction fees
      and
      trading fees and other investment income, increased $261,000, or 151%, to
      $434,000 from $173,000 during the first quarter of fiscal year 2007 compared
      to
      the first quarter of fiscal year 2006. The increase is due to an increase in
      fee
      based assets under management and investment income realized from the Company’s
      venture capital fund.





Three
                Months EndedDecember
                31,
            
            Increase
                (Decrease)2006
            
            2005
            
            Amount
            
            PercentCommission
                expense related to:Commission
                revenue
            
            $
            7,333,000
            
            $
            6,273,000
            
            $
            1,060,000
            
            
            17
            %Net
                dealer inventory gains
            
            
            2,441,000
            
            
            1,340,000
            
            
            1,101,000
            
            
            82
            %Investment
                banking
            
            
            10,000
            
            
            2,075,000
            
            
            (2,065,000
            )
            
            (100
            %)Commissions
            
            
            9,784,000
            
            
            9,688,000
            
            
            96,000
            
            
            1
            %Employee
                compensation
            
            
            1,514,000
            
            
            1,292,000
            
            
            222,000
            
            
            17
            %Clearing
                fees
            
            
            375,000
            
            
            364,000
            
            
            11,000
            
            
            3
            %Communications
            
            
            402,000
            
            
            487,000
            
            
            (85,000
            )
            
            (17
            %)Occupancy
                and equipment costs
            
            
            735,000
            
            
            676,000
            
            
            59,000
            
            
            9
            %Professional
                fees
            
            
            958,000
            
            
            338,000
            
            
            620,000
            
            
            183
            %Interest
            
            
            104,000
            
            
            110,000
            
            
            (6,000
            )
            
            (5
            %)Taxes,
                licenses and registration
            
            
            179,000
            
            
            145,000
            
            
            34,000
            
            
            23
            %Other
                administrative expenses
            
            
            320,000
            
            
            332,000
            
            
            (12,000
            )
            
            (4
            %)$
            14,371,000
            
            $
            13,432,000
            
            $
            939,000
            
            
            7
            %








In
      comparison with the 4% increase in total revenues, total expenses increased
      7%
      or $939,000 to $14,371,000 for the first quarter of fiscal year 2007 compared
      to
      $13,432,000 in the first quarter of fiscal year 2006. The increase in total
      expenses is a result of legal fees and costs incurred to settle certain
      arbitrations. Commission expense, which includes expenses related to commission
      revenue, net dealer inventory gains and investment banking, increased $96,000,
      or 1%, to $9,784,000 in the first quarter of fiscal year 2007 from $9,688,000
      in
      the first quarter of fiscal year 2006. Commission expense related to commission
      revenue increased $1,060,000, or 17%, to $7,333,000 in the first quarter of
      fiscal year 2007 from $6,273,000 in the first quarter of fiscal year 2006;
      commission expense related to net dealer inventory gains increased $1,101,000,
      or 82%, to $2,441,000 in the first quarter of fiscal year 2007 from $1,340,000
      in the first quarter of fiscal year 2006; and commission expense related to
      investment banking decreased $2,065,000, or almost 100%, to $10,000 in the
      first
      quarter of fiscal year 2007 from $2,075,000 in the first quarter of fiscal
      year
      2006. Commission expense as a percentage of commission revenues decreased to
      87%
      in the first quarter of fiscal year 2007 from 88% in the first quarter of fiscal
      year 2006. This decrease is attributable to a decrease in the amortization
      of
      advances to registered representatives. Commission expense as a percentage
      of
      net dealer inventory gains increased to 74% in the first quarter of fiscal
      year
      2007 from 72% in the first quarter of fiscal year 2006. This increase is
      attributable to changes in the securities traded, and their related commission
      payouts. Commission expense as a percentage of investment banking decreased
      to
      2% in the first quarter of fiscal year 2007 from 68% in the first quarter of
      fiscal year 2006. This decrease is due to the receipt of investment banking
      revenues in the first quarter of fiscal year 2007 that did not incur any
      corresponding commission expense. Commission expense includes the amortization
      of advances to registered representatives of $230,000 and $312,000 for the
      first
      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.




11





Employee
      compensation expense increased $222, 000, or 17%, to $1,514,000 in the first
      quarter of fiscal year 2007 from $1,292,000 in the first quarter of fiscal
      year
      2006. The increase is attributable to new employees hired during fiscal year
      2006. Overall, combined commission and employee compensation expense, as a
      percentage of revenue, decreased slightly to 79% from 80% in the first quarters
      of fiscal year 2007 and 2006, respectively.





Clearing
      fees increased $11,000, or 3%, to $375000 in the first quarter of fiscal year
      2007 from $364,000 in the first quarter of fiscal year 2006. The smaller
      increase in clearing fees as compared to the increase in commission revenue
      is
      attributable to higher average commission revenue per ticket in the first
      quarter of fiscal year 2007.





Communication
      expenses decreased $85,000 or 17%, to $402,000 from $487,000 in the first
      quarter of fiscal year 2007 compared to the first quarter of fiscal year 2006.
      The decrease is due to the Company’s ability to acquire certain of these
      services at a lower price. Occupancy costs increased $59,000, or 9%, to $735,000
      from $676,000 in the first quarter of fiscal year 2007 compared to the first
      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.
      Professional fees increased $620,000, or 183%, to $958,000 from $338,000 in
      the
      first quarter of fiscal year 2007 compared to the first quarter of fiscal year
      2006. The increase in professional fees is a result of legal fees and costs
      incurred to settle certain arbitrations.




Interest
      expense decreased $6,000, or 5%, to $104,000 from $110,000 in the first quarter
      of fiscal year 2007 compared to the first quarter of fiscal year 2006. Taxes,
      licenses and registration increased $34,000, or 23%, to $179,000 from $145,000
      in the first quarter of fiscal year 2007 compared to the first quarter 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 decreased $12,000 or 4% to $320,000
      from $332,000 in the first quarter of fiscal year 2007 compared to the first
      quarter of fiscal year 2006.





The
      Company reported a net loss of $85,000 in the first quarter of fiscal year
      2007
      compared to net income of $259,000 in the first quarter of fiscal year 2006.
      The
      net loss attributable to common stockholders in the first quarter of fiscal
      year
      2007 was $190,000, or $.04 per common share, as compared to net income
      attributable to common stockholders in the first quarter of fiscal year 2006
      of
      $183,000, or $.04 per common share. The net income attributable to common
      stockholders for the first quarter of fiscal year 2007 and 2006 reflects
      $105,000 and $76,000, respectively, of cumulative preferred stock dividends
      on
      the Company’s preferred stock.




12





**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
      December 31, 2006, National Securities’ net capital exceeded the requirement by
      $1,665,000.





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





The
      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 has been included in
“Accounts Payable, Accrued Expenses and Other Liabilities” in the accompanying
      consolidated statements of financial condition as of December 31, 2006. 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 will be beneficial to the
      Company’s cost structure, liquidity and capital resources.





In
      the
      quarter ended December 31, 2006, the Company received proceeds of approximately
      $132,000 from the exercise of outstanding warrants.





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





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





Credit
      risk represents the amount of accounting loss the Company could incur if
      counterparties to its proprietary transactions fail to perform and the value
      of
      any collateral proves inadequate. Although credit risk relating to various
      financing activities is reduced by the industry practice of obtaining and
      maintaining collateral, the Company maintains more stringent requirements to
      further reduce its exposure. The Company monitors its exposure to counterparty
      risk on a daily basis by using credit exposure information and monitoring
      collateral values. The Company maintains a credit committee, which reviews
      margin requirements for large or concentrated accounts and sets higher
      requirements or requires a reduction of either the level of margin debt or
      investment in high-risk securities or, in some cases, requiring the transfer
      of
      the account to another broker-dealer.




13





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.





Long
            
            Short
            
            NetCorporate
                stocks
            
            $
            1,921,000
            
            $
            230,000
            
            $
            1,691,000Corporate
                bonds
            
            
            -
            
            
            45,000
            
            
            (45,000
            )Government
                obligations
            
            
            16,000
            
            
            -
            
            
            16,000$
            1,937,000
            
            $
            275,000
            
            $
            1,662,000





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 December 31, 2006:





**ITEM
      4. CONTROLS AND PROCEDURES**





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





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.




14





**PART
      II - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





During
      the quarter ended December 31, 2006, 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 5 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**





None.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5. OTHER INFORMATION**





On
      January 24, 2007, the Company and St. Cloud Capital Partners, L.P. (“St. Cloud”)
      amended the 11% convertible promissory note held by St. Cloud in the principal
      amount of $850,000 (the “Note”) in order to amend the Prepayment Charge (as
      defined therein) from a charge of 120% of the principal amount of the Note
      to a
      sliding charge of between 5% and 1% of the outstanding principal amount of
      the
      Note, depending upon the year in which a prepayment is made. Marshall S. Geller,
      a director of the Company, is a principal of St. Cloud.





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





4.3
            Amendment No. 1 to 11% Convertible
              Promissory Note.





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.






15




**SIGNATURES**





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




**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**




February 9, 2007
            By:
            /s/ Mark GoldwasserMark
              GoldwasserPresident and Chief Executive
              Officer


February 9, 2007
            By:
            /s/ Robert H. DaskalRobert
              H. DaskalChief Financial
              Officer





16