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 June 30,
      2009
                      Commission
      File Number 001-12629
 
 NATIONAL
HOLDINGS CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                              36-4128138(State
      or other jurisdiction of
                              (I.R.S.
      Employerincorporation
      or organization)
                              Identification
      No.)
 
 120 Broadway,
27th  Floor, New York, NY 10271
 (Address
including zip code of principal executive offices)
 Registrant’s
telephone number, including area code: (212)
417-8000
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]  No [   ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes
[   ]  No [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one).
 
 Large
Accelerated Filer  [  
]                                                               Accelerated
Filer [   ]
 
 Non-Accelerated
Filer [  
]            
                                                     Smaller
Reporting Company [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES [   ]  NO
[X]
 
 As of
August 12, 2009 there were 17,150,704shares
of the registrant's common stock outstanding.
 
 
 
  NATIONAL
HOLDINGS CORPORATION
 FORM
10-Q
 QUARTERLY
PERIOD ENDED JUNE 30, 2009
 
 INDEX
  PART
      I – FINANCIAL INFORMATIONItem
      1 – Financial StatementsUnaudited
      Condensed Consolidated Statements of Financial Conditionas
      of June 30, 2009 and September 30, 2008
                      4Unaudited
      Condensed Consolidated Statements of Operations for theThree
      and nine months ended June 30, 2009 and 2008
                      5Unaudited
      Condensed Consolidated Statements of Cash Flows for theThree
      and nine months ended June 30, 2009 and 2008
                      6Notes
      to Unaudited Condensed Consolidated Financial Statements
                      7Item
      2 – Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      18Item
      3 – Quantitative & Qualitative Disclosures About Market
      Risk
                      28Item
      4 – Controls and Procedures
                      29PART
      II – OTHER INFORMATIONItem
      1 – Legal Proceedings
                      30Item
      1a – Risk Factors
                      30Item
      2 – Unregistered Sales of Equity Securities and Use of
      Proceeds
                      30Item
      3 – Defaults Upon Senior Securities
                      30Item
      4 – Submission of Matters to a Vote of Security Holders
                      31Item
      5 – Other Information
                      31Item
      6 – Exhibits
                      31Signatures
                      31
 2
 
 FORWARD-LOOKING
STATEMENTS
 
 The
following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report.  All
statements that express or involve discussions as to: expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, identified through the use of words or phrases such as we or our
management believes, expects, anticipates or hopes and words or phrases such as
will result, are expected to, will continue, is anticipated, estimated,
projection and outlook, and words of similar import) are not statements of
historical facts and may be forward-looking.  These forward-looking
statements are based largely on our expectations and are subject to a number of
risks and uncertainties including, but not limited to, economic, competitive,
regulatory, growth strategies, available financing and other factors discussed
elsewhere in this report and in the documents filed by us with the Securities
and Exchange Commission ("SEC"). Many of these factors are beyond our control.
Actual results could differ materially from the forward-looking statements we
make in this report or in other documents that reference this report. In light
of these risks and uncertainties, there can be no assurance that the results
anticipated in the forward-looking information contained in this report or other
documents that reference this report will, in fact, occur.
 
 These
forward-looking statements involve estimates, assumptions and uncertainties,
and, accordingly, actual results could differ materially from those expressed in
the forward-looking statements.  These uncertainties include, among
others, the following: (i) the inability of our broker-dealer operations to
operate profitably in the face of intense competition from larger full service
and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity
financing.
 
 Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.  New factors emerge from time to time and it is not possible
for our management to predict all of such factors, nor can our management assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
 
 
 3
 PART
I. FINANCIAL INFORMATION
 
 ITEM
I. FINANCIAL STATEMENTS
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONASSETS
  June
      30,
                                                                        
                                                                        
                                                                        September
      30,2009
                                                                        
                                                                        
                                                                        2008(unaudited)
                                                                        
                                                                        
                                                                        (see
      note below)Cash
                                                                        
                                                                        $
                                                                        5,921,000
                                                                        
                                                                        
                                                                        $
                                                                        7,387,000Deposits
      with clearing organizations
                                                                        
                                                                        
                                                                        1,261,000
                                                                        
                                                                        
                                                                        
                                                                        1,210,000Receivables
      from broker dealers and clearing organizations
                                                                        
                                                                        
                                                                        4,342,000
                                                                        
                                                                        
                                                                        
                                                                        3,691,000Other
      receivables, net of allowance for uncollectible accounts of
      $198,000and
      $164,000 at June 30, 2009 and September 30, 2008,
    respectively
                                                                        
                                                                        
                                                                        913,000
                                                                        
                                                                        
                                                                        
                                                                        580,000Advances
      to registered representatives
                                                                        
                                                                        
                                                                        3,529,000
                                                                        
                                                                        
                                                                        
                                                                        4,463,000Securities
      owned - at fair market value
                                                                        
                                                                        
                                                                        632,000
                                                                        
                                                                        
                                                                        
                                                                        1,024,000Fixed
      assets, net
                                                                        
                                                                        
                                                                        1,290,000
                                                                        
                                                                        
                                                                        
                                                                        1,243,000Secured
      demand note
                                                                        
                                                                        
                                                                        500,000
                                                                        
                                                                        
                                                                        
                                                                        500,000Intangible
      assets, net
                                                                        
                                                                        
                                                                        2,484,000
                                                                        
                                                                        
                                                                        
                                                                        2,950,000Other
      assets
                                                                        
                                                                        
                                                                        1,134,000
                                                                        
                                                                        
                                                                        
                                                                        1,429,000Total
      Assets
                                                                        
                                                                        $
                                                                        22,006,000
                                                                        
                                                                        
                                                                        $
                                                                        24,477,000LIABILITIES
      AND STOCKHOLDERS' EQUITYPayable
      to broker dealers and clearing organizations
                                                                        
                                                                        $
                                                                        279,000
                                                                        
                                                                        
                                                                        $
                                                                        730,000Securities
      sold, but not yet purchased, at market
                                                                        
                                                                        
                                                                        76,000
                                                                        
                                                                        
                                                                        
                                                                        63,000Accounts
      payable, accrued expenses and other liabilities
                                                                        
                                                                        
                                                                        13,356,000
                                                                        
                                                                        
                                                                        
                                                                        12,335,000Convertible
      notes payable, net of debt discounts of  $1,135,000
      and$1,431,000
      at June 30, 2009 and September 30, 2008, respectively
                                                                        
                                                                        
                                                                        4,865,000
                                                                        
                                                                        
                                                                        
                                                                        4,569,000Notes
      payable, net of debt discount of $0 and $41,000 atJune
      30, 2009 and September 30, 2008, respectively
                                                                        
                                                                        
                                                                        500,000
                                                                        
                                                                        
                                                                        
                                                                        959,000Total
      Liabilities
                                                                        
                                                                        
                                                                        19,076,000
                                                                        
                                                                        
                                                                        
                                                                        18,656,000Subordinated
      borrowings
                                                                        
                                                                        
                                                                        600,000
                                                                        
                                                                        
                                                                        
                                                                        500,000Stockholders'
      EquityPreferred
      stock, $.01 par value, 200,000 shares authorized; 50,000
      sharesdesignated
      as Series A and 20,000 shares designated as Series BSeries
      A 9% cumulative convertible preferred stock, $.01 par value,
      50,000shares
      authorized; 42,957 shares issued and outstanding
    (liquidationpreference:
      $4,295,700) at June 30, 2009 and 37,550 shares issued andoutstanding
      (liquidation preference: $3,755,000) at September 30, 2008
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Series
      B 9% cumulative convertible preferred stock, $.01 par value,
      20,000shares
      authorized; 0 shares issued and outstanding (liquidationpreference:
      $0) at June 30, 2009 and September 30, 2008
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Common
      stock, $.02 par value, 50,000,000 shares authorized;
      17,150,704shares
      issued and outstanding at June 30, 2009 and 16,421,538shares
      issued and outstanding at September 30, 2008
                                                                        
                                                                        
                                                                        342,000
                                                                        
                                                                        
                                                                        
                                                                        328,000Additional
      paid-in capital
                                                                        
                                                                        
                                                                        40,211,000
                                                                        
                                                                        
                                                                        
                                                                        39,279,000Accumulated
      deficit
                                                                        
                                                                        
                                                                        (38,223,000
                                                                        )
                                                                        
                                                                        
                                                                        (34,286,000
                                                                        )Total  Stockholders'
      Equity
                                                                        
                                                                        
                                                                        2,330,000
                                                                        
                                                                        
                                                                        
                                                                        5,321,000Total
      Liabilities and Stockholders' Equity
                                                                        
                                                                        $
                                                                        22,006,000
                                                                        
                                                                        
                                                                        $
                                                                        24,477,000
  Note:
      The balance sheet at September 30, 2008 has been derived from the audited
      consolidated financial statements at that date.See
      accompanying notes to unaudited condensed consolidated financial
      statements
 4
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
  --------
      Three Months Ended ---------
                                    
                                    
                                    --------
      Nine Months Ended ---------June
      30,
                                    
                                    
                                    June
      30,
                                    
                                    
                                    June
      30,
                                    
                                    
                                    June
      30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Revenues:Commissions
                                    
                                    $
                                    22,337,000
                                    
                                    
                                    $
                                    11,428,000
                                    
                                    
                                    $
                                    50,308,000
                                    
                                    
                                    $
                                    34,644,000Net
      dealer inventory gains
                                    
                                    
                                    5,077,000
                                    
                                    
                                    
                                    3,202,000
                                    
                                    
                                    
                                    19,016,000
                                    
                                    
                                    
                                    11,035,000Investment
      banking
                                    
                                    
                                    896,000
                                    
                                    
                                    
                                    1,210,000
                                    
                                    
                                    
                                    2,046,000
                                    
                                    
                                    
                                    1,277,000Total
      commission and fee revenues
                                    
                                    
                                    28,310,000
                                    
                                    
                                    
                                    15,840,000
                                    
                                    
                                    
                                    71,370,000
                                    
                                    
                                    
                                    46,956,000Interest
      and dividends
                                    
                                    
                                    252,000
                                    
                                    
                                    
                                    837,000
                                    
                                    
                                    
                                    1,285,000
                                    
                                    
                                    
                                    2,647,000Transfer
      fees and clearing services
                                    
                                    
                                    3,847,000
                                    
                                    
                                    
                                    1,105,000
                                    
                                    
                                    
                                    9,516,000
                                    
                                    
                                    
                                    3,378,000Other
                                    
                                    
                                    1,121,000
                                    
                                    
                                    
                                    897,000
                                    
                                    
                                    
                                    3,783,000
                                    
                                    
                                    
                                    2,347,000Total
      Revenues
                                    
                                    
                                    33,530,000
                                    
                                    
                                    
                                    18,679,000
                                    
                                    
                                    
                                    85,954,000
                                    
                                    
                                    
                                    55,328,000Expenses:Commissions
                                    
                                    
                                    26,061,000
                                    
                                    
                                    
                                    14,695,000
                                    
                                    
                                    
                                    64,524,000
                                    
                                    
                                    
                                    43,449,000Employee
      compensation and related expenses
                                    
                                    
                                    2,985,000
                                    
                                    
                                    
                                    1,786,000
                                    
                                    
                                    
                                    9,029,000
                                    
                                    
                                    
                                    6,334,000Clearing
      fees
                                    
                                    
                                    1,523,000
                                    
                                    
                                    
                                    541,000
                                    
                                    
                                    
                                    3,890,000
                                    
                                    
                                    
                                    1,676,000Communications
                                    
                                    
                                    1,245,000
                                    
                                    
                                    
                                    299,000
                                    
                                    
                                    
                                    3,137,000
                                    
                                    
                                    
                                    907,000Occupancy
      and equipment costs
                                    
                                    
                                    954,000
                                    
                                    
                                    
                                    831,000
                                    
                                    
                                    
                                    3,786,000
                                    
                                    
                                    
                                    2,564,000Professional
      fees
                                    
                                    
                                    483,000
                                    
                                    
                                    
                                    546,000
                                    
                                    
                                    
                                    1,790,000
                                    
                                    
                                    
                                    1,597,000Interest
                                    
                                    
                                    291,000
                                    
                                    
                                    
                                    176,000
                                    
                                    
                                    
                                    925,000
                                    
                                    
                                    
                                    319,000Taxes,
      licenses, registration
                                    
                                    
                                    414,000
                                    
                                    
                                    
                                    123,000
                                    
                                    
                                    
                                    1,016,000
                                    
                                    
                                    
                                    330,000Other
      administrative expenses
                                    
                                    
                                    442,000
                                    
                                    
                                    
                                    591,000
                                    
                                    
                                    
                                    1,795,000
                                    
                                    
                                    
                                    1,590,000Total
      Expenses
                                    
                                    
                                    34,398,000
                                    
                                    
                                    
                                    19,588,000
                                    
                                    
                                    
                                    89,892,000
                                    
                                    
                                    
                                    58,766,000Net
      loss
                                    
                                    
                                    (868,000
                                    )
                                    
                                    
                                    (909,000
                                    )
                                    
                                    
                                    (3,938,000
                                    )
                                    
                                    
                                    (3,438,000
                                    )Preferred
      stock dividends
                                    
                                    
                                    (96,000
                                    )
                                    
                                    
                                    (84,000
                                    )
                                    
                                    
                                    (265,000
                                    )
                                    
                                    
                                    (253,000
                                    )Net
      loss attributable to common stockholders
                                    
                                    $
                                    (964,000
                                    )
                                    
                                    $
                                    (993,000
                                    )
                                    
                                    $
                                    (4,203,000
                                    )
                                    
                                    $
                                    (3,691,000
                                    )Net
      loss per common shareBasic:Net
      loss attributable to common stockholders
                                    
                                    $
                                    (0.06
                                    )
                                    
                                    $
                                    (0.12
                                    )
                                    
                                    $
                                    (0.25
                                    )
                                    
                                    $
                                    (0.43
                                    )Diluted:Net
      loss attributable to common stockholders
                                    
                                    $
                                    (0.06
                                    )
                                    
                                    $
                                    (0.12
                                    )
                                    
                                    $
                                    (0.25
                                    )
                                    
                                    $
                                    (0.43
                                    )Weighted
      average number of shares outstandingBasic
                                    
                                    
                                    16,930,924
                                    
                                    
                                    
                                    8,622,628
                                    
                                    
                                    
                                    16,635,442
                                    
                                    
                                    
                                    8,611,602Diluted
                                    
                                    
                                    16,930,924
                                    
                                    
                                    
                                    8,622,628
                                    
                                    
                                    
                                    16,635,442
                                    
                                    
                                    
                                    8,611,602
  See
      accompanying notes to unaudited condensed consolidated financial
      statements
  5
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
  Nine
      Months EndedJune
      30,2009
                                                
                                                
                                                2008Cash
      flows from operating activitiesNet
      loss
                                                
                                                $
                                                (3,938,000
                                                )
                                                
                                                $
                                                (3,438,000
                                                )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activitiesDepreciation
      and amortization
                                                
                                                
                                                1,017,000
                                                
                                                
                                                
                                                146,000Amortization
      of deferred financing costs
                                                
                                                
                                                41,000
                                                
                                                
                                                
                                                15,000Amortization
      of note discount
                                                
                                                
                                                296,000
                                                
                                                
                                                
                                                98,000Compensatory
      element of common stock options issuance
                                                
                                                
                                                678,000
                                                
                                                
                                                
                                                361,000Unrealized
      loss on securities owned
                                                
                                                
                                                (142,000
                                                )
                                                
                                                
                                                -Changes
      in assets and liabilitiesDeposits
      with clearing organizations
                                                
                                                
                                                (51,000
                                                )
                                                
                                                
                                                -Receivables
      from broker-dealers, clearing organizations and others
                                                
                                                
                                                (651,000
                                                )
                                                
                                                
                                                891,000Other
      receivables
                                                
                                                
                                                (333,000
                                                )
                                                
                                                
                                                -Advances
      to registered representatives
                                                
                                                
                                                934,000
                                                
                                                
                                                
                                                -Securities
      owned: marketable, at market value
                                                
                                                
                                                541,000
                                                
                                                
                                                
                                                850,000Securities
      owned: non-marketable, at fair value
                                                
                                                
                                                (7,000
                                                )
                                                
                                                
                                                -Other
      assets
                                                
                                                
                                                295,000
                                                
                                                
                                                
                                                (133,000
                                                )Accounts
      payable and accrued expenses
                                                
                                                
                                                1,022,000
                                                
                                                
                                                
                                                (3,748,000
                                                )Payable
      to broker dealers and clearing organizations
                                                
                                                
                                                (451,000
                                                )
                                                
                                                
                                                -Securities
      sold, but not yet purchased, at market
                                                
                                                
                                                13,000
                                                
                                                
                                                
                                                229,000Net
      cash used in operating activities
                                                
                                                
                                                (736,000
                                                )
                                                
                                                
                                                (4,729,000
                                                )Cash
      flows from investing activitiesPurchase
      of fixed assets
                                                
                                                
                                                (598,000
                                                )
                                                
                                                
                                                (142,000
                                                )Net
      cash used in investing activities
                                                
                                                
                                                (598,000
                                                )
                                                
                                                
                                                (142,000
                                                )Cash
      flows from financing activitiesRepayment
      of notes payable
                                                
                                                
                                                (500,000
                                                )
                                                
                                                
                                                -Net
      proceeds from issuance of convertible notes payable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                6,000,000Net
      proceeds from subordinated borrowings
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                -Proceeds
      from sale of common stock
                                                
                                                
                                                502,000
                                                
                                                
                                                
                                                (181,000
                                                )Costs
      associated with sale of common stock
                                                
                                                
                                                (234,000
                                                )
                                                
                                                
                                                (449,000
                                                )Exercise
      of stock options
                                                
                                                
                                                -
                                                
                                                
                                                
                                                8,000Net
      cash (used in) provided by financing activities
                                                
                                                
                                                (132,000
                                                )
                                                
                                                
                                                5,378,000Net
      decrease (increase) in cash
                                                
                                                
                                                (1,466,000
                                                )
                                                
                                                
                                                507,000Cash
      balanceBeginning
      of the period
                                                
                                                
                                                7,387,000
                                                
                                                
                                                
                                                4,957,000End
      of the period
                                                
                                                $
                                                5,921,000
                                                
                                                
                                                $
                                                5,464,000Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                                                
                                                $
                                                574,000
                                                
                                                
                                                $
                                                162,000Income
      taxes
                                                
                                                $
                                                80,000
                                                
                                                
                                                $
                                                37,000Supplemental
      disclosures of noncash financing activitiesWarrants
      issued in connection with debt
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                1,184,000Preferred
      stock dividends
                                                
                                                $
                                                676,000
                                                
                                                
                                                $
                                                -
  See
      accompanying notes to unaudited condensed consolidated financial
      statements
 6
    NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (UNAUDITED)
 
 NOTE
1. BASIS OF PRESENTATION
 
 The
accompanying condensed consolidated financial statements of National Holdings
Corporation (“National” or the “Company”) have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.  Accordingly, they do not include all of the information and
disclosures required for annual financial statements.  In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.  The
condensed consolidated financial statements as of June 30, 2009 and for the
periods ended June 30, 2009 and June 30, 2008 are unaudited.  The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the fiscal year.  These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included thereto in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2008.
 
 NOTE 2. CONSOLIDATION
 
 The
condensed consolidated financial statements include the accounts of National and
its wholly owned subsidiaries.  National operates primarily through
National Securities Corporation (“National Securities”), vFinance Investments,
Inc. (“vFinance Investments”) and EquityStation, Inc. (“EquityStation”)
(collectively, the “Broker Dealer Subsidiaries”).  The Broker Dealer
Subsidiaries conduct a national securities brokerage business through its main
offices in New York, New York, Boca Raton, Florida, and Seattle,
Washington.
  Through
its Broker Dealer Subsidiaries, the Company offers (1) full service brokerage
servicing approximately 45,000 accounts, consisting of retail, high net worth
and institutional clients, (2) provides investment banking, merger, acquisition
and advisory services to micro, small and mid-cap high growth companies, and (3)
engages in trading securities, including making markets in over 3,500 micro and
small cap stocks and provides liquidity in the United States Treasury
marketplace.  The Broker Dealer Subsidiaries are introducing brokers
and clear all transactions through clearing organizations on a fully disclosed
basis.  They are registered with the Securities and Exchange
Commission ("SEC"), are members of the Financial Industry Regulatory Authority,
Inc. ("FINRA") (formerly the National Association of Securities Dealers) and
Securities Investor Protection Corporation ("SIPC").  vFinance
Investments is also a member of the National Futures Association
("NFA").
 
 In July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc., a Washington corporation ("NAM").  NAM is a
federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed.  In March 2008, all of the issued and outstanding stock of
NAM was transferred from National Securities to National.  National
formed a new wholly owned subsidiary, National Insurance Corporation, a
Washington corporation (“National Insurance”) in the third quarter of fiscal
year 2006.  National Insurance provides fixed insurance products to
its clients, including life insurance, disability insurance, long term care
insurance and fixed annuities.  National Insurance finalized certain
requisite state registrations during the second quarter of fiscal year 2007 and
commenced business operations that to date have been de
minimus.  vFinance Lending Services, Inc. (“vFinance Lending”),
originally formed as a wholly owned subsidiary of vFinance, Inc. was established
in May 2002.  It is a mortgage lender focused primarily on the
commercial sector, providing bridge loans and commercial mortgages through its
nationwide network of lenders. Its operations to date have been de
minimus.  All significant inter-company accounts and transactions have
been eliminated in consolidation.
 
 7
 
 NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”), which is a revision of SFAS 141, “Business
Combinations”. The primary requirements of SFAS 141(R) are as
follows:
 •
              
              upon
      initially obtaining control, the acquiring entity in a business
      combination must recognize 100% of the fair values of the acquired assets,
      including goodwill, and assumed liabilities, with only limited exceptions
      even if the acquirer has not acquired 100% of its target—as a consequence,
      the current step acquisition model will be eliminated;•
              
              contingent
      consideration arrangements will be fair valued at the acquisition date and
      included in the purchase price consideration—the concept of recognizing
      contingent consideration at a later date when the amount of that
      consideration is determinable beyond a reasonable doubt will no longer be
      applicable;•
              
              for
      prior business combinations, adjustments for recognized changes in
      acquired tax uncertainties are to be recognized in accordance with the
      provisions of FASB Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes — An Interpretation of FASB No. 109,” and adjustments
      for recognized changes in the valuation allowance for acquired deferred
      tax assets are to be recognized in income tax expense in accordance with
      the provisions of SFAS No. 109, “Accounting for Income Taxes;”
      and•
              
              all
      transaction costs will be expensed as
incurred.
 
 In
April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (“FSP FAS 141(R)-1”). FSP FAS 141(R)-1 amends and clarifies
SFAS 141(R) to address application issues raised about the initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business combination. SFAS
141(R) and FSP FAS 141(R)-1 apply prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements — An Amendment of ARB
No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 requires non-controlling interests or
minority interests to be treated as a separate component of equity and any
changes in the parent’s ownership interest (in which control is retained) are to
be accounted for as equity transactions. However, a change in ownership of a
consolidated subsidiary that results in deconsolidation triggers gain or loss
recognition, with the establishment of a new fair value basis in any remaining
non-controlling ownership interests. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the non-controlling interests. SFAS 160 is effective for fiscal years beginning
on or after December 15, 2008. We are currently evaluating the impact that
the adoption of SFAS 160 will have on our financial condition, results of
operations, and disclosures.
 
 In
April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The
intent of the position is to improve the consistency between the useful life of
a recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R),
and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the impact that the adoption
of FSP FAS 142-3 will have on our financial condition, results of operations and
disclosures.
 
 8
 
 NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
 -Continued-
 
 In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement is not expected to change
existing practices but rather reduce the complexity of financial reporting. This
statement was effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting
Principles.” The provisions in SFAS 162 did not have a material impact on our
financial condition, results of operations, or disclosures.
 
 In
June 2008, the FASB issued FSP No. Emerging Issues Task Force (“EITF”)
03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
clarifies whether unvested share-based payment awards that entitle holders to
receive non-forfeitable dividends or dividend equivalents (whether paid or
unpaid) are considered participating securities and should be included in the
computation of earnings per share pursuant to the two-class method. The
two-class method of computing earnings per share is an earnings allocation
formula that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and
participation rights in undistributed earnings. FSP EITF 03-6-1 requires
retrospective application and is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. We do not
believe the adoption of FSP EITF 03-6-1 will have a material impact on our
calculation of earnings per share and related disclosures.
 
 In
April 2009, in response to the current credit crisis, FASB issued three new
FSPs to address fair value measurement concerns as follows:
 •
              
              FSP
      No. FAS 157-4, “Determining Fair Value When the Volume and Level of
      Activity for the Asset or Liability Have Significantly Decreased and
      Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), provides
      additional guidance on measuring the fair value of financial instruments
      when market activity has decreased and quoted prices may reflect
      distressed transactions;•
              
              FSP
      No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
      Other-Than-Temporary Impairments” (“FSP FAS 115-2 and 124-2”), amends the
      other-than-temporary impairment guidance for debt securities. Under FSP
      FAS 115-2 and 124-2, an other-than-temporary impairment is now triggered
      when there is intent to sell the security, it is more likely than not that
      the security will be required to be sold before recovery in value, or the
      security is not expected to recover the entire amortized cost basis of the
      security. If an entity does not intend to sell the security, credit
      related losses on debt securities that exist will be considered an
      other-than-temporary impairment recognized in earnings, and any other
      losses due to a decline in fair value relative to the amortized cost
      deemed not to be other-than-temporary will be recorded in other
      comprehensive income; and•
              
              FSP
      No. FAS 107-1 and APB No. 28-1, “Interim Disclosures about Fair
      Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), expands
      the fair value disclosures required for financial instruments to interim
      reporting periods for publicly traded companies, including disclosure of
      the significant assumptions used to estimate the fair value of those
      financial instruments.
 
 
 9
  NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
 -Continued-
 
 FSP 157-4
and FSP FAS 115-2 and 124-2 are effective for interim and annual periods ending
after June 15, 2009 and are effective for us during our annual period
ending August 31, 2009. FSP FAS 107-1 and APB 28-1 is effective for interim
periods ending after June 15, 2009. Early adoption is permitted for periods
ending after March 15, 2009 only if all three FSPs are adopted together. We
have not elected to early adopt these FSPs. We do not believe that the adoption
of FSP FAS 157-4, FSP FAS 115-2 and 124-2, and FSP FAS 107-1 and APB 28-1 will
have a material impact on our financial condition, results of operations, and
disclosures.
 
 In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”), which provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. SFAS 165 is
effective for interim and annual periods ending after June 15,
2009.  We do not believe that the adoption of SFAS 165 will have a
material impact on our financial condition, results of operations, and
disclosures.
 
 In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”),
which requires additional information regarding transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures. SFAS 166 is effective for fiscal years beginning after
November 15, 2009.  We are currently evaluating the impact that
the adoption of SFAS 166 will have on our financial condition, results of
operations, and disclosures.
 
 In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. We are currently evaluating the impact
that the adoption of SFAS 167 will have on our financial condition, results of
operations, and disclosures.
 
 In
June 2009, the FASB approved the “FASB Accounting Standards Codification”
(“Codification”) as the single source of authoritative nongovernmental U.S. GAAP
to be launched on July 1, 2009. The Codification does not change current
U.S. GAAP, but is intended to simplify user access to all authoritative U.S.
GAAP by providing all the authoritative literature related to a particular topic
in one place. All existing accounting standard documents will be superseded and
all other accounting literature not included in the Codification will be
considered non-authoritative. The Codification is effective for interim and
annual periods ending after September 15, 2009. The Codification will not
have an impact on our financial condition or results of operations. We are
currently evaluating the impact to our financial reporting process of providing
Codification references in our public filings.
 
 
 10
  NOTE 4. STOCK BASED
COMPENSATION
 
 Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment.”  This statement is a
revision of SFAS Statement No. 123 and supersedes APB Opinion No. 25,
and its related implementation guidance.  SFAS 123R addresses all
forms of share based payment (“SBP”) awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights.  Under SFAS 123R, SBP awards will result in a
charge to operations that will be measured at fair value on the awards grant
date, based on the estimated number of awards expected to vest over the service
period.   The Company granted 40,000 and 180,000 options during the nine
months ended June 30, 2009 and June 30, 2008, respectively.  A charge
of approximately $237,000 and $710,000 was recorded in the three and nine months
ended June 30, 2009, respectively, and a charge of approximately $149,000 and
$361,000 was recorded in the three and nine months ended June 30, 2008,
respectively, relating to the amortization of the fair value associated with
stock option grants and restricted stock grants.
 
 The
Black-Scholes option valuation model is used to estimate the fair value of the
options granted.  The model includes subjective input assumptions that
can materially affect the fair value estimates.  The model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and that are fully transferable.  For example,
the expected volatility is estimated based on the most recent historical period
of time equal to the weighted average life of the options
granted.  Options issued under the Company's option plans have
characteristics that differ from traded options.  In management's
opinion, this valuation model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 A summary
of the stock option activity as of June 30, 2009, and changes during the nine
month period then ended is presented below:
 
  WeightedWeighted
                                                            
                                                            
                                                            AverageAverage
                                                            
                                                            
                                                            Remaining
                                                            
                                                            
                                                            AggregateExercise
                                                            
                                                            
                                                            Contractual
                                                            
                                                            
                                                            IntrinsicShares
                                                            
                                                            
                                                            Price
                                                            
                                                            
                                                            Term
      (Yrs)
                                                            
                                                            
                                                            ValueOutstanding
      at September 30, 2008
                                                            
                                                            
                                                            6,887,640
                                                            
                                                            
                                                            $
                                                            1.58
                                                            
                                                            
                                                            
                                                            3.98
                                                            
                                                            
                                                            $
                                                            -Granted
                                                            
                                                            
                                                            50,000
                                                            
                                                            
                                                            $
                                                            0.64
                                                            
                                                            
                                                            
                                                            5.00Expired
                                                            
                                                            
                                                            467,675
                                                            
                                                            
                                                            $
                                                            1.52
                                                            
                                                            
                                                            
                                                            0.95Outstanding
      at June 30, 2009
                                                            
                                                            
                                                            6,469,965
                                                            
                                                            
                                                            $
                                                            1.58
                                                            
                                                            
                                                            
                                                            3.38
                                                            
                                                            
                                                            $
                                                            -Exerciseable
      at June 30, 2009
                                                            
                                                            
                                                            3,372,524
                                                            
                                                            
                                                            $
                                                            1.48
                                                            
                                                            
                                                            
                                                            2.46
                                                            
                                                            
                                                            $
                                                            -
 As of
June 30, 2009, there was approximately $1,000,000 of total unrecognized deferred
compensation costs related to share-based compensation
arrangements.  The Company has experienced a historic forfeiture rate
of approximately 38% on previously granted stock options and expects that future
forfeitures will be consistent with this experience.
  
 11
 
 NOTE 4. STOCK BASED
COMPENSATION
 - Continued –
 
 A summary
of the status of the Company’s non-vested shares as of June 30, 2009, and
changes during the three month period then ended is presented
below:
  Weighted
      AverageGrant
      DateNonvested
      Shares
                          
                          Shares
                          
                          
                          Fair
      ValueNonvested
      at September 30, 2008
                          
                          
                          3,828,774
                          
                          
                          $
                          0.92Granted
                          
                          
                          50,000
                          
                          
                          
                          0.61Vested
                          
                          
                          (489,131
                          )
                          
                          
                          0.85Expired
                          
                          
                          (292,202
                          )
                          
                          
                          0.92Nonvested
      at June 30, 2009
                          
                          
                          3,097,441
                          
                          
                          
                          0.79
 NOTE
      5. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
    PURCHASED
 
 The
following table shows the quoted market values of securities owned by the
Company as of June 30, 2009 and September 30, 2008 respectively:
  Securities
      ownedJune
      30, 2009
                                
                                
                                September
      30, 2008Corporate
      stocks
                                
                                $
                                88,000
                                
                                
                                $
                                454,000Corporate
      bonds
                                
                                
                                68,000
                                
                                
                                
                                6,000Government
      obligations
                                
                                
                                422,000
                                
                                
                                
                                516,000Restricted
      Securities
                                
                                
                                54,000
                                
                                
                                
                                48,000$
                                632,000
                                
                                
                                $
                                1,024,000
 The
following table shows the quoted market values of securities sold, but not yet
purchased by the Company as of June 30, 2009 and September 30, 2008
respectively:
 
 Securities
      sold, butnot
      yet purchasedJune
      30, 2009
                              
                              
                              September
      30, 2008Corporate
      stocks
                              
                              $
                              76,000
                              
                              
                              $
                              9,000Corporate
      bonds
                              
                              
                              -
                              
                              
                              
                              10,000Government
      obligations
                              
                              
                              -
                              
                              
                              
                              44,000$
                              76,000
                              
                              
                              $
                              63,000
 
 12
  NOTE
      5. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
    PURCHASED
 -
Continued -
 
 Fair
Value Measurements
 
 As of
June 30, 2009
  Securities
      owned at fair valueLevel
      1
                            
                            
                            Level
      2
                            
                            
                            Level
      3
                            
                            
                            TotalCorporate
      stocks
                            
                            $
                            88,000
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            88,000Corporate
      bonds
                            
                            
                            68,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            68,000Government
      obligations
                            
                            
                            422,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            422,000Restricted
      stock
                            
                            
                            -
                            
                            
                            
                            54,000
                            
                            
                            
                            -
                            
                            
                            
                            54,000$
                            578,000
                            
                            
                            $
                            54,000
                            
                            
                            $
                            -
                            
                            
                            $
                            632,000
  Securities
      sold, butnot
      yet purchased at fair value
                            
                            Level
      1
                            
                            
                            Level
      2
                            
                            
                            Level
      3
                            
                            
                            TotalCorporate
      stocks
                            
                            $
                            76,000
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            76,000Corporate
      bonds
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Government
      obligations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -$
                            76,000
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            76,000
  As of
September 30, 2008
  Securities
      owned at fair valueLevel
      1
                          
                          
                          Level
      2
                          
                          
                          Level
      3
                          
                          
                          TotalCorporate
      stocks
                          
                          $
                          454,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          454,000Corporate
      bonds
                          
                          
                          6,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,000Government
      obligations
                          
                          
                          516,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          516,000Restricted
      stock
                          
                          
                          -
                          
                          
                          
                          48,000
                          
                          
                          
                          -
                          
                          
                          
                          48,000$
                          976,000
                          
                          
                          $
                          48,000
                          
                          
                          $
                          -
                          
                          
                          $
                          1,024,000




13


Securities
      sold, butnot
      yet purchased at fair value
                          
                          Level
      1
                          
                          
                          Level
      2
                          
                          
                          Level
      3
                          
                          
                          TotalCorporate
      stocks
                          
                          $
                          9,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          9,000Corporate
      bonds
                          
                          
                          10,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          10,000Government
      obligations
                          
                          
                          44,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          44,000$
                          63,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          63,000
 
  NOTE 6. COMMITMENTS AND
CONTINGENCIES
 
 Operating
Leases
 
 In
February 2009, the Company’s office lease on its Military Trail office in Boca
Raton, Florida had expired.  Thereafter, the Company made arrangements
with the landlord of this space to holdover until April 30, 2009 paying rent on
a month to month basis at the then current rate per square foot.
 
 In March
2009, the Company negotiated a simultaneous termination of its existing lease
for the 1200 North Federal Highway Location and a new lease for the same
space.  This resulted in a savings of approximately
$350,000.  The Company relocated all of its employees from its
Military Trail office to this location in May.  The new lease
terminates on August 15, 2015 and the Landlord provided a rent holiday for the
first four months of the lease and reimbursement of build-out costs to a maximum
of $150,000.
 
 Litigation
and Regulatory Matters
  On March
4, 2008, vFinance received a customer arbitration (FINRA Case No.08-00472) from
Donald and Patricia Halfmann, alleging that Jeff Lafferty, a former registered
representative of vFinance, misappropriated approximately $110,000 of the
Halfmanns' funds via check alteration, and that vFinance ought to be liable
for an additional $150,000 for other dishonest and fraudulent acts
committed after he left vFinance.  On August 6, 2009 the arbitrators’ ruled
that vFinance Investments must pay for losses, interest, attorneys costs and
punitive damages totaling approximately $780,000.  The firm has made a
claim against its fidelity bond carrier, and is completing its analysis as to
whether to seek to have the entire arbitration award, or any part of that award,
vacated.
 
 In
October, 2008, vFinance and others were named as defendants in a civil action
(Case No. 09-CV-9008 United Stated District Court, Southern District of New
York), wherein The Pinnacle Fund, L.P. and others alleged securities law
violations and other causes of action stemming from a private placement
transaction into a public company which vFinance acted as placement agent. 
Plaintiffs alleged damages in excess of $12,000,000 in compensatory
damages.  vFinance asserted its indemnification rights against a one of the
co-defendants, and has thus far received reimbursement of most of the attorneys
fees and costs incurred.  The parties have reached a settlement and the
action was dismissed with prejudice and vFinance Investments, Inc. was
indemnified as to all costs in this matter.
  The
Company’s subsidiaries are defendants in various arbitrations and administrative
proceedings, lawsuits and claims together alleging damages in excess of
$11,100,000.   The Company estimates, to the extent that it can,
that based on discussions with legal counsel and prior experience, its aggregate
liability from these pending actions may be less than $450,000 (exclusive of
fees, costs and unspecified punitive damages related to certain claims and
inclusive of expected insurance coverage).  These matters arise in the
normal course of business. The Company intends to vigorously defend itself
in these actions, and based on discussions with counsel believes that the
eventual outcome of these matters will not have a material adverse effect on the
Company.  However, the ultimate outcome of these matters cannot be
determined at this time.  The amounts related to such matters that are
reasonably estimable and which have been accrued at June 30, 2009 and 2008, is
$290,000 and $40,000 (inclusive of legal fees and estimated claims),
respectively, and have been included in "Accounts Payable, Accrued Expenses and
Other Liabilities" in the accompanying consolidated statements of financial
condition. The Company has included in "Professional fees" litigation and
FINRA related expenses of $176,000 and $170,000 for the third quarter of fiscal
year 2009 and 2008, respectively, and $460,000 and $660,000 for the first nine
months of fiscal year 2009 and 2008, respectively.
   14
  NOTE
7. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
  The
holders of the Company’s Series A convertible preferred stock, that are
convertible into the Company’s common stock at $1.25 per share, are entitled to
receive dividends on a quarterly basis at a rate of 9% per annum, per
share.  Such dividends are cumulative and accumulate whether or not
declared by the Company’s Board of Directors, but are payable only when and if
declared by the Company’s Board of Directors.  In the quarter and nine
months ended June 30, 2009, the Company accumulated $96,000 and $265,000,
respectively, of dividends on its Series A preferred stock.  In March
2009, the Company’s Board of Directors declared an in-kind dividend in the
aggregate of 5,407 shares of Series A preferred stock, in payment of
approximately $676,000 of dividends accrued through March 31, 2009. At June 30,
2009, the accumulated dividend on the Company’s 42,957 issued and outstanding
shares of Series A preferred stock was $96,000.
 
 NOTE
8. LOSS PER COMMON SHARE
 
 Basic
loss per share is computed on the basis of the weighted average number of common
shares outstanding.  Diluted loss per share is computed on the basis
of the weighted average number of common shares outstanding plus the potential
dilution that would occur if securities or other contracts to issue common
shares were exercised or converted.
 
 For both
the three and nine month periods ended June 30, 2009, 12,163,057 common share
equivalents were excluded from the calculation of diluted net loss per share
because their inclusion would have been anti-dilutive.  For both the
three and nine month periods ended June 30, 2008, 10,014,750 common share
equivalents were excluded from the calculation of diluted net loss per share
because their inclusion would have been anti-dilutive.
 
 The
following table sets forth the common share equivalents that were excluded from
the calculation:
 
 Three
      Months Ended
                        
                        
                        Nine
      Months EndedJune
      30, 2009
                        
                        
                        June
      30, 2008
                        
                        
                        June
      30, 2009
                        
                        
                        June
      30, 2008Stock
      options
                        
                        
                        3,373,524
                        
                        
                        
                        2,092,000
                        
                        
                        
                        3,373,524
                        
                        
                        
                        2,092,000Warrants
                        
                        
                        1,977,973
                        
                        
                        
                        1,543,750
                        
                        
                        
                        1,977,973
                        
                        
                        
                        1,543,750Assumed
      conversion of:Series
      A Preferred Stock
                        
                        
                        3,436,560
                        
                        
                        
                        3,004,000
                        
                        
                        
                        3,436,560
                        
                        
                        
                        3,004,000Notes
                        
                        
                        3,375,000
                        
                        
                        
                        3,375,000
                        
                        
                        
                        3,375,000
                        
                        
                        
                        3,375,000Dilutive
      potential common shares
                        
                        
                        12,163,057
                        
                        
                        
                        10,014,750
                        
                        
                        
                        12,163,057
                        
                        
                        
                        10,014,750
 
 15
  NOTE
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
 
 Accounts
payable, accrued expenses and other liabilities as of June 30, 2009 and
September 30, 2008, respectively, consist of the following:
  June
      30, 2009
                          
                          
                          September
      30, 2008Commissions
      payable
                          
                          $
                          7,198,000
                          
                          
                          $
                          6,537,000Deferred
      clearing fee credits
                          
                          
                          508,000
                          
                          
                          
                          578,000Telecommunications
      vendors payable
                          
                          
                          176,000
                          
                          
                          
                          209,000Legal
      payable
                          
                          
                          758,000
                          
                          
                          
                          646,000Deferred
      rent payable
                          
                          
                          259,000
                          
                          
                          
                          313,000Accrued
      compensation
                          
                          
                          651,000
                          
                          
                          
                          679,000Capital
      lease liability
                          
                          
                          778,000
                          
                          
                          
                          613,000Other
      vendors
                          
                          
                          3,028,000
                          
                          
                          
                          2,760,000Total
                          
                          $
                          13,356,000
                          
                          
                          $
                          12,335,000
 
 NOTE
10. NET CAPITAL REQUIREMENTS
 
 National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net
capital.  National Securities has elected to use the alternative
standard method permitted by the rule.  This requires that National
Securities maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security for which
National Securities is a market maker.  The alternative method
precludes National Securities from having to maintain a ratio of aggregate
indebtedness to net capital.  At June 30, 2009, National Securities
had net capital of approximately $542,000 which exceeded its requirement by
approximately $261,000.
 
 Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain
$100,000.  In addition to the net capital requirements, each of
vFinance Investments and EquityStation are required to maintain a ratio of
aggregate indebtedness to net capital, as defined, of not more than 15 to 1 (and
the rule of the “applicable” exchange also provides that equity capital may not
be withdrawn or cash dividends paid if the resulting net capital ratio would
exceed 10 to 1).  At June 30, 2009, vFinance Investments had net
capital of approximately $1,421,000 which was approximately $421,000 in excess
of its required net capital of $1,000,000 and its percentage of aggregate
indebtedness to net capital was 471%.  At June 30, 2009, EquityStation
had net capital of approximately $211,000 which was approximately $111,000 in
excess of its required net capital of $100,000 and its percentage of aggregate
indebtedness to net capital was 251%.  Each of the Broker Dealer
subsidiaries qualifies under the exemptive provisions of Rule 15c3-3 under
Section (k)(2)(ii) of the Rule, as none of them carry the accounts of their
customers on their books nor perform custodial functions related to customer
securities.
 
 Advances,
dividend payments and other equity withdrawals from its broker dealer
subsidiaries are restricted by the regulations of the SEC, and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.
 
 
 16
  NOTE
11. PRO FORMA
 
 Had the
acquisition of vFinance, Inc. occurred on October 1, 2007, the results would
have been as follows:
 
  For
      the ninemonths
      endedJune
      30, 2008Total
      Revenue
                      
                      $
                      94,172,000Net
      loss
                      
                      
                      (7,544,000
                      )Basic
      and diluted loss per common share
                      
                      
                      (0.71
                      )
 
 
 17
  ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 
 The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements.  This Quarterly Report may contain certain
statements of a forward-looking nature relating to future events or future
business performance.  Any such statements that refer to the Company’s
estimated or anticipated future results or other non-historical facts are
forward-looking and reflect the Company’s current perspective of existing trends
and information.  These statements involve risks and uncertainties
that cannot be predicted or quantified and, consequently, actual results may
differ materially from those expressed or implied by such forward-looking
statements.  Such risks and uncertainties include, among others, risks
and uncertainties detailed in the Company’s Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on December 29, 2008.  Any
forward-looking statements contained in or incorporated into this Quarterly
Report speak only as of the date of this Quarterly Report.  The
Company undertakes no obligation to update publicly any forward-looking
statement, whether as a result of new information, future events or
otherwise.
 
 OVERVIEW
 
 We are
engaged in investment banking, equity research, institutional sales and trading,
independent brokerage and advisory services and asset management services
through our principal subsidiaries, National Securities Corporation (“National
Securities”), vFinance Investments, Inc. (“vFinance Investments”) and
EquityStation, Inc. (“EquityStation”, and collectively with National Securities
and vFinance Investments, the “Broker Dealer Subsidiaries”). We are committed to
establishing a significant presence in the financial services industry by
meeting the varying investment needs of our retail, corporate and institutional
clients.
  Each of
the Broker Dealer Subsidiaries is subject to regulation by, among others, the
Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory
Authority (“FINRA”), the Municipal Securities Rulemaking Board (“MSRB”) and is a
member of the Securities Investor Protection Corporation
(“SIPC”).  vFinance Investments is also subject to regulation by the
National Futures Association (“NFA”). In addition, each of the Broker Dealer
Subsidiaries is licensed to conduct its brokerage activities in all 50 states,
plus the District of Columbia and Puerto Rico, with vFinance Investments also
being licensed in the U.S. Virgin Islands.
  As of
June 30, 2009, we had approximately 918 associated personnel serving retail and
institutional customers, trading and investment banking clients. With the
exception of our New York, New Jersey, Florida, Washington and Illinois
branches, our approximately 84 other registered offices are owned and operated
by independent owners who maintain all appropriate licenses and are responsible
for all office overhead and expenses. Because these independent operators, many
of whom are financial planners, are required to pay their own expenses, we
generally pay them a much greater percentage of the commissions and fee income
they generate, typically 70% - 90%.
  18
 Our
registered representatives offer a broad range of investment products and
services. These products and services allow us to generate both commissions
(from transactions in securities and other investment products) and fee income
(for providing investment advisory services, namely managing a client’s
account). The investment products and services offered include but are not
limited to stocks, bonds, mutual funds, annuities, insurance, and managed money
accounts.
 
 Difficult
Market Conditions
 
 The U.S.
and global economies have continued to deteriorate and are now in a recession,
which could be long-term. We, like other companies in the financial services
sector, are exposed to volatility and trends in the securities markets and the
economy, generally. The market downturn and poor economic conditions have
reduced overall investment banking and client activity levels. It is difficult
to predict when conditions will change. Given difficult market and economic
conditions, we have focused on reducing redundancies and unnecessary expense. At
the same time, however, we continue to seek to selectively upgrade our talent
pool given the availability of experienced professionals.
  GrowthStrategy
 
 We
continue to evaluate opportunities to grow our businesses, including potential
acquisitions or mergers with other securities, investment banking and investment
advisory firms, and by adding to our base of independent representatives
organically.These
acquisitions may involve payments of material amounts of cash, the incurrence of
a significant amount of debt or the issuance of significant amounts of our
equity securities, which may be dilutive to our existing shareholders and/or may
increase our leverage. We cannot assure you that we will be able to consummate
any such potential acquisitions at all or on terms acceptable to us or, if we
do, that any acquired business will be profitable. There is also a risk that we
will not be able to successfully integrate acquired businesses into our existing
business and operations.
 
 Key
Indicators of Financial Performance for Management
 
 Management
periodically reviews and analyzes our financial performance across a number of
measurable factors considered to be particularly useful in understanding and
managing our business. Key metrics in this process include productivity and
practice diversification of representatives, top line commission and advisory
services revenues, gross margins, operating expenses, legal costs, taxes and
earnings per share.
 
 Acquisition
of vFinance, Inc.
  In July
2008, we acquired vFinance, Inc. through a merger with a newly formed
wholly-owned subsidiary.  The assets and liabilities acquired as well
as the financial results of vFinance were included in our consolidated financial
statements after the close of business on July 1, 2008, the acquisition date.
The aggregate acquisition price was approximately $17.6 million, which consisted
of approximately 7,788,910 shares of Company common stock issued in exchange for
all of the issued and outstanding common stock of vFinance, and direct expenses
of $0.6 million in legal fees, valuation fees, severance costs and contract
cancellation costs. We accounted for the acquisition of vFinance under the
provisions of Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 141 “Business
Combinations.”
  Since
July 1, 2008, our management team has been focused on the task of eliminating
duplicative overhead and services, and eliminating unnecessary costs in an
effort to improve bottom line performance.  As of the date of this
report, the Company has made considerable progress on cost cutting measures, and
these savings are exceeding $6 million dollars on an annualized
basis.  We fully intend to continue our efforts to conserve capital
and keep costs low in an effort to improve the Company’s
profitability.
 
 19
  RESULTS
OF OPERATIONS
 
 Three Months Ended June 30,
2009 Compared to Three Months Ended June 30, 2008
 
 The
Company’s third quarter of fiscal year 2009 resulted in an increase in revenues,
but a greater increase in expenses compared to the same period last
year.  As a result, the Company reported a net loss of $868,000
compared with a net loss of $909,000 for the third quarters of fiscal years 2009
and 2008, respectively.
  Three
      Months EndedJune
      30,
                                  
                                  
                                  Increase
      (Decrease)2009
                                  
                                  
                                  2008
                                  
                                  
                                  Amount
                                  
                                  
                                  PercentCommissions
                                  
                                  $
                                  22,337,000
                                  
                                  
                                  $
                                  11,428,000
                                  
                                  
                                  $
                                  10,909,000
                                  
                                  
                                  
                                  95%Net
      dealer inventory gains
                                  
                                  
                                  5,077,000
                                  
                                  
                                  
                                  3,202,000
                                  
                                  
                                  
                                  1,875,000
                                  
                                  
                                  
                                  59%Investment
      banking
                                  
                                  
                                  896,000
                                  
                                  
                                  
                                  1,210,000
                                  
                                  
                                  
                                  (314,000
                                  )
                                  
                                  
                                  -26%Interest
      and dividends
                                  
                                  
                                  252,000
                                  
                                  
                                  
                                  837,000
                                  
                                  
                                  
                                  (585,000
                                  )
                                  
                                  
                                  -70%Transfer
      fees and clearance services
                                  
                                  
                                  3,847,000
                                  
                                  
                                  
                                  1,105,000
                                  
                                  
                                  
                                  2,742,000
                                  
                                  
                                  
                                  248%Other
                                  
                                  
                                  1,121,000
                                  
                                  
                                  
                                  897,000
                                  
                                  
                                  
                                  224,000
                                  
                                  
                                  
                                  25%$
                                  33,530,000
                                  
                                  
                                  $
                                  18,679,000
                                  
                                  
                                  $
                                  14,851,000
                                  
                                  
                                  
                                  80%
 Total
revenues increased $14,851,000, or 80%, in the third quarter of fiscal year 2009
to $33,530,000 from $18,679,000 in the third quarter of fiscal year
2008.  Commission revenue increased $10,909,000, or 95%, to
$22,337,000 from $11,428,000 during the third quarter of fiscal year 2009
compared with the same period in fiscal year 2008.  Net dealer
inventory gains which includes profits on proprietary trading, market making
activities and customer mark-ups and mark-downs, increased $1,875,000, or 59%,
to $5,077,000 from $3,202,000 during the third quarter of fiscal year 2009
compared with the same period in fiscal year 2008.  The increase in
total revenues, commission revenues and net dealer inventory gains were all
primarily due to the addition of vFinance revenues as a result of the
merger.
 
 Investment
banking revenue decreased $314,000, or 26%, in the third quarter of fiscal year
2009 to $896,000 from $1,210,000 in the third quarter of fiscal year
2008.  This decrease in revenues was primarily attributed to less
favorable market conditions during the quarter in comparison to the same quarter
of last year.  The Company completed a capital raise during the third
quarter of 2009, and received modest fee income.  Interest and
dividend income decreased by $585,000 or 70%, to $252,000 from $837,000 in the
third quarter of fiscal year 2009 compared with the same period last
year.  The decrease in interest income is attributable to generally
lower customer margin account balances, lower customer free cash balances and
lower prevailing interest rates during the quarter.  Transfer fees and
clearance service fee income increased $2,742,000 or 248%, to $3,847,000 in the
third quarter of fiscal year 2009 from $1,105,000 in the third quarter of fiscal
year 2008.  The increase is due primarily to the addition of vFinance
revenues as a result of the merger.
 
 20
 Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees and other investment income, increased $224,000, or 25%, to
$1,121,000 from $897,000 during the third quarter of fiscal year 2009 compared
to the third quarter of fiscal year 2008.  The increase is due
primarily to the addition of vFinance revenues as a result of the
merger.
 
 In
comparison with the 80% increase in total revenues, total expenses increased 76%
or $14,810,000 to $34,398,000 for the third quarter of fiscal year 2009 compared
to $19,588,000 in the third quarter of fiscal year 2008.  The increase
in total expenses is primarily a result of the addition of vFinance expenses as
a result of the merger.
  Three
      Months EndedJune
      30,
                                            
                                            
                                            Increase
      (Decrease)2009
                                            
                                            
                                            2008
                                            
                                            
                                            Amount
                                            
                                            
                                            PercentCommissions
                                            
                                            $
                                            26,061,000
                                            
                                            
                                            $
                                            14,695,000
                                            
                                            
                                            $
                                            11,366,000
                                            
                                            
                                            
                                            77%Employee
      compensation
                                            
                                            
                                            2,985,000
                                            
                                            
                                            
                                            1,786,000
                                            
                                            
                                            
                                            1,199,000
                                            
                                            
                                            
                                            67%Clearing
      fees
                                            
                                            
                                            1,523,000
                                            
                                            
                                            
                                            541,000
                                            
                                            
                                            
                                            982,000
                                            
                                            
                                            
                                            182%Communications
                                            
                                            
                                            1,245,000
                                            
                                            
                                            
                                            299,000
                                            
                                            
                                            
                                            946,000
                                            
                                            
                                            
                                            316%Occupancy
      and equipment costs
                                            
                                            
                                            954,000
                                            
                                            
                                            
                                            831,000
                                            
                                            
                                            
                                            123,000
                                            
                                            
                                            
                                            15%Professional
      fees
                                            
                                            
                                            483,000
                                            
                                            
                                            
                                            546,000
                                            
                                            
                                            
                                            (63,000
                                            )
                                            
                                            
                                            -12%Interest
                                            
                                            
                                            291,000
                                            
                                            
                                            
                                            176,000
                                            
                                            
                                            
                                            115,000
                                            
                                            
                                            
                                            65%Taxes,
      licenses and registration
                                            
                                            
                                            414,000
                                            
                                            
                                            
                                            123,000
                                            
                                            
                                            
                                            291,000
                                            
                                            
                                            
                                            237%Other
      administrative expenses
                                            
                                            
                                            442,000
                                            
                                            
                                            
                                            591,000
                                            
                                            
                                            
                                            (149,000
                                            )
                                            
                                            
                                            -25%$
                                            34,398,000
                                            
                                            
                                            $
                                            19,588,000
                                            
                                            
                                            $
                                            14,810,000
                                            
                                            
                                            
                                            76%
 Commission
expense, which primarily includes expenses related to commission revenue, net
dealer inventory gains and investment banking, increased $11,366,000, or 77%, to
$ 26,061,000 in the third quarter of fiscal year 2009 from $14,695,000 in the
third quarter of fiscal year 2008.  The increase is primarily
attributable to an increase in the related commission revenues from the vFinance
merger and is consistent with the increase in commission
revenues.  Commission expense includes the amortization of advances to
registered representatives of $391,000 and $240,000 for the third quarter of
fiscal years 2009 and 2008, respectively.  These amounts fluctuate
based upon the amounts of advances outstanding and the time period for which the
registered representatives have agreed to be affiliated with our Broker Dealer
Subsidiaries.
 
 Employee
compensation expense increased $1,199,000, or 67%, to $2,985,000 in the third
quarter of fiscal year 2009 from $1,786,000 in the third quarter of fiscal year
2008.  The increase is primarily attributable to costs from vFinance
due to the merger.  Employee compensation includes the amortization of
the fair value associated with stock based compensation of $237,000 and $149,000
in third quarter of fiscal years 2009 and 2008,
respectively.  Overall, combined commission and employee compensation
expense, as a percentage of total revenue decreased to 87% from 88% in the third
quarter of fiscal year 2009 and 2008, respectively as a result of cost cutting
plans implemented due to economic conditions.
 
 Clearing
fees increased $982,000 or 182%, to $1,523,000 in the third quarter of fiscal
year 2009 from $541,000 in the third quarter of fiscal year 2008.  The
increase in clearing fees is primarily attributable to costs from vFinance due
to the merger.  The greater increase in clearing fees as compared to
the increase in commission revenue is attributable to lower average commission
revenue per ticket in the third quarter of fiscal year 2009 and new fees charged
by the Company’s clearings firms.
 
 21
 Communication
expenses increased $946,000 or 316%, to $1,245,000 from $299,000 in the third
quarter of fiscal year 2009 compared to the third quarter of fiscal year
2008.  The increase is partly due to costs from vFinance due to the
merger and the need for additional network connectivity between corporate
offices.  Occupancy costs increased $123,000, or 15%, to $954,000 from
$831,000 in the third quarter of fiscal year 2009 compared to the third quarter
of fiscal year 2008.  The increase in occupancy expense is due to
annual rent increases contained in the Company’s office leases and the addition
of rented office space due to the vFinance merger.  The Company
anticipates a savings of in excess of $600,000 on an annualized basis as a
result of eliminating one of it leased spaces in Boca Raton, Florida in May
2009.
 
 Professional
fees decreased $63,000, or 12%, to $483,000 from $546,000 in the third quarter
of fiscal year 2009 compared to the third quarter of fiscal year
2008.  The decrease in professional fees is primarily a result of
higher than normal professional fees in the third quarter of 2008 due to legal
costs incurred in the defense of an arbitration, in addition to costs incurred
for the merger and the filing of a registration statement.
 
 
 Interest
expense increased $115,000, or 65%, to $291,000 from $176,000 in the third
quarter of fiscal year 2009 compared to the third quarter of fiscal year
2008.  The increase in interest expense is attributable to new
convertible notes issued in June of fiscal year 2008.  Included in
interest expense is the amortization of deferred financing costs of $110,000 and
$58,000 for the third quarter of fiscal years 2009 and 2008,
respectively.  Taxes, licenses and registration increased $291,000, or
237%, to $414,000 from $123,000 in the third quarter of fiscal year 2009
compared to the third quarter of fiscal year 2008.  The increase in
taxes, licenses and registration is due to primarily to costs from vFinance due
to the merger.  Other administrative expenses decreased $149,000 or
25% to $442,000 from $591,000 in the third quarter of fiscal year 2009 compared
to the third quarter of fiscal year 2008.  The decrease is primarily
attributable to costs from vFinance due to the merger.
 
 The
Company reported a net loss of $868,000 in the third quarter of fiscal year 2009
compared to a net loss of $909,000 in the third quarter of fiscal year
2008.  The net loss attributable to common stockholders in the third
quarter of fiscal year 2009 was $964,000, or $0.06 per common share, as compared
to a net loss attributable to common stockholders in the third quarter of fiscal
year 2008 of $993,000, or $.12 per common share.  The net loss
attributable to common stockholders for the third quarter of fiscal year 2009
and 2008 reflects $96,000 and $84,000, respectively, of cumulative preferred
stock dividends on the Company’s preferred stock.
 
 Nine Months Ended June 30,
2009 Compared to Nine Months Ended June 30, 2008
 
 The
Company’s first nine months of fiscal year 2009 resulted in an increase in
revenues, but a greater increase in expenses compared to the same period last
year.  As a result, the Company reported a net loss of $3,937,000
compared with a net loss of $3,438,000 for the first nine months of fiscal years
2009 and 2008, respectively.
  Nine
      Months EndedJune
      30,
                                      
                                      
                                      Increase
      (Decrease)2009
                                      
                                      
                                      2008
                                      
                                      
                                      Amount
                                      
                                      
                                      PercentCommissions
                                      
                                      $
                                      50,308,000
                                      
                                      
                                      $
                                      34,644,000
                                      
                                      
                                      $
                                      15,664,000
                                      
                                      
                                      
                                      45%Net
      dealer inventory gains
                                      
                                      
                                      19,016,000
                                      
                                      
                                      
                                      11,035,000
                                      
                                      
                                      
                                      7,981,000
                                      
                                      
                                      
                                      72%Investment
      banking
                                      
                                      
                                      2,046,000
                                      
                                      
                                      
                                      1,277,000
                                      
                                      
                                      
                                      769,000
                                      
                                      
                                      
                                      60%Interest
      and dividends
                                      
                                      
                                      1,285,000
                                      
                                      
                                      
                                      2,647,000
                                      
                                      
                                      
                                      (1,362,000
                                      )
                                      
                                      
                                      -51%Transfer
      fees and clearance services
                                      
                                      
                                      9,516,000
                                      
                                      
                                      
                                      3,378,000
                                      
                                      
                                      
                                      6,138,000
                                      
                                      
                                      
                                      182%Other
                                      
                                      
                                      3,783,000
                                      
                                      
                                      
                                      2,347,000
                                      
                                      
                                      
                                      1,436,000
                                      
                                      
                                      
                                      61%$
                                      85,954,000
                                      
                                      
                                      $
                                      55,328,000
                                      
                                      
                                      $
                                      30,626,000
                                      
                                      
                                      
                                      55%
 22
 Total
revenues increased $30,626,000, or 55%, in the first nine months of fiscal year
2009 to $85,954,000 from $55,328,000 in the first nine months of fiscal year
2008.  The increase in revenues is due primarily to the addition of
vFinance revenues as a result of the merger.  Commission revenue
increased $15,664,000, or 45%, to $50,308,000 from $34,644,000 during the first
nine months of fiscal year 2009 compared with the same period in fiscal year
2008, which is due primarily to the addition of vFinance revenues as a result of
the merger.  Net dealer inventory gains which includes profits on
proprietary trading, market making activities and customer mark-ups and
mark-downs, increased $7,981,000, or 72%, to $19,016,000 from $11,035,000 during
the first nine months of fiscal year 2009 compared with the same period in
fiscal year 2008.  The increase is due primarily to the addition of
vFinance revenues as a result of the merger.
  Investment
banking revenue increased $769,000, or 60%, in the first nine months of fiscal
year 2009 to $2,046,000 from $1,277,000 in the first nine months of fiscal year
2008.  These revenues were attributable to the closing of a few
smaller private placements as well as advisory and consulting services provided
during the nine month period.  Interest and dividend income decreased
by $1,362,000 or 51%, to $1,285,000 from $2,647,000 in the first nine months of
fiscal year 2009 compared with the same period last year.  The
decrease in interest income is attributable to generally lower customer margin
account balances, lower customer free cash balances and lower prevailing
interest rates during the quarter.  Transfer fees and clearance
services increased $6,138,000 or 182%, to $9,516,000 in the first nine months of
fiscal year 2009 from $3,378,000 in the first nine months of fiscal year
2008.  The increase is due primarily to the addition of vFinance
revenues as a result of the merger.
 
 Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees and other investment income, increased $1,436,000, or 61%, to
$3,783,000 from $2,347,000 during the first nine months of fiscal year 2009
compared to the first nine months of fiscal year 2008.  The increase
is due primarily to the addition of vFinance revenues as a result of the
merger.
 
 In
comparison with the 55% increase in total revenues, total expenses increased 53%
or $31,126,000 to $89,892,000 for the first nine months of fiscal year 2009
compared to $58,766,000 in the first nine months of fiscal year
2008.  The increase in total expenses is primarily a result of the
addition of vFinance expenses as a result of the merger.
  Nine
      Months EndedJune
      30,
                                            
                                            
                                            Increase
      (Decrease)2009
                                            
                                            
                                            2008
                                            
                                            
                                            Amount
                                            
                                            
                                            PercentCommissions
                                            
                                            
                                            64,524,000
                                            
                                            
                                            $
                                            43,449,000
                                            
                                            
                                            $
                                            21,075,000
                                            
                                            
                                            
                                            49%Employee
      compensation
                                            
                                            
                                            9,029,000
                                            
                                            
                                            
                                            6,334,000
                                            
                                            
                                            
                                            2,695,000
                                            
                                            
                                            
                                            43%Clearing
      fees
                                            
                                            
                                            3,890,000
                                            
                                            
                                            
                                            1,676,000
                                            
                                            
                                            
                                            2,214,000
                                            
                                            
                                            
                                            132%Communications
                                            
                                            
                                            3,137,000
                                            
                                            
                                            
                                            907,000
                                            
                                            
                                            
                                            2,230,000
                                            
                                            
                                            
                                            246%Occupancy
      and equipment costs
                                            
                                            
                                            3,786,000
                                            
                                            
                                            
                                            2,564,000
                                            
                                            
                                            
                                            1,222,000
                                            
                                            
                                            
                                            48%Professional
      fees
                                            
                                            
                                            1,790,000
                                            
                                            
                                            
                                            1,597,000
                                            
                                            
                                            
                                            193,000
                                            
                                            
                                            
                                            12%Interest
                                            
                                            
                                            925,000
                                            
                                            
                                            
                                            319,000
                                            
                                            
                                            
                                            606,000
                                            
                                            
                                            
                                            190%Taxes,
      licenses and registration
                                            
                                            
                                            1,016,000
                                            
                                            
                                            
                                            330,000
                                            
                                            
                                            
                                            686,000
                                            
                                            
                                            
                                            208%Other
      administrative expenses
                                            
                                            
                                            1,795,000
                                            
                                            
                                            
                                            1,590,000
                                            
                                            
                                            
                                            205,000
                                            
                                            
                                            
                                            13%$
                                            89,892,000
                                            
                                            
                                            $
                                            58,766,000
                                            
                                            
                                            $
                                            31,126,000
                                            
                                            
                                            
                                            53%
 
 23
 Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $21,075,000, or 49%, to
$64,524,000 in the first nine months of fiscal year 2009 from $43,449,000 in the
first nine months of fiscal year 2008.  The increase is primarily
attributable to an increase in the related commission revenues from the vFinance
merger.  Commission expense includes the amortization of advances to
registered representatives of $1,158,000 and $1,044,000 for the first nine
months of fiscal years 2009 and 2008, respectively.  These amounts
fluctuate based upon the amounts of advances outstanding and the time period for
which the registered representatives have agreed to be affiliated with our
Broker Dealer Subsidiaries.
 
 Employee
compensation expense increased $2,695,000, or 43%, to $9,029,000 in the first
nine months of fiscal year 2009 from $6,334,000 in the first nine months of
fiscal year 2008.  The increase is primarily attributable to costs
from vFinance due to the merger.  Employee compensation includes the
amortization of the fair value associated with stock based compensation of
$730,000 and $442,000 in first nine months of fiscal years 2009 and 2008,
respectively.  Overall, combined commission and employee compensation
expense, as a percentage of revenue decreased to 86% from 90% in the first nine
months of fiscal year 2009 and 2008, respectively as a result of cost cutting
plans implemented due to economic conditions.
 
 Clearing
fees increased $2,214,000 or 132%, to $3,890,000 in the first nine months of
fiscal year 2009 from $1,676,000 in the first nine months of fiscal year
2008.  The increase in clearing fees is primarily attributable to
costs from vFinance due to the merger.  The greater increase in
clearing fees as compared to the increase in commission revenue is attributable
to lower average commission revenue per ticket in the first nine months of
fiscal year 2009.
 
 Communication
expenses increased $2,230,000 or 246%, to $3,137,000 from $907,000 in the first
nine months of fiscal year 2009 compared to the first nine months of fiscal year
2008.  The increase is due to costs from vFinance due to the
merger.  Occupancy costs increased $1,222,000, or 48%, to $3,786,000
from $2,564,000 in the first nine months of fiscal year 2009 compared to the
first nine months of fiscal year 2008.  The increase in occupancy
expense is due to annual rent increases contained in the Company’s office leases
and the addition of rented office space due to the vFinance merger.
 
 Professional
fees increased $193,000, or 12%, to $1,790,000 from $1,597,000 in the first nine
months of fiscal year 2009 compared to the first nine months of fiscal year
2008.  The increase in professional fees is primarily a result of the
filing of a registration statement and slightly higher legal costs associated
with the merger with vFinance.
 
 Interest
expense increased $606,000, or 190%, to $925,000 from $319,000 in the first nine
months of fiscal year 2009 compared to the first nine months of fiscal year
2008.  The increase in interest expense is attributable to new
convertible notes issued in March and June of fiscal year
2008.  Included in interest expense is the amortization of deferred
financing costs of $337,000 and $113,000 the first nine months of fiscal years
2009 and 2008, respectively.  Taxes, licenses and registration
increased $686,000, or 208%, to $1,016,000 from $330,000 in the first nine
months of fiscal year 2009 compared to the first nine months of fiscal year
2008.  The increase in taxes, licenses and registration is due to
primarily attributable to costs from vFinance due to the
merger.  Other administrative expenses increased $205,000 or 13% to
$1,795,000 from $1,590,000 in the first nine months of fiscal year 2009 compared
to the first nine months of fiscal year 2008.  The increase is
primarily attributable to costs from vFinance due to the merger.
 
 The
Company reported a net loss of $3,938,000 in the first nine months of fiscal
year 2009 compared to a net loss of $3,438,000 in the first nine months of
fiscal year 2008.  The net loss attributable to common stockholders in
the first nine months of fiscal year 2009 was $4,203,000 or $0.25 per common
share, as compared to a net loss attributable to common stockholders in the
first nine months of fiscal year 2008 of $3,691,000, or $.43 per common
share.  The net loss attributable to common stockholders for the first
nine months of fiscal year 2009 and 2008 reflects $265,000 and $253,000,
respectively, of cumulative preferred stock dividends on the Company’s preferred
stock.
 
 24
 NON-G.A.A.P.
INFORMATION
 
 Management
considers EBITDA, as adjusted, an important indicator in evaluating our business
on a consistent basis across various periods. Due to the significance of
non-recurring items, EBITDA, as adjusted, enables our board of directors and
management to monitor and evaluate our business on a consistent basis. We use
EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate
financial and strategic planning decisions regarding future operating
investments and potential acquisitions. We believe that EBITDA, as adjusted,
eliminates items that are not part of our core operations, such as interest
expense and amortization expense associated with intangible assets, or do not
involve a cash outlay, such as stock-related compensation. EBITDA, as adjusted
should be considered in addition to, rather than as a substitute for, pre-tax
income, net income and cash flows from operating activities.  For the
three and nine months ended June 30, 2009, EBITDA, as adjusted, was $431,000 and
$($21,000), respectively.  In the three and nine months ended June 30,
2008, EBITDA, as adjusted, was ($274,000) and ($1,935,000),
respectively.  This improvement of $705,000 and $1,914,000 in both the
three and nine months ended June 30, 2009 over 2008 result from increased
revenues, lower average payout per dollar of commission earned, and significant
reductions in operating expenses.
 
 The
following table presents a reconciliation of EBITDA, as adjusted, to net income
as reported.
  Three
      Months Ended
                                                                            
                                                                            
                                                                            Nine
      Months EndedJune
      30,
                                                                            
                                                                            
                                                                            June
      30,2009
                                                                            
                                                                            
                                                                            2008
                                                                            
                                                                            
                                                                            2009
                                                                            
                                                                            
                                                                            2008Net
      income loss, as reported
                                                                            
                                                                            $
                                                                            (868,000
                                                                            )
                                                                            
                                                                            $
                                                                            (909,000
                                                                            )
                                                                            
                                                                            $
                                                                            (3,938,000
                                                                            )
                                                                            
                                                                            $
                                                                            (3,438,000
                                                                            )Interest
      expense
                                                                            
                                                                            
                                                                            291,000
                                                                            
                                                                            
                                                                            
                                                                            176,000
                                                                            
                                                                            
                                                                            
                                                                            926,000
                                                                            
                                                                            
                                                                            
                                                                            319,000Taxes
                                                                            
                                                                            
                                                                            29,000
                                                                            
                                                                            
                                                                            
                                                                            63,000
                                                                            
                                                                            
                                                                            
                                                                            106,000
                                                                            
                                                                            
                                                                            
                                                                            169,000Depreciation
                                                                            
                                                                            
                                                                            189,000
                                                                            
                                                                            
                                                                            
                                                                            45,000
                                                                            
                                                                            
                                                                            
                                                                            551,000
                                                                            
                                                                            
                                                                            
                                                                            146,000Amortization
                                                                            
                                                                            
                                                                            162,000
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            466,000
                                                                            
                                                                            
                                                                            
                                                                            -EBITDA
                                                                            
                                                                            
                                                                            (197,000
                                                                            )
                                                                            
                                                                            
                                                                            (625,000
                                                                            )
                                                                            
                                                                            
                                                                            (1,889,000
                                                                            )
                                                                            
                                                                            
                                                                            (2,804,000
                                                                            )Non-cash
      compensation expense
                                                                            
                                                                            
                                                                            237,000
                                                                            
                                                                            
                                                                            
                                                                            54,000
                                                                            
                                                                            
                                                                            
                                                                            710,000
                                                                            
                                                                            
                                                                            
                                                                            83,000Forgivable
      loan write down
                                                                            
                                                                            
                                                                            391,000
                                                                            
                                                                            
                                                                            
                                                                            297,000
                                                                            
                                                                            
                                                                            
                                                                            1,158,000
                                                                            
                                                                            
                                                                            
                                                                            786,000EBITDA,
      as adjusted
                                                                            
                                                                            $
                                                                            431,000
                                                                            
                                                                            
                                                                            $
                                                                            (274,000
                                                                            )
                                                                            
                                                                            $
                                                                            (21,000
                                                                            )
                                                                            
                                                                            $
                                                                            (1,935,000
                                                                            )
  Earnings
before interest, taxes, depreciation and amortization, or EBITDA, adjusted for
gains or losses on sales of assets, non-cash compensation expense and loss on
extinguishment of debt, is a key metric we use in evaluating our business.
EBITDA is considered a non-GAAP financial measure as defined by Regulation G
promulgated by the SEC under the Securities Act of 1933, as
amended.
 
 Liquidity
and Capital Resources
 
 For the
periods ended June 30, 2009 and September 30, 2008, 55% and 54% of our total
assets consisted of cash and cash equivalents, marketable securities owned and
receivables from clearing brokers and other broker dealers.  The level
of cash used in each asset class is subject to fluctuation based on market
volatility, revenue production and trading activity in the
marketplace.  Allocation of cash into marketable securities classes
are dependent upon overall market activity, but the majority of our securities
owned are in municipal securities and common stock.
 
 25
 Our
Broker Dealer Subsidiaries are subject to the SEC's Uniform Net Capital Rule
15c3-1, which is designed to measure the general financial integrity and
liquidity of a broker-dealer and requires the maintenance of minimum net
capital.  Net capital is defined as the net worth of a broker-dealer
subject to certain adjustments.  In computing net capital, various
adjustments are made to net worth that exclude assets not readily convertible
into cash.  Additionally, the regulations require that certain assets,
such as a broker-dealer's position in securities, be valued in a conservative
manner so as to avoid over-inflation of the broker-dealer's net
capital.  National Securities has elected to use the alternative
standard method permitted by the rule.  This requires that National
Securities maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security for which
National Securities is a market maker.  At June 30, 2008, National
Securities’ net capital exceeded the requirement by $261,000.  Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain $100,000,
and at June 30, 2009 the firms had excess net capital of $421,000 and $111,000,
respectively.
 
 Cash used
in operations for the nine months ended June 30, 2009 was $736,000 which was
primarily due to our net loss of $3,938,000, reduced by non cash adjustments of
$1,017,000 in depreciation and amortization and $678,000 in stock compensation
expense.  An increase in receivables from our clearing firms of
$651,000, an increase in other receivables of $333,000, and a decrease of the
payable to broker dealers and clearing organizations of $451,000 further
decreased cash but was offset by an increase in accounts payable and accrued
expenses of $1,021,000, a decrease in advances to brokers of $934,000 and a
decrease in long securities owned at market value of
$541,000.  Investing activities used $598,000 due to the need to
purchase fixed assets under mostly capital leases due to the move of our
vFinance Boca Raton data center into a co-location in Miami, Florida and the
move of our Boca Raton office to a new location.
 
 Financing
activities used $132,000 due in part to the repayment of indebtedness to certain
principal stockholders of $500,000.  But a private placement of our
securities (net of costs) and securing a subordinated loan brought in about
$368,000.
 
 The
Company has historically satisfied its capital needs with cash generated from
operations or from financing activities.  The Company believes that it
will have sufficient funds to maintain its current level of business activities
during fiscal year 2009.  If market conditions should weaken, the
Company would need to consider curtailing certain of its business activities,
reducing its fixed overhead costs and/or seek additional sources of
financing.
 
 Advances,
dividend payments and other equity withdrawals from the Company’s subsidiary are
restricted by the regulations of the SEC and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.  During the quarter
ended June 30, 2009 the Company did not have any equity
withdrawals.
 
 The
Company extends unsecured credit in the normal course of business to its
brokers.  The determination of the appropriate amount of the reserve
for uncollectible accounts is based upon a review of the amount of credit
extended, the length of time each receivable has been outstanding, and the
specific individual brokers from whom the receivables are due.
 
 26
 The
objective of liquidity management is to ensure that the Company has ready access
to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
 
 National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company to borrow
securities that can be used by the Company for collateral
agreements.  In February 2008, upon the maturity of the previously
issued note, National Securities and the holder entered into a new $500,000
secured demand note collateral agreement with a maturity date of March 1, 2009
at which time the holder also entered into a warrant agreement to purchase
150,000 shares of common stock at a price of $1.25 per share, with an expiration
date of July 31, 2009.  The note collateral agreement automatically
renewed on March 1, 2009 and is set to mature on March 1, 2010.
 
 In
February 2007, the Company completed a financing transaction under which certain
investors purchased 10% promissory notes in the principal amount of $1.0
million, which notes matured in February 2009.  The Company recorded a
debt discount of approximately $195,000 that is being charged to interest
expense over the life of the debt.  The investment included $500,000
by Christopher C. Dewey and $250,000 by St. Cloud Capital Partners, L.P. (“St.
Cloud”).  Mr. Dewey, and Marshall S. Geller, the Senior Managing
Partner of St. Cloud, are each members of the Company’s board of
directors.  In February 2009, we entered into forbearance agreements
with the investors as previously reported on our Current Report on Form 8-K, as
filed with the SEC on March 2, 2009, and on April 6, 2009 we amended our
forbearance agreement with St. Cloud, as filed with the SEC on April 10,
2009.  The St. Cloud note was repaid in full on April 30,
2009.
 
 On May 6,
2009, we entered into amendments to the existing forbearance agreements with the
remaining investors, as previously reported on our Current Report on Form 8-K,
as filed with the SEC on May 6, 2009, whereby the remaining investors agreed not
exercise any of their rights under their notes until May 12, 2009. On May 14,
2009, we entered into second amendments to the existing forbearance agreements
with the remaining investors whereby the remaining investors agreed not exercise
any of their rights under their notes until May 22, 2009.  On May 29,
2009 we repaid $250,000 owed to Bedford Oak Partners, L.P., a principal
stockholder of the Company, and on May 29, 2009 we entered into a third
amendment to the forbearance agreement with Mr. Dewey as previously reported on
our Current Report on Form 8-K, as filed with the SEC on May 29, 2009, whereby
Mr. Dewey agreed to not exercise any of his rights under his note until June 1,
2010 and agreed to lower the interest rate on his note from 10% to 7% per
annum.
 
 On March
31, 2008, the Company completed a financing transaction under which an investor
made an investment in the Company by purchasing a convertible promissory note in
the principal amount of $3.0 million, with a warrant to purchase 375,000 shares
of common stock at an exercise price of $2.50 per share.  The
promissory note matures in March 2012, is convertible into common stock at a
price of $2.00 per share and has a stated interest rate of 10% per
annum.  Under accounting guidance provided by EITF No 98-5 and EITF
No. 00-27 the relative fair value of the warrant was calculated using the
Black-Scholes Option Valuation Model.  The Company also recorded an
additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $791,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 On June
30, 2008, the Company completed a financing transaction under which the same
investor made an additional investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0 million, with a
warrant to purchase 468,750 shares of common stock at an exercise price of $2.00
per share.  The promissory note matures in June 2012, is convertible
into common stock at a price of $1.60 per share and has a stated interest rate
of 10% per annum.  Under accounting guidance provided by EITF No 98-5
and EITF No. 00-27 the relative fair value of the warrant was calculated using
the Black-Scholes Option Valuation Model.  The Company also recorded
an additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $789,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 27
 In April
2005, National Securities entered into a clearing agreement with National
Financial Services LLC (“NFS”) that became effective in June 2005.  In
the first quarter of fiscal year 2007, NFS paid National Securities a $750,000
general business credit that is being amortized over an eight year period ending
November 2014, corresponding with the expiration date of the clearing
agreement.  In the second quarter of fiscal year 2007, NFS provided
National Securities a $250,000 clearing fee waiver that is being amortized over
a two year period ending December 2008, corresponding with the time period that
certain performance standards were to be achieved.  The clearing
agreement includes a termination fee if National Securities terminates the
agreement without cause. The Broker Dealer Subsidiaries currently have clearing
agreements with NFS, Penson Financial Services, Inc., Legent Clearing LLC and
Fortis Securities, LLC.  The Company believes that the overall effect
of its clearing relationships has been beneficial to the Company’s cost
structure, liquidity and capital resources.
 
 In June
2009, National Securities was approved by the FINRA to receive a Subordinated
loan from Legent Clearing for $100,000.  This loan was granted
subsequent to National Securities signing a clearing agreement with Legent, to
clear a portion of the business.  This loan is forgivable after one
year and National Securities bringing over a certain number of assets to the
Legent clearing platform.
 
 Contractual
Obligations
 
 In May
2009 the Company ceased using its Military Trail office in Boca Raton, Florida
and relocated all of its employees from this location to space it already had
under lease on North Federal Highway in Boca Raton.  The original
lease on the Federal Highway location was terminated and a new lease was signed
for the Company to begin use in May.  In addition to extending the
term of the lease by approximately one year, the Landlord gave a rent holiday
for the first four months of the lease and provided reimbursement of build-out
costs to a maximum of $150,000.
 
 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.
 
 28
 The
Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed.  There can be no assurance, however, that the
Company's risk management procedures and internal controls will prevent losses
from occurring as a result of such risks.
 
 The
following table shows the quoted market values of marketable securities owned
("long") and securities sold but not yet purchased ("short") the Company as of
June 30, 2009:
 
 Long
                                      
                                      
                                      ShortCorporate
      stocks
                                      
                                      $
                                      88,000
                                      
                                      
                                      $
                                      76,000Corporate
      bonds
                                      
                                      
                                      68,000
                                      
                                      
                                      
                                      -Government
      obligations
                                      
                                      
                                      422,000
                                      
                                      
                                      
                                      -$
                                      578,000
                                      
                                      
                                      $
                                      76,000
 
 ITEM
4. CONTROLS AND PROCEDURES
 
 Evaluation of disclosure
controls and procedures.
 
 Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure and control
procedures are also designed to ensure that such information is accumulated and
communicated to management, including the chief executive officer and principal
accounting officer, to allow timely decisions regarding required
disclosures.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act, is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding disclosure.
 
 Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange
Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the period covered
by this report, the Company’s disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this quarterly report on Form
10-Q was being prepared.
 
 Changes in internal
controls.
 
 We have
continually had in place systems relating to internal control over financial
reporting.  There were no significant changes in the Company’s
internal controls over financial reporting or in other factors during the last
fiscal quarter to which this Quarterly Report on Form 10-Q relates that could
significantly affect those controls and procedures subsequent to the date of our
evaluation nor any significant deficiencies or material weaknesses in such
internal controls and procedures requiring corrective actions.
 
 
 29
  PART
II – OTHER INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 On March
4, 2008, vFinance received a customer arbitration (FINRA Case No.08-00472) from
Donald and Patricia Halfmann, alleging that Jeff Lafferty, a former registered
representative of vFinance, misappropriated approximately $110,000 of the
Halfmanns' funds via check alteration, and that vFinance ought to be liable
for an additional $150,000 for other dishonest and fraudulent acts
committed after he left vFinance.  On August 6, 2009 the arbitrators’ ruled
that vFinance Investments must pay for losses, interest, attorneys costs and
punitive damages totaling approximately $780,000.  The firm has made a
claim against its fidelity bond carrier, and is completing its analysis as to
whether to seek to have the entire arbitration award, or any part of that award,
vacated.
 
 In
October, 2008, vFinance and others were named as defendants in a civil action
(Case No. 09-CV-9008 United Stated District Court, Southern District of New
York), wherein The Pinnacle Fund, L.P. and others alleged securities law
violations and other causes of action stemming from a private placement
transaction into a public company which vFinance acted as placement agent. 
Plaintiffs alleged damages in excess of $12,000,000 in compensatory
damages.  vFinance asserted its indemnification rights against a one of the
co-defendants, and has thus far received reimbursement of most of the attorneys
fees and costs incurred.  The parties have reached a settlement and the
action was dismissed with prejudice and vFinance Investments, Inc. was
indemnified as to all costs in this matter.
 
 During
the quarter ended June 30, 2009, there were no other significant developments in
the Company’s legal proceedings except those already discussed in Note 6 to the
financial statements entitled Commitments and Contingencies.  For a
detailed discussion of the Company’s legal proceedings, please refer to Note 6
herein, and the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2008.
 
 ITEM
1A.  RISK FACTORS
 
 There are
no material changes from the risk factors previously disclosed in the Company’s
Form 10-K for the fiscal year ended September 30, 2008.
 
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 None.
  ITEM
3. DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 30
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 ITEM
5. OTHER INFORMATION
 
 None.
 
 ITEM
6.EXHIBITS
 
 10.34
              Amendment
      No.2 to Forbearance Agreement, dated as of May 29, 2009, by
      and between National Holdings Corporation and Christopher C.
      Dewey.
 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.
 
 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 SUBSIDIARIESAugust
      14, 2009
                              
                              /s/ Mark
      GoldwasserMark
      Goldwasser
                                Chief
      Executive OfficerAugust
      14, 2009
                              By:
                              /s/
      Alan B. LevinAlan
      B. Levin
                                Chief
      Financial Officer
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