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, 2006
            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.
                Employer incorporation ororganization)
            Identification
                No.)




875
      North Michigan Avenue, Suite 1560, Chicago, Illinois 60611


(Address
      of principal executive offices) (Zip code)





Registrant’s
                telephone number, including area code:
            (312)
                751-8833




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





Indicate
      by checkmark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes o No
x





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





The
      number of shares outstanding of registrant’s common stock, par value $0.02 per
      share, at August 11, 2006 was 5,223,968.


1
  **NATIONAL
              HOLDINGS CORPORATION AND SUBSIDIARY**
  **CONDENSED
              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**
 **ASSETS**June
                          30,
                      
                      September
                          30,2006
                      
                      2005(unaudited)
                      
                      (see
                          note below)CASH
                      
                      $
                      2,490,000
                      
                      $
                      398,000DEPOSITS
                          WITH CLEARING ORGANIZATIONS
                      
                      
                      300,000
                      
                      
                      300,000RECEIVABLES
                          FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
                      
                      
                      3,568,000
                      
                      
                      3,329,000OTHER
                          RECEIVABLES, net of allowance for uncollectible accounts
                          of $393,000
                          and$368,000
                          at June 30, 2006 and September 30, 2005, respectively
                      
                      
                      365,000
                      
                      
                      485,000ADVANCES
                          TO REGISTERED REPRESENTATIVES
                      
                      
                      1,559,000
                      
                      
                      1,653,000SECURITIES
                          HELD FOR RESALE, at market
                      
                      
                      433,000
                      
                      
                      166,000FIXED
                          ASSETS, net
                      
                      
                      329,000
                      
                      
                      250,000SECURED
                          DEMAND NOTE
                      
                      
                      1,000,000
                      
                      
                      1,000,000OTHER
                          ASSETS
                      
                      
                      606,000
                      
                      
                      379,000TOTAL
                          ASSETS
                      
                      $
                      10,650,000
                      
                      $
                      7,960,000**LIABILITIES
                          AND STOCKHOLDERS' EQUITY**PAYABLE
                          TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
                      
                      $
                      197,000
                      
                      $
                      122,000SECURITIES
                          SOLD, BUT NOT YET PURCHASED, at market
                      
                      
                      234,000
                      
                      
                      44,000ACCOUNTS
                          PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
                      
                      
                      4,503,000
                      
                      
                      4,045,000CONVERTIBLE
                          NOTES PAYABLE, net of debt discounts of $168,000 and $0at
                          June 30, 2006 and September 30, 2005, respectively
                      
                      
                      832,000
                      
                      
                      -NOTES
                          PAYABLE, net of debt discounts of $65,000 and $206,000at
                          June 30, 2006 and September 30, 2005, respectively
                      
                      
                      785,000
                      
                      
                      1,819,000TOTAL
                          LIABILITIES
                      
                      
                      6,551,000
                      
                      
                      6,030,000SUBORDINATED
                          BORROWINGS
                      
                      
                      1,000,000
                      
                      
                      1,000,000COMMITMENTS
                          AND CONTINGENCIESREDEEMABLE
                          STOCKSeries
                          B 10% cumulative convertible preferred stock, $.01 par
                          value,
                          20,000shares
                          authorized; 10,000 shares issued and outstanding
                          (liquidationpreference:
                          $1,000,000) at June 30, 2006 and 0 shares issued andoutstanding
                          at September 30, 2005
                      
                      
                      1,000,000
                      
                      
                      -STOCKHOLDERS'
                          EQUITYPreferred
                          stock, $.01 par value, 200,000 shares authorized; 50,000
                          sharesdesignated
                          as Series A and 20,000 shares designated as Series B (see
                          above)
                      
                      
                      -
                      
                      
                      -Series
                          A 9% cumulative convertible preferred stock, $.01 par value,
                          50,000shares
                          authorized; 35,316 shares issued and outstanding
                          (liquidationpreference:
                          $3,531,600) at June 30, 2006 and 33,320 shares issued andoutstanding
                          (liquidation preference: $3,332,000) at September 30, 2005
                      
                      
                      -
                      
                      
                      -Common
                          stock, $.02 par value, 30,000,000 shares authorized;5,223,968
                          and 5,045,878 shares issued and outstanding,at
                          June 30, 2006 and September 30, 2005, respectively
                      
                      
                      104,000
                      
                      
                      101,000Additional
                          paid-in capital
                      
                      
                      16,024,000
                      
                      
                      15,295,000Deferred
                          compensation
                      
                      
                      (76,000
                      )
                      
                      -Accumulated
                          deficit
                      
                      
                      (13,953,000
                      )
                      
                      (14,466,000
                      )TOTAL
                          STOCKHOLDERS' EQUITY
                      
                      
                      2,099,000
                      
                      
                      930,000TOTAL
                          LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      $
                      10,650,000
                      
                      $
                      7,960,000
  Note:
                The
                balance sheet at September 30, 2005 has been derived from the audited
                consolidated financial statements at that date.
  See
            notes
            to condensed consolidated financial statements.
  
 2




**NATIONAL
        HOLDINGS CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**


--------
                  Three Months Ended ---------
              
              --------
                  Nine Months Ended ---------June
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005REVENUES:Commissions
              
              $
              7,952,000
              
              $
              6,500,000
              
              $
              25,823,000
              
              $
              25,646,000Net
                  dealer inventory gains
              
              
              2,219,000
              
              
              1,810,000
              
              
              6,270,000
              
              
              4,402,000Investment
                  banking
              
              
              1,574,000
              
              
              278,000
              
              
              8,667,000
              
              
              516,000Interest
                  and dividends
              
              
              825,000
              
              
              621,000
              
              
              2,207,000
              
              
              1,983,000Transfer
                  fees and clearing services
              
              
              867,000
              
              
              681,000
              
              
              2,597,000
              
              
              2,257,000Other
              
              
              547,000
              
              
              106,000
              
              
              894,000
              
              
              507,000TOTAL
                  REVENUES
              
              
              13,984,000
              
              
              9,996,000
              
              
              46,458,000
              
              
              35,311,000EXPENSES:Commissions
              
              
              10,044,000
              
              
              7,269,000
              
              
              33,775,000
              
              
              25,388,000Employee
                  compensation and related expenses
              
              
              1,541,000
              
              
              1,213,000
              
              
              4,425,000
              
              
              3,765,000Clearing
                  fees
              
              
              405,000
              
              
              (664,000
              )
              
              1,205,000
              
              
              6,000Communications
              
              
              296,000
              
              
              365,000
              
              
              1,328,000
              
              
              1,200,000Occupancy
                  and equipment costs
              
              
              693,000
              
              
              713,000
              
              
              2,001,000
              
              
              2,186,000Professional
                  fees
              
              
              246,000
              
              
              294,000
              
              
              830,000
              
              
              1,014,000Interest
              
              
              104,000
              
              
              120,000
              
              
              389,000
              
              
              347,000Taxes,
                  licenses, registration
              
              
              177,000
              
              
              102,000
              
              
              490,000
              
              
              260,000Other
                  administrative expenses
              
              
              326,000
              
              
              473,000
              
              
              1,180,000
              
              
              1,356,000TOTAL
                  EXPENSES
              
              
              13,832,000
              
              
              9,885,000
              
              
              45,623,000
              
              
              35,522,000NET
                  INCOME (LOSS)
              
              
              152,000
              
              
              111,000
              
              
              835,000
              
              
              (211,000
              )Preferred
                  stock dividends
              
              
              (104,000
              )
              
              (75,000
              )
              
              (275,000
              )
              
              (215,000
              )Net
                  income (loss) attributable to common stockholders
              
              $
              48,000
              
              $
              36,000
              
              $
              560,000
              
              $
              (426,000
              )NET
                  INCOME (LOSS) PER COMMON SHAREBasic:Net
                  income (loss) attributable to common stockholders
              
              $
              0.01
              
              $
              0.01
              
              $
              0.11
              
              $
              (0.08
              )Diluted:Net
                  income (loss) attributable to common stockholders
              
              $
              0.01
              
              $
              0.01
              
              $
              0.09
              
              $
              (0.08
              )Weighted
                  average number of shares outstandingBasic
              
              
              5,223,968
              
              
              5,045,878
              
              
              5,120,290
              
              
              5,017,486Diluted
              
              
              5,454,099
              
              
              5,123,861
              
              
              10,378,810
              
              
              5,017,486




See
      notes
      to condensed consolidated financial statements.




3




**NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARY**
  **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  ----------Nine
                  Months Ended--------------June
                  30, 2006
              
              June
                  30, 2005CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income (loss)
              
              $
              835,000
              
              $
              (211,000
              )Adjustments
                  to reconcile net income (loss) to netcash
                  provided by (used in) operating activitiesDepreciation
                  and amortization
              
              
              113,000
              
              
              113,000Amortization
                  of deferred financing costs
              
              
              3,000
              
              
              -Amortization
                  of note discount
              
              
              159,000
              
              
              134,000Compensatory
                  element of common stock issuance
              
              
              12,000
              
              
              -Compensatory
                  element of common stock option issuances
              
              
              12,000
              
              
              -Provision
                  for doubtful accounts
              
              
              25,000
              
              
              50,000Issuance
                  of common stock in settlement of arbitrations and claims
              
              
              -
              
              
              40,000Changes
                  in assets and liabilitiesDeposits
                  with clearing organizations
              
              
              -
              
              
              495,000Receivables
                  from broker-dealers, clearing organizations and others
              
              
              (50,000
              )
              
              563,000Securities
                  held for resale, at market
              
              
              (267,000
              )
              
              (748,000
              )Other
                  assets
              
              
              (202,000
              )
              
              (65,000
              )Payables
              
              
              533,000
              
              
              (1,087,000
              )Securities
                  sold, but not yet purchased, at market
              
              
              190,000
              
              
              401,000Net
                  cash provided by operating activities
              
              
              1,363,000
              
              
              (315,000
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of fixed assets
              
              
              (193,000
              )
              
              (64,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESIncrease
                  in cash overdraft
              
              
              -
              
              
              142,000Net
                  proceeds from issuance of common stock
              
              
              175,000
              
              
              -Net
                  proceeds from issuance of preferred stock
              
              
              972,000
              
              
              -Net
                  proceeds from issuance of convertible notes payable
              
              
              1,000,000
              
              
              -Cash
                  payment of deferred financing costs
              
              
              (28,000
              )
              
              -Payment
                  of notes payable
              
              
              (1,175,000
              )
              
              (75,000
              )Dividends
                  paid
              
              
              (22,000
              )
              
              -Exercise
                  of stock options and warrants
              
              
              -
              
              
              20,000Net
                  cash (used in) provided by financing activities
              
              
              922,000
              
              
              87,000NET
                  INCREASE IN CASH
              
              
              2,092,000
              
              
              (292,000
              )CASH
                  BALANCEBeginning
                  of the period
              
              
              398,000
              
              
              351,000End
                  of the period
              
              $
              2,490,000
              
              $
              59,000SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during the period for:Interest
              
              $
              234,000
              
              $
              215,000Dividends
              
              $
              21,000
              
              $
              -SUPPLEMENTAL
                  DISCLOSURES OF NONCASH INVESTING ANDFINANCING
                  ACTIVITIESWarrants
                  issued in connection with debt
              
              $
              187,000
              
              $
              -Preferred
                  stock dividends
              
              $
              300,000
              
              $
              322,000




See
        notes
        to condensed consolidated financial statements.




4




**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


**(UNAUDITED)**





**NOTE
      1. BASIS OF PRESENTATION**





The
      accompanying consolidated financial statements of National Holdings Corporation
      f/k/a Olympic Cascade Financial Corporation (“National Holdings” or the
“Company”) have been prepared in accordance with generally accepted accounting
      principles for interim financial statements and with the instructions to Form
      10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
      of
      the information and disclosures required for annual financial statements. In
      the
      opinion of management, all adjustments (consisting of normal recurring accruals)
      considered necessary for a fair presentation have been included. The
      consolidated financial statements as of and for the periods ended June 30,
      2006
      and June 30, 2005 are unaudited. The results of operations for the interim
      periods are not necessarily indicative of the results of operations for the
      fiscal year. These 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, 2005.





**NOTE
      2.**  **ACCOUNTING
      POLICY**





In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      155, which is an amendment of SFAS No. 133 and 140. This Statement (a) permits
      fair value re-measurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation, (b) clarifies
      which interest-only strip and principal-only strip are not subject to the
      requirements of SFAS 133, (c) establishes a requirement to evaluate interests
      in
      securitized financial assets to identify interests that are freestanding
      derivatives or that are hybrid financial instruments that contain an embedded
      derivative requiring bifurcation, (d) clarifies that concentrations of credit
      risk in the form of subordination are not embedded derivatives, and (e) amends
      SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity
      from holding a derivative financial instrument that pertains to a beneficial
      interest other than another derivative financial instrument. This Statement
      is
      effective for financial statements for fiscal years beginning after September
      15, 2006. Earlier adoption of this Statement is permitted as of the beginning
      of
      an entity’s fiscal year, provided the entity has not yet issued any financial
      statements for that fiscal year. Management believes this Statement will not
      have an impact on the financial statements of the Company once
      adopted.





In
      March
      2006, the FASB issued SFAS No. 156, which amends FASB Statement No. 140. This
      Statement establishes, among other things, the accounting for all separately
      recognized servicing assets and servicing liabilities. This Statement amends
      SFAS 140 to require that all separately recognized servicing assets and
      servicing liabilities be initially measured at fair value, if practicable.
      This
      Statement permits, but does not require, the subsequent measurement of
      separately recognized servicing assets and servicing liabilities at fair value.
      An entity that uses derivative instruments to mitigate the risks inherent in
      servicing assets and servicing liabilities is required to account for those
      derivative instruments at fair value. Under this Statement, an entity can elect
      subsequent fair value measurement to account for its separately recognized
      servicing assets and servicing liabilities. By electing that option, an entity
      may simplify its accounting because this Statement permits income statement
      recognition of the potential offsetting changes in fair value of those servicing
      assets and servicing liabilities and derivative instruments in the same
      accounting period. This Statement is effective for financial statements for
      fiscal years beginning after September 15, 2006. Earlier adoption of this
      Statement is permitted as of the beginning of an entity’s fiscal year, provided
      the entity has not yet issued any financial statements for that fiscal year.
      Management believes this Statement will not have an impact on the financial
      statements of the Company once adopted.




5


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





Stock
      Based Compensation - Prior to October 1, 2005, the Company accounted for
      employee stock transactions in accordance with Accounting Principle Board,
      APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company had
      adopted the pro forma disclosure requirements of Statement of Financial
      Accounting Standards No. 123, “Accounting For 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.  No stock options were
      granted during the three months ended June 30, 2006. During the nine months
      ended June 30, 2006, the Company granted 170,000 stock options with a fair
      value
      of approximately $88,000. A charge of approximately $7,000 and $12,000 was
      recorded in the three and nine months ended June 30, 2006, respectively,
      relating to the amortization of the fair value associated with these grants.





For
      the
      three and nine months ended June 30, 2005, the Company applied APB Opinion
      No. 25, “Accounting for Stock Issued to Employees.”  As required under
      SFAS No. 148, “Accounting for Stock-based Compensation - Transition and
      Disclosure,” the following table presents pro forma net income and basic and
      diluted earnings per share as if the fair value-based method had been applied
      to
      all awards during that period.





Three
                months ended
            
            Nine
                months endedJune
                30, 2005
            
            June
                30, 2005Net
                income (loss) attributable to common stockholders - as
                reported
            
            $
            36,000
            
            $
            (426,000
            )Stock-based
                employee compensation cost determinedunder
                fair value method, net of tax effects
            
            
            -
            
            
            (869,000
            )Net
                income (loss) attributable to common stockholders - pro
                forma
            
            $
            36,000
            
            $
            (1,295,000
            )Earnings
                (loss) per shareBasic
                earnings (loss) per share:Net
                income (loss) attributable to common stockholders - as
                reported
            
            $
            0.01
            
            $
            (0.08
            )Per
                share stock-based employee compensation costdetermined
                under fair value method, net of tax effects
            
            
            -
            
            
            (0.17
            )Net
                income (loss) attributable to common stockholders - pro
                forma
            
            $
            0.01
            
            $
            (0.25
            )Diluted
                earnings (loss) per share:Net
                income (loss) attributable to common stockholders - as
                reported
            
            $
            0.01
            
            $
            (0.08
            )Per
                share stock-based employee compensation costdetermined
                under fair value method, net of tax effects
            
            
            -
            
            
            (0.17
            )Net
                income (loss) attributable to common stockholders - pro
                forma
            
            $
            0.01
            
            $
            (0.25
            )





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




6


2006
            
            2005Assumptions:Risk-free
                interest rate
            
            
            4.40
            %
            
            3.15
            %Expected
                life, in years
            
            
            3.0
            
            
            5.0Expected
                volatility
            
            
            88
            %
            
            135
            %





A
      summary
      of the stock option activity as of June 30, 2006, and changes during the nine
      month period then ended is presented below:





WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contractual
            
            IntrinsicShares
            
            Price
            
            Term
            
            ValueOutstanding
                at September 30, 2005
            
            
            793,667
            
            $
            1.35
            
            
            4.05Granted
            
            
            170,000
            
            $
            1.14Expired
            
            
            (31,667
            )
            $
            1.58Outstanding
                at June 30, 2006
            
            
            932,000
            
            $
            1.30
            
            
            3.58
            
            $
            266,000Exerciseable
                at June 30, 2006
            
            
            787,000
            
            $
            1.33
            
            
            3.40
            
            $
            211,000





As
      of
      June 30, 2006, there was $76,000 of total deferred compensation costs related
      to
      share-based compensation arrangements.





A
      summary
      of the status of the Company’s nonvested shares as of June 30, 2006, and changes
      during the nine month period then ended is presented below:


WeightedAverageGrant
                    DateNonvested
                    Shares
                
                Shares
                
                Fair
                    ValueNonvested
                    at September 30, 2005
                
                
                10,000
                
                $
                -Granted
                
                
                170,000
                
                $
                0.52Vested
                
                
                (31,250
                )
                $
                0.26Expired
                
                
                (3,750
                )
                $
                -Nonvested
                    at June 30, 2006
                
                
                145,000
                
                $
                0.55
  7





**NOTE
      4. SECURITIES HELD FOR RESALE AND SECURITIES SOLD, BUT NOT YET
      PURCHASED**





The
      following table shows the quoted market values of the Company's securities
      held
      for resale and securities sold, but not yet purchased as of June 30,
      2006:


Securities
                  held
              
              Securities
                  sold, butfor
                  resale
              
              not
                  yet purchasedCorporate
                  Stocks
              
              $
              418,000
              
              $
              234,000Corporate
                  Bonds
              
              
              -
              
              
              -Government
                  Obligations
              
              
              15,000
              
              
              -$
              433,000
              
              $
              234,000


**NOTE
      5. CLEARING AGREEMENTS**





In
      April
      2005, our wholly owned subsidiary, National Securities Corporation (“National
      Securities”) entered into a clearing agreement with National Financial Services
      LLC (“NFS”) that became effective in June 2005. The clearing agreement includes
      a termination fee if National Securities terminates the agreement without cause.
      Additionally, in June 2005, National Securities entered into a clearing
      agreement with Penson Financial Services, Inc. (“Penson”) for the purpose of
      providing clearing services that are not provided by NFS. The Company believes
      that the overall effect of these clearing relationships is beneficial to the
      Company’s cost structure, liquidity and capital resources.





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





The
      NASD
      was engaged in an industry-wide investigation of mutual fund trading activities.
      National Securities is one of the numerous broker-dealers that were contacted
      by
      the NASD with respect to this investigation. The NASD identified certain
      customer mutual fund transactions ordered through National Securities during
      the
      time period from October 2000 to February 2003 that it believed constituted
      mutual fund timing and/or excessive trading activity. National Securities
      engaged in discussions and negotiations with the NASD to informally resolve
      these matters. Such resolution resulted in a settlement, whereby National
      Securities, without admitting or denying any violations, agreed to make both
      restitution and pay a fine to the NASD that in the aggregate approximated
      $600,000. Additionally, the Company was obligated to pay the fines imposed
      by
      the NASD on two executive officers totaling $50,000 pursuant to its
      indemnification obligations. The unpaid balance of approximately $105,000 and
      $194,000 at
      June
      30, 2006 and 2005, respectively, has
      been
      included in “Accounts Payable, Accrued Expenses and Other Liabilities” in the
      accompanying consolidated statements of financial condition.





The
      Company is also a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims, seeking
      damages the Company approximates
      at $700,000 (exclusive of unspecified punitive damages related to certain claims
      and inclusive of expected insurance coverage). The Company has filed a
      counterclaim for approximately $220,000 in one such proceeding. These matters
      arise in the normal course of business. The Company intends to vigorously defend
      itself in these actions, and believes that the eventual outcome of these matters
      will not have a material adverse effect on the Company. However,
      the ultimate outcome of these matters cannot be determined at this time. The
      amounts related to such matters that are reasonably estimable and which have
      been accrued at June 30, 2006 and 2005, is $207,000 and $165,000 (including
      related legal fees), respectively, and have
      been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
      the accompanying consolidated statements of financial condition . The
      Company has included in “Professional fees” litigation and NASD related expenses
      of $127,000 and $163,000 for the third quarter of fiscal year 2006 and 2005,
      respectively, and $527,000 and $709,000 for the first nine months of fiscal
      year
      2006 and 2005, respectively.





8


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





The
      holders of the Company’s Series A Convertible Preferred Stock, convertible into
      the Company’s common stock at $1.25 per share, are entitled to receive dividends
      on a quarterly basis at a rate of 9% per annum per share. Such dividends are
      cumulative and are payable only when declared by the Company’s Board of
      Directors. In March 2006, the Company’s Board of Directors declared an in-kind
      dividend in the aggregate of 1,996 shares of Series A Preferred Stock, in
      payment of approximately $300,000 of dividends accrued through June 30, 2006.
      Such shares were issued on April 30, 2006. At June 30, 2006, the accumulated
      dividend on the Company’s 35,316 issued and outstanding shares of Series A
      Preferred Stock was $79,000.





The
      holders of the Company’s Series B Convertible Preferred Stock, convertible into
      the Company’s common stock at $.75 per share, are entitled to receive dividends
      on a quarterly basis at a rate of 10% per annum per share. Such dividends are
      cumulative and are payable only when declared by the Company’s Board of
      Directors. In June 2006, the Company’s Board of Directors declared a cash
      dividend of $25,000 payable to the holders of the Series B Preferred Stock
      that
      was paid in July 2006.





Both
      the
      holders of the Company’s Series A and Series B Convertible Preferred Stock have
      voting rights equal to the number of shares of Common Stock into which such
      shares of Preferred Stock could be converted at a particular record
      date.





**NOTE
      8. INCOME (LOSS) PER COMMON SHARE**





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





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





9





Three
                  Months Ended
              
              Nine
                  Months EndedJune
                  30, 2006
              
              June
                  30, 2005
              
              June
                  30, 2006
              
              June
                  30, 2005Numerator:Net
                  income (loss)
              
              $
              152,000
              
              $
              111,000
              
              $
              835,000
              
              $
              (211,000
              )Preferred
                  stock dividends
              
              
              (104,000
              )
              
              (75,000
              )
              
              (275,000
              )
              
              (215,000
              )Numerator
                  for basic earnings per share--
                  net income (loss) attributable tocommon
                  stockholders - as reported
              
              
              48,000
              
              
              36,000
              
              
              560,000
              
              
              (426,000
              )Effect
                  of dilutive securitiesInterest
                  on convertible notes
              
              
              -
              
              
              -
              
              
              51,000
              
              
              -Preferred
                  stock dividends
              
              
              -
              
              
              -
              
              
              275,000
              
              
              -Numerator
                  for basic earnings per share--
                  net income (loss) attributable tocommon
                  stockholders - as adjusted
              
              $
              48,000
              
              $
              36,000
              
              $
              886,000
              
              $
              (426,000
              )Denominator:Denominator
                  for basic earnings pershare--weighted
                  average shares
              
              
              5,223,968
              
              
              5,045,878
              
              
              5,120,290
              
              
              5,017,486Effect
                  of dilutive securities:Stock
                  options
              
              
              57,626
              
              
              24,665
              
              
              28,645
              
              
              -Warrants
              
              
              172,505
              
              
              53,318
              
              
              71,262
              
              
              -Assumed
                  conversion of Series APreferred
                  Stock
              
              
              -
              
              
              -
              
              
              2,825,280
              
              
              -Assumed
                  conversion of Series BPreferred
                  Stock
              
              
              -
              
              
              -
              
              
              1,333,333
              
              
              -Assumed
                  conversion of Note
              
              
              -
              
              
              -
              
              
              1,000,000
              
              
              -Dilutive
                  potential common shares
              
              
              230,131
              
              
              77,983
              
              
              5,258,520
              
              
              -Denominator
                  for diluted earnings pershare--adjusted
                  weighted-averageshares
                  and assumed conversions
              
              
              5,454,099
              
              
              5,123,861
              
              
              10,378,810
              
              
              5,017,486Net
                  income (loss) available tocommon
                  stockholdersBasic:
              
              $
              0.01
              
              $
              0.01
              
              $
              0.11
              
              $
              (0.08
              )Diluted:
              
              $
              0.01
              
              $
              0.01
              
              $
              0.09
              
              $
              (0.08
              )





For
      the
      three and nine-month periods ended June 30, 2006, 5,168,613 and 0 shares,
      respectively, attributable to the outstanding Series A and Series B Preferred
      Stock, and Convertible Notes, were excluded from the calculation of diluted
      net
      income per share because if included the effect would be
      anti-dilutive.





For
      the
      three months ended June 30, 2005, 2,221,331 shares attributable to the
      outstanding Series A Preferred Stock were excluded from the calculation of
      diluted net income per share because if included the effect would be
      anti-dilutive. For the nine months ended June 30, 2005, 5,365,611 shares
      attributable to the outstanding Series A Preferred Stock, stock options and
      warrants, were excluded from the calculation of diluted net income per share
      because if included the effect would be anti-dilutive.





10





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





Accounts
      payable, accrued expenses and other liabilities as of June 30, 2006 and
      September 30, 2005, respectively, consist of the following:


June
                  30, 2006
              
              September
                  30, 2005Commissions
                  payable
              
              $
              2,878,000
              
              $
              2,204,000Legal
                  payable
              
              
              312,000
              
              
              555,000Other
              
              
              1,313,000
              
              
              1,286,000Total
              
              $
              4,503,000
              
              $
              4,045,000




**NOTE
      10. NOTES PAYABLE**





In
      January 2006, t he
      Company used $1.0 million of the proceeds from a private placement (See Note
      11)
      to pay in full $1.0 million of promissory notes held by two unrelated note
      holders that had a maturity date of July 31, 2007.





In
      February 2006, National Securities and the holder of a $1.0 million secured
      demand note that was scheduled to mature on March 1, 2006, extended the term
      of
      the secured demand note to March 1, 2007.




In
      March
      2006, t he
      Company used $175,000 of the proceeds from a private placement (See Note 11)
      to
      pay in full $175,000 of promissory notes held by four unrelated note holders
      that had a maturity date of January 13, 2007.





**NOTE
      11. PRIVATE PLACEMENTS**





In
      January 2006, the Company completed a
      financing transaction pursuant to which certain new investors (collectively,
      the
“New Investors”) made a $2.0 million investment in the Company (the “New
      Transaction”) by purchasing an aggregate of the following: (i) $1 .0
      million for
      10,000 shares of the Company’s newly created Series B Preferred Stock, which has
      a 10% dividend rate and is convertible into Common Stock at a price of $.75
      per
      share, and (ii) 11 %
      convertible promissory notes in the principal amount of $1 .0
      million , which
      are
      convertible into Common Stock at a price of $1.00 per share with warrants
      to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
      of $1.00 per share.





The
      convertible promissory notes mature in January 2011, and have a stated interest
      rate of 11% per annum. The Company granted 300,000 warrants to acquire shares
      of
      common stock to the note holders, and the fair value of the warrants was
      calculated using the Black-Scholes Option Valuation Model. The Company recorded
      a debt discount of approximately $187,000 that will be charged to interest
      expense over the life of the debt.





The
      investment by the New Investors included $1.7 million by St. Cloud Capital
      Partners, L.P. (“St. Cloud”), and an aggregate of $300,000 by two unrelated
      investors. Marshall S. Geller, the Senior Managing Member of
      SCGP,
      LLC, the General Partner of St. Cloud, became a
      member of the Board of Directors of the Company
      simultaneous with the closing of the New Transaction. The
      Company incurred legal fees and other costs related to this capital transaction,
      in the amount of $56,000. The Company capitalized one-half of the fees to
      deferred financing costs that will be amortized to interest expense over the
      life of the convertible promissory notes and one-half of the fees were charged
      to paid-in capital.





11


The
      Series B Preferred Stock and warrants were accounted for in accordance with
      EITF
      98-5 and EITF 00-27. The Series B Preferred Stock is considered permanent
      equity. The warrants and conversion option are components of equity and were
      not
      determined to be a derivative liability in accordance with SFAS No. 133 (par
      11). The convertible
      promissory notes and warrants were
      accounted for in accordance with EITF 98-5 and EITF 00-27.





In
      March
      2006, the Company issued 159,090 shares of the Company’s common stock to an
      unaffiliated party for $175,000.





**NOTE
      12. REDEEMABLE SERIES B PREFERRED STOCK**





The
      Company’s Series B Preferred Stock that was issued in a private placement in
      January 2006 has been reclassified on the Company’s balance sheet as Redeemable
      Preferred Stock for the quarter ended June 30, 2006. This treatment has been
      necessitated by certain redemption rights held by the New Investors. Subsequent
      to June 30, 2006, the New Investors have agreed to waive the provision which
      allows for the contingent redemption, and it is expected that the Series B
      Preferred Stock will be reclassified as part of Stockholders’ Equity in future
      filings.





**NOTE
      13. NEW SUBSIDIARY**





In
      the
      third quarter ended June 30, 2006, the Company formed a new wholly owned
      subsidiary, National Insurance Corporation. National Insurance will provide
      fixed insurance products to its clients, including life insurance, disability
      insurance, long tem care insurance and fixed annuities. National Insurance
      is in
      the process of completing the requisite state registrations, and has not yet
      commenced business operations.








12




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





*The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. This Quarterly Report may contain certain statements
      of a forward-looking nature relating to future events or future business
      performance. Any such statements that refer to the Company’s estimated or
      anticipated future results or other non-historical facts are forward-looking
      and
      reflect the Company’s current perspective of existing trends and information.
      These statements involve risks and uncertainties that cannot be predicted or
      quantified and, consequently, actual results may differ materially from those
      expressed or implied by such forward-looking statements. Such risks and
      uncertainties include, among others, risks and uncertainties detailed in the
      Company’s Annual Report on Form 10-K, filed with the Securities and Exchange
      Commission on December 28, 2004. Any forward-looking statements contained in
      or
      incorporated into this Quarterly Report speak only as of the date of this
      Quarterly Report. The Company undertakes no obligation to update publicly any
      forward-looking statement, whether as a result of new information, future events
      or otherwise.*





**RESULTS
      OF OPERATIONS**





Three
      Months Ended June 30, 2006 Compared to Three Months Ended June 30,
      2005





The
      Company’s third quarter of fiscal year 2006 resulted in an increase in revenues,
      and a comparable increase in expenses compared
      to the same period last year. The increase in revenues is due to the stronger
      securities markets experienced by the Company in the first half of the current
      year’s quarter, and the completion of investment banking transactions in the
      current year’s quarter. As
      a
      result, the Company reported net income of $152,000, compared with net income
      of
      $111,000 (as a result of a $1.0 million conversion fee credit from the Company’s
      clearing firm), for the third quarters of fiscal years 2006 and 2005,
      respectively. This represents an improvement of $41,000 from the prior period.


Three
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2006
              
              2005
              
              Amount
              
              PercentCommissions
              
              $
              7,952,000
              
              $
              6,500,000
              
              $
              1,452,000
              
              
              22%Proprietary
                  trading
              
              
              2,133,000
              
              
              1,810,000
              
              
              323,000
              
              
              18%Market
                  making
              
              
              68,000
              
              
              -
              
              
              68,000
              
              
              n/aMark-ups
                  and mark-downs
              
              
              18,000
              
              
              -
              
              
              18,000
              
              
              n/aNet
                  dealer inventory gains
              
              
              2,219,000
              
              
              1,810,000
              
              
              409,000
              
              
              23%Investment
                  banking
              
              
              1,574,000
              
              
              278,000
              
              
              1,296,000
              
              
              466%Interest
                  and dividends
              
              
              825,000
              
              
              621,000
              
              
              204,000
              
              
              33%Transfer
                  fees and clearance services
              
              
              867,000
              
              
              681,000
              
              
              186,000
              
              
              27%Other
              
              
              547,000
              
              
              106,000
              
              
              441,000
              
              
              416%$
              13,984,000
              
              $
              9,996,000
              
              $
              3,988,000
              
              
              40%


Total
      revenues increased $3,988,000, or 40%, in the third quarter of fiscal year
      2006
      to $13,984,000 from $9,996,000 in the third quarter of fiscal year 2005. This
      increase is mainly due to the improved securities markets, and the completion
      of
      investment banking transactions. During the third quarter of fiscal year 2006,
      total trading volume increased 34%, compared to the third quarter of fiscal
      year
      2005. The lesser increase in trading volume compared to revenues reflects an
      increase in the average revenue per trade, partially offset by the Company’s
      re-entry into market making activities. Trading volume in this period related
      to
      retail brokerage increased 29%. Commission revenue increased $1,452,000, or
      22%,
      to $7,952,000 from $6,500,000 during the third quarter of fiscal year 2006
      compared with the same period in fiscal year 2005. Net dealer inventory gains,
      which includes profits on proprietary trading, market making activities and
      customer mark-ups and mark-downs, increased $409,000, or 23%, to $2,219,000
      from
      $1,810,000 during the third quarter of fiscal year 2006 compared with the same
      period in fiscal year 2005. The increase is primarily due to an increase in
      proprietary trading in the bond market, and reflects the Company’s re-entry into
      market making activities. During the third quarter of fiscal year 2006, revenues
      from proprietary trading increased $323,000, or 18%, to $2,133,000 from
      $1,810,000 in the same period of fiscal year 2005, revenues from market making
      activities increased to $68,000 from $0 in the third quarter of fiscal year
      2005, and revenues from customer mark-ups and mark-downs increased to $18,000
      from $0 in the third quarter of fiscal year 2005.





13


Investment
      banking revenue increased $1,296,000, or 466%, to $1,574,000 from $278,000
      in
      the third quarter of fiscal year 2006 compared with the third quarter of fiscal
      year 2005. The increase in investment banking revenues is attributable to the
      Company having completed investment banking transactions in the third quarter
      of
      fiscal year 2006. Interest and dividend income increased $204,000, or 33%,
      to
      $825,000 from $621,000 in the third quarter of fiscal year 2006 compared with
      the same period last year. The increase in interest income is attributable
      to an
      increase in the amount of debit balances in National Securities’ customer
      accounts from the same period last year, and higher interest rates. Transfer
      fees increased $186,000, or 27%, to $867,000 in the third quarter of fiscal year
      2006 from $681,000 in the third quarter of fiscal year 2005. The increase
      reflects higher transfer fees for trades generated from the retail brokerage
      business of brokers recently associated with the Company.





Other
      revenue, consisting of asset management fees, miscellaneous transaction fees
      and
      trading fees, and other investment income, increased $441,000, or 416%, to
      $547,000 from $106,000 during the third quarter of fiscal year 2006 compared
      to
      the third quarter of fiscal year 2005. The increase is primarily due to
      investment income realized in the Company’s venture capital fund in the third
      quarter of fiscal year 2006.


Three
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2006
              
              2005
              
              Amount
              
              PercentCommission
                  expense related to:Commission
                  revenue
              
              $
              7,111,000
              
              $
              5,708,000
              
              $
              1,403,000
              
              
              25%Net
                  dealer inventory gains
              
              
              1,753,000
              
              
              1,338,000
              
              
              415,000
              
              
              31%Investment
                  banking
              
              
              1,180,000
              
              
              223,000
              
              
              957,000
              
              
              429%Commissions
              
              
              10,044,000
              
              
              7,269,000
              
              
              2,775,000
              
              
              38%Employee
                  compensation
              
              
              1,541,000
              
              
              1,213,000
              
              
              328,000
              
              
              27%Clearing
                  fees
              
              
              405,000
              
              
              (664,000
              )
              
              1,069,000
              
              
              n/aCommunications
              
              
              296,000
              
              
              365,000
              
              
              (69,000
              )
              
              (19%)Occupancy
                  and equipment costs
              
              
              693,000
              
              
              713,000
              
              
              (20,000
              )
              
              (3%)Professional
                  fees
              
              
              246,000
              
              
              294,000
              
              
              (48,000
              )
              
              (16%)Interest
              
              
              104,000
              
              
              120,000
              
              
              (16,000
              )
              
              (13%)Taxes,
                  licenses and registration
              
              
              177,000
              
              
              102,000
              
              
              75,000
              
              
              74%Other
                  administrative expenses
              
              
              326,000
              
              
              473,000
              
              
              (147,000
              )
              
              (31%)$
              13,832,000
              
              $
              9,885,000
              
              $
              3,947,000
              
              
              40%




In
      comparison with the 40% increase in total revenues, total expenses also
      increased 40%, or $3,947,000, to $13,832,000 for the third quarter of fiscal
      year 2006 compared to $9,885,000 in the third quarter of fiscal year 2005.
      The
      increase in total expenses is primarily the result of higher commission expenses
      directly associated with commission revenues and higher net clearing fees.





14


Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $2,775,000, or 38%, to
      $10,044,000 in the third quarter of fiscal year 2006 from $7,269,000 in the
      third quarter of fiscal year 2005. Commission expense related to commission
      revenue increased $1,403,000, or 25%, to $7,111,000 in the third quarter of
      fiscal year 2006 from $5,708,000 in the third quarter of fiscal year 2005;
      commission expense related to net dealer inventory gains  increased
      $415,000, or 31%, to $1,753,000 in the third quarter of fiscal year 2006 from
      $1,338,000 in the third quarter of fiscal year 2005; and commission expense
      related to investment banking increased $957,000, or 429%, to $1,180,000 in
      the
      third quarter of fiscal year 2006 from $223,000 in the third quarter of fiscal
      year 2005. Commission expense as a percentage of commission revenues was
      relatively unchanged at 89% and 88% in the third quarter of fiscal years 2006
      and 2005, respectively. Commission expense as a percentage of net dealer
      inventory gains increased to 79% in the third quarter of fiscal year 2006 from
      74% in the third quarter of fiscal year 2005. This increase is attributable
      to
      changes in the production of particular brokers and traders, not all of who
      are
      paid at the same commission rate. Commission expense as a percentage of
      investment banking revenues decreased to 75% in the third quarter of fiscal
      year
      2006 from 80% in the third quarter of fiscal year 2005. This decrease is
      attributable to the type and size of the particular investment banking
      transactions completed in the current year’s quarter. Commission expense
      includes the amortization of advances to registered representatives of $319,000
      and $324,000 for the third quarter of fiscal years 2006 and 2005, respectively.
      These amounts fluctuate based upon the amounts of advances outstanding and
      the
      time period for which the registered representatives have agreed to be
      affiliated with National Securities.





Employee
      compensation expense increased $328,000, or 27%, to $1,541,000 in the third
      quarter of fiscal year 2006 from $1,213,000 in the third quarter of fiscal
      year
      2005. The increase is attributable to new hires in the current fiscal year.
      Overall, combined commission and employee compensation expense, as a percentage
      of revenue decreased to 83% from 85% in the third quarter of fiscal years 2006
      and 2005, respectively. The decrease is attributable to the increase in revenues
      and the fixed nature of employee compensation expense.





Clearing
      fees increased $1,069,000 to $405,000 in the third quarter of fiscal year 2006
      from a positive $664,000 in
      the
      third quarter of fiscal year 2005. The increase in clearing fees is attributable
      to the increased commission revenues in the third quarter of fiscal year 2006
      compared to the third quarter of fiscal year 2005, a different pricing structure
      for certain products with different clearing firms, and the receipt in the
      third
      quarter of fiscal year 2005 of a $1.0 million conversion fee credit from the
      Company’s clearing firm.





Communication
      expenses decreased $69,000, or 19%, to $296,000 from $365,000 in the third
      quarter of fiscal year 2006 compared to the third quarter of fiscal year 2005.
      The decrease is due to the receipt of a refund of prior periods charges from
      a
      service provider. Occupancy costs decreased $20,000, or 3%, to $693,000 from
      $713,000 in the third quarter of fiscal year 2006 compared to the third quarter
      of fiscal year 2005. The decrease in occupancy expense is due to an overall
      reduction in leased office space. Professional fees decreased $48,000, or 16%,
      to $246,000 from $294,000 in the third quarter of fiscal year 2006 compared
      to
      the third quarter of fiscal year 2005. The decrease in professional fees is
      due
      to a decrease in legal fees relating to various lawsuits and
      arbitrations.





Interest
      expense decreased $16,000, or 13%, to $104,000 from $12,000 in the third quarter
      of fiscal year 2006 compared to the third quarter of fiscal year 2005. The
      decrease is attributable to the retirement of certain debt by the Company in
      the
      second quarter of fiscal year 2006. Included in interest expense is the
      amortization of deferred financing costs of $31,000 and $43,000 for the third
      quarter of fiscal years 2006 and 2005, respectively. Taxes, licenses and
      registration increased $75,000, or 74%, to $177,000 from $102,000 in the third
      quarter of fiscal year 2006 compared to the third quarter of fiscal year 2005.
      The increase is due to registration incentives provided to certain brokers
      who
      became affiliated with the Company in fiscal year 2006. Other administrative
      expenses decreased $147,000, or 31%, to $326,000 from $473,000 in the third
      quarter of fiscal year 2006 compared to the third quarter of fiscal year 2005.
      The decrease is attributable to costs incurred relating to the Company’s change
      of clearing firms in the third quarter of fiscal year 2005.





15


The
      Company reported net income of $152,000 in the third quarter of fiscal year
      2006
      compared to net income of $111,000 in
      the
      third quarter of fiscal year 2005 .
      Overall, the diluted earnings attributable to common stockholders in the third
      quarter of fiscal year 2006 was $48,000, or $.01 per common share, as compared
      to the diluted earnings attributable to common stockholders of $36,000, or
      $.01
      per common share in the third quarter of fiscal year 2005. The net income
      attributable to common stockholders for the third quarter of fiscal years 2006
      and 2005 reflects $104,000 and $75,000 of cumulative Preferred Stock dividends
      on the Company’s Preferred Stock for the third quarter of fiscal years 2006 and
      2005, respectively.





Nine
      months Ended June 30, 2006 Compared to Nine months Ended June 30,
      2005





The
      Company’s first nine months of fiscal year 2006 resulted in an increase in
      revenues, and a comparatively lesser increase in expenses compared
      to the same period last year. The increase in revenues is primarily due to
      the
      completion of investment banking transactions in the
      first
      nine months of fiscal year 2006 . As
      a
      result, the Company reported net income of $835,000 compared with a net loss
      of
      $211,000 for the first nine months of fiscal years 2006 and 2005, respectively.
      This represents an improvement of $1,046,000 from the prior period.


Nine
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2006
              
              2005
              
              Amount
              
              PercentCommissions
              
              $
              25,823,000
              
              $
              25,646,000
              
              $
              177,000
              
              
              1%Proprietary
                  trading
              
              
              6,028,000
              
              
              4,338,000
              
              
              1,690,000
              
              
              39%Market
                  making
              
              
              151,000
              
              
              -
              
              
              151,000
              
              
              n/aMark-ups
                  and mark-downs
              
              
              91,000
              
              
              64,000
              
              
              27,000
              
              
              42%Net
                  dealer inventory gains
              
              
              6,270,000
              
              
              4,402,000
              
              
              1,868,000
              
              
              42%Investment
                  banking
              
              
              8,667,000
              
              
              516,000
              
              
              8,151,000
              
              
              1580%Interest
                  and dividends
              
              
              2,207,000
              
              
              1,983,000
              
              
              224,000
              
              
              11%Transfer
                  fees and clearance services
              
              
              2,597,000
              
              
              2,257,000
              
              
              340,000
              
              
              15%Other
              
              
              894,000
              
              
              507,000
              
              
              387,000
              
              
              76%$
              46,458,000
              
              $
              35,311,000
              
              $
              11,147,000
              
              
              32%




Total
      revenues increased $11,147,000, or 32%, in the first nine months of fiscal
      year
      2006 to $46,458,000 from $35,311,000 in the first nine months of fiscal year
      2005. This increase is mainly due to the completion of investment banking
      transactions. During the first nine months of fiscal year 2006, total trading
      volume increased 3%, compared to the first nine months of fiscal year 2005.
      The
      lesser increase in trading volume compared to revenues reflects an increase
      in
      the average revenue per trade, partially offset by the Company’s re-entry into
      market making activities. Trading volume related to retail brokerage was
      virtually the same in both periods. Commission revenue decreased $177,000,
      or
      1%, to $25,823,000 from $25,646,000 during the first nine months of fiscal
      year
      2006 compared with the same period in fiscal year 2005. Net dealer inventory
      gains, which includes profits on proprietary trading, market making activities
      and customer mark-ups and mark-downs, increased $1,868,000, or 42%, to
      $6,270,000 from $4,402,000 during the first nine months of fiscal year 2006
      compared with the same period in fiscal year 2005. The increase is primarily
      due
      to an increase in proprietary trading in the bond market, and reflects the
      Company’s re-entry into market making activities. During the first nine months
      of fiscal year 2006, revenues from proprietary trading increased $1,690,000,
      or
      39%, to $6,028,000 from $4,338,000 in the same period of fiscal year 2005,
      revenues from market making activities increased to $151,000 from $0 in the
      first nine months of fiscal year 2006, and revenues from customer mark-ups
      and
      mark-downs increased $27,000, or 42%, to $91,000 from $64,000 in the first
      nine
      months of fiscal year 2005.  ****





16


Investment
      banking revenue increased $8,151,000, or 1,580%, to $8,667,000 from $516,000
      in
      the first nine months of fiscal year 2006 compared with the first nine months
      of
      fiscal year 2005. The increase in investment banking revenues is attributable
      to
      the Company having completed investment banking transactions in the first nine
      months of fiscal year 2005. Interest and dividend income increased $224,000,
      or
      11%, to $2,207,000 from $1,983,000 in the first nine months of fiscal year
      2006
      compared with the same period last year. The increase in interest income is
      attributable to an increase in the interest rate charged for debit balances
      in
      National Securities’ customer accounts from the same period last year. Transfer
      fees increased $340,000, or 15%, to $2,597,000 in the first nine months of
      fiscal year 2006 from $2,257,000 in the first nine months of fiscal year 2005.
      The increase is due to higher transfer fees for trades generated from the retail
      brokerage business of brokers recently associated with the Company.





Other
      revenue, consisting of asset management fees, miscellaneous transaction fees
      and
      trading fees, and other investment income, increased $387,000, or 76%, to
      $894,000 from $507,000 during the third quarter of fiscal year 2006 compared
      to
      the third quarter of fiscal year 2005. The increase is primarily due to
      investment income realized in the Company’s venture capital fund in the third
      quarter of fiscal year 2006.


Nine
                  Months EndedJune
                  30,
              
              Increase
                  (Decrease)2006
              
              2005
              
              Amount
              
              PercentCommission
                  expense related to:Commission
                  revenue
              
              $
              22,833,000
              
              $
              22,002,000
              
              $
              831,000
              
              
              4%Net
                  dealer inventory gains
              
              
              4,737,000
              
              
              2,971,000
              
              
              1,766,000
              
              
              59%Investment
                  banking
              
              
              6,205,000
              
              
              415,000
              
              
              5,790,000
              
              
              1395%Commissions
              
              
              33,775,000
              
              
              25,388,000
              
              
              8,387,000
              
              
              33%Employee
                  compensation
              
              
              4,425,000
              
              
              3,765,000
              
              
              660,000
              
              
              18%Clearing
                  fees
              
              
              1,205,000
              
              
              6,000
              
              
              1,199,000
              
              
              n/aCommunications
              
              
              1,328,000
              
              
              1,200,000
              
              
              128,000
              
              
              11%Occupancy
                  and equipment costs
              
              
              2,001,000
              
              
              2,186,000
              
              
              (185,000
              )
              
              (8%)Professional
                  fees
              
              
              830,000
              
              
              1,014,000
              
              
              (184,000
              )
              
              (18%)Interest
              
              
              389,000
              
              
              347,000
              
              
              42,000
              
              
              12%Taxes,
                  licenses and registration
              
              
              490,000
              
              
              260,000
              
              
              230,000
              
              
              88%Other
                  administrative expenses
              
              
              1,180,000
              
              
              1,356,000
              
              
              (176,000
              )
              
              (13%)$
              45,623,000
              
              $
              35,522,000
              
              $
              10,101,000
              
              
              28%




In
      comparison with the 32% increase in total revenues, total expenses increased
      28%, or $10,101,000, to $45,623,000 for the first nine months of fiscal year
      2006 compared to $35,522,000 in the first nine months of fiscal year 2005.
      The
      increase in total expenses is primarily the result of higher commission expenses
      directly associated with commission revenues, particularly investment banking
      revenues.





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $8,387000, or 33%, to
      $33,775,000 in the first nine months of fiscal year 2006 from $25,388,000 in
      the
      first nine months of fiscal year 2005. Commission expense related to commission
      revenue increased $831,000, or 4%, to $22,833,000 in the first nine months
      of
      fiscal year 2006 from $22,002,000 in the first nine months of fiscal year 2005;
      commission expense related to net dealer inventory gains increased $1,766,000,
      or 59%, to $4,737,000 in the first nine months of fiscal year 2006 from
      $2,971,000 in the first nine months of fiscal year 2005; and commission expense
      related to investment banking increased $5,790,000, or 1,395%, to $6,205,000
      in
      the first nine months of fiscal year 2006 from $415,000 in the first nine months
      of fiscal year 2005. Commission expense as a percentage of commission revenues
      increased to 88% in the first nine months of fiscal year 2006 from 86% in the
      first nine months of fiscal year 2005. This increase is attributable to changes
      in the production of particular brokers, not all of who are paid at the same
      commission rate and an increase in the amortization of advances to registered
      representatives. Commission expense as a percentage of net dealer inventory
      gains increased to 76% in the first nine months of fiscal year 2006 from 67%
      in
      the first nine months of fiscal year 2005. This increase is attributable to
      changes in the production of particular brokers and traders, not all of who
      are
      paid at the same commission rate. Commission expense as a percentage of
      investment banking revenues decreased to 72% in the third quarter of fiscal
      year
      2006 from 80% in the third quarter of fiscal year 2005. This decrease is
      attributable to the type and size of the particular investment banking
      transactions completed in the current year’s quarter. Commission expense
      includes the amortization of advances to registered representatives of $936,000
      and $824,000 for the first nine months of fiscal years 2006 and 2005,
      respectively. These amounts fluctuate based upon the amounts of advances
      outstanding and the time period for which the registered representatives have
      agreed to be affiliated with National Securities.





17


Employee
      compensation expense increased $660,000, or 18%, to $4,425,000 in the first
      nine
      months of fiscal year 2006 from $3,765,000 in the first nine months of fiscal
      year 2005. The increase is attributable to new hires, bonuses based on current
      year’s profits and year-end bonuses that were paid to certain staff employees in
      the first quarter of fiscal year 2006. Overall, combined commission and employee
      compensation expense, as a percentage of revenue remained constant at
      approximately 82% in the first nine months of fiscal years 2006 and
      2005.





Clearing
      fees increased $1 ,199,000
      to $1,205,000 in the first nine months of fiscal year 2006 from $6,000 in the
      first nine months of fiscal year 2005. The increase in clearing fees is
      attributable to a different pricing structure for certain products with
      different clearing firms, and the receipt in the third quarter of fiscal year
      2005 of a $1.0 million conversion fee credit from the Company’s clearing
      firm.





Communication
      expenses increased $128,000, or 11%, to $1,328,000 from $1,200,000 in the first
      nine months of fiscal year 2006 compared to the first nine months of fiscal
      year
      2005. The increase is primarily due to telecommunication incentives provided
      to
      certain brokers who recently became affiliated with the Company, and additional
      quotation machines for the Company’s market making activities, offset by the
      receipt of a refund of prior periods charges from a service provider. Occupancy
      costs decreased $185,000, or 8%, to $2,001,000 from $2,186,000 in the first
      nine
      months of fiscal year 2006 compared to the first nine months of fiscal year
      2005. The decrease in occupancy expense is due to an overall reduction in leased
      office space. Professional fees decreased $184,000, or 18%, to $830,000 from
      $1,014,000 in the first nine months of fiscal year 2006 compared to the first
      nine months of fiscal year 2005. The decrease in professional fees is due to
      a
      decrease in legal fees relating to various lawsuits and
      arbitrations.





Interest
      expense increased $42,000, or 12%, to $389,000 from $347,000 in the first nine
      months of fiscal year 2006 compared to the first nine months of fiscal year
      2005. The increase is primarily attributable to the acceleration of amortization
      on notes that were paid prior to maturity and amortization related to new notes
      issued by the Company in the third quarter of fiscal year 2006. Included in
      interest expense is the amortization of deferred financing costs of $162,000
      and
      $127,000 for the first nine months of fiscal year 2006 and 2005, respectively.
      Taxes, licenses and registration increased $230,000, or 88%, to $490,000 from
      $260,000 in the first nine months of fiscal year 2006 compared to the first
      nine
      months of fiscal year 2005. The increase is due to registration incentives
      provided to certain brokers who became affiliated with the Company in fiscal
      year 2006, and the receipt of a refund of prior years state business taxes
      in
      fiscal year 2005. Other administrative expenses decreased $176,000, or 13%,
      to
      $1,180,000 from $1,356,000 in the first nine months of fiscal year 2006 compared
      to the first nine months of fiscal year 2005. The decrease in other expenses
      is
      due to costs incurred in fiscal year 2005 relating to the Company’s change of
      clearing firms.





The
      Company reported net income of $835,000 in the first nine months of fiscal
      year
      2006 compared to a net loss of $211,000 in
      the
      first nine months of fiscal year 2005 .
      Overall, the diluted earnings attributable to common stockholders in the first
      nine months of fiscal year 2006 was $560,000, or $.09 per common share, as
      compared to the net loss attributable to common stockholders of $426,000, or
      $.08 per common share in the first nine months of fiscal year 2005. The net
      income attributable to common stockholders for the first nine months of fiscal
      year 2006 and the net loss attributable to common stockholders for the first
      nine months of fiscal year 2005 reflects $275,000 and $215,000 of cumulative
      Preferred Stock dividends on the Company’s Preferred Stock for the
      first nine months of fiscal years 2006 and 2005, respectively .





18


**Liquidity
      and Capital Resources**





National
      Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
      Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
      National Securities has elected to use the alternative standard method permitted
      by the rule. This requires that National Securities maintain minimum net capital
      equal to the greater of $250,000 or a specified amount per security based on
      the
      bid price of each security for which National Securities is a market maker. At
      June
      30, 2006, National Securities’ net capital exceeded the requirement by
      $2,478,000.





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





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





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





In
      April
      2005, National Securities entered into a clearing agreement with NFS that became
      effective in June 2005. The clearing agreement includes a termination fee if
      National Securities terminates the agreement without cause. Additionally, in
      June 2005, National Securities entered into a clearing agreement with Penson
      for
      the purpose of providing clearing services that are not provided by NFS. The
      Company believes that the overall effect of these clearing relationships is
      beneficial to the Company’s cost structure, liquidity and capital
      resources.





In
      January 2006, the Company completed a
      financing transaction under which certain new investors made a $2.0 million
      investment in the Company by purchasing an aggregate of the following: (i) $1 .0
      million for
      10,000 shares of the Company’s newly created Series B Preferred Stock, which has
      a 10% dividend rate and is convertible into Common Stock at a price of $.75
      per
      share, and (ii) 11 %
      convertible promissory notes in the principal amount of $1 .0
      million , which
      are
      convertible into Common Stock at a price of $1.00 per share with warrants
      to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
      of $1.00 per share.





The
      convertible promissory notes mature in January 2011, and have a stated interest
      rate of 11% per annum. The Company granted 300,000 warrants to acquire shares
      of
      common stock to the note holders, and the fair value of the warrants was
      calculated using the Black-Scholes Option Valuation Model. The Company recorded
      a debt discount of approximately $187,000 that will be charged to interest
      expense over the life of the debt.





The
      investment by the New Investors included $1.7 million by St. Cloud, and an
      aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior
      Managing Member of
      SCGP,
      LLC, the General Partner of St. Cloud, became a
      member of the Board of Directors of the Company
      simultaneous with the closing of the New Transaction. The
      Company incurred legal fees and other costs related to this capital transaction,
      in the amount of $56,000. The Company capitalized one-half of the fees to
      deferred financing costs that will be amortized to interest expense over the
      life of the convertible promissory notes and one-half of the fees were charged
      to paid-in capital.





19


In
      January 2006, t he
      Company used $1.0 million of the proceeds from the above private placement
      to
      pay in full $1.0 million of promissory notes held by two unrelated note holders
      that had a maturity date of July 31, 2007.





In
      February 2006, National Securities and the holder of a $1.0 million secured
      demand note that was scheduled to mature on March 1, 2006, extended the term
      of
      the secured demand note to March 1, 2007.





In
      March
      2006, the Company issued 159,090 shares of the Company’s common stock to an
      unaffiliated party for $175,000. The proceeds from the private placement were
      used to retire $175,000 of the Company’s promissory notes that were due to
      mature in January 2007.





In
      May
      2006, the Company filed a Registration Statement on Form S-1 under the
      Securities Act of 1933 for the resale of certain shares of Common Stock and
      shares of Common Stock issuable upon the conversion of preferred stock, and
      exercise of certain warrants previously issued in connection with private
      placement transactions, and shares of Common Stock issuable upon the conversion
      of preferred stock and notes, and warrants that were issued in the private
      placement that was completed in the current fiscal year. The Registration
      Statement is currently being reviewed by the SEC.





In
      the
      quarter and nine months ended June 30, 2005 the Company received proceeds of
      approximately $12,500 and $20,000, respectively, from the exercise of
      outstanding warrants.





In
      October 2004, the Company entered into a preliminary letter of intent to
      consummate a merger or other similar combination with First Montauk Financial
      Corp. ,
      a
      publicly traded company whose wholly owned subsidiary is also a registered
      broker-dealer with a business similar to National Securities. In
      February 2005, the Company and First Montauk entered into a definitive merger
      agreement that
      was
      amended and restated in June
      2005. In October 2005, the Company and First Montauk mutually agreed to
      terminate their proposed merger. The
      Company expensed approximately $320,000 in “Professional fees” relating to the
      proposed merger with First Montauk in the fourth quarter of fiscal year
      2005.





The
      Company believes that it will have sufficient funds to maintain its current
      level of business activities during fiscal year 2006. If market conditions
      should weaken further, the Company would need to consider curtailing certain
      of
      its business activities, reducing its fixed overhead costs and/or seek
      additional sources of financing.





**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.





20


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





The
      following table shows the quoted market values of the Company's securities
      held
      for resale ("long"), securities sold, but not yet purchased ("short") and net
      positions as of June 30, 2006:


Long
              
              Short
              
              NetCorporate
                  Stocks
              
              $
              418,000
              
              $
              234,000
              
              $
              184,000Corporate
                  Bonds
              
              
              -
              
              
              -
              
              
              -Government
                  Obligations
              
              
              15,000
              
              
              -
              
              
              15,000$
              433,000
              
              $
              234,000
              
              $
              199,000




**ITEM
      4. CONTROLS AND PROCEDURES**





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





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





**PART
      II - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





During
      the quarter ended June 30, 2006, there were no significant developments in
      the
      Company’s legal proceedings. For a detailed discussion of the Company’s legal
      proceedings, please refer to Note 6 herein, and the Company’s Annual Report on
      Form 10-K for the fiscal year ended September 30, 2005.





**ITEM
      1A. RISK FACTORS**





There
      are
      no material changes from the risk factors previously disclosed in the Company’s
      Form 10-K for the year ended September 30, 2005.





21


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





In
      January 2006, the Company completed a
      financing transaction exempt
      from registration under Section 4(2) of the Securities Act of 1933, as
      amended, under
      which certain new investors made a $2.0 million investment in the Company by purchasing an aggregate of the following: (i) $1 .0
      million for
      10,000 shares of the Company’s newly created Series B Preferred Stock, which has
      a 10% dividend rate and is convertible into Common Stock at a price of $.75
      per
      share, and (ii) 11 %
      convertible promissory notes in the principal amount of $1 .0
      million , which
      are
      convertible into Common Stock at a price of $1.00 per share with warrants
      to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
      of $1.00 per share.





The
      convertible promissory notes mature in January 2011, and have a stated interest
      rate of 11% per annum. The Company granted 300,000 warrants to acquire shares
      of
      common stock to the note holders, and the fair value of the warrants was
      calculated using the Black-Scholes Option Valuation Model. The Company recorded
      a debt discount of approximately $187,000 that will be charged to interest
      expense over the life of the debt.





The
      investment by the New Investors included $1.7 million by St. Cloud, and an
      aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior
      Managing Member of
      SCGP,
      LLC, the General Partner of St. Cloud, became a
      member of the Board of Directors of the Company
      simultaneous with the closing of the New Transaction. The
      Company incurred legal fees and other costs related to this capital transaction,
      in the amount of $56,000. The Company capitalized one-half of the fees to
      deferred financing costs that will be amortized to interest expense over the
      life of the convertible promissory notes and one-half of the fees were charged
      to paid-in capital.





In
      January 2006, t he
      Company used $1.0 million of the proceeds from the above private placement
      to
      pay in full $1.0 million of promissory notes held by two unrelated note holders
      that had a maturity date of July 31, 2007.





In
      March
      2006, the Company issued 159,090 shares of the Company’s common stock to an
      unaffiliated party for $175,000 in a
      private placement exempt from registration under Section 4(2) of the Securities
      Act of 1933, as amended .
      The
      proceeds from the private placement were used to retire $175,000 of the
      Company’s promissory notes that were due to mature in January 2007.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5. OTHER INFORMATION**





None.





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





31.1
            Chief
                Executive Officer’s Certificate pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.


31.2
            Chief
                Financial Officer’s Certificate pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.


32.1
            Chief
                Executive Officer’s Certificate pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.


32.2
            Chief
                Financial Officer’s Certificate pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





22





**SIGNATURES**





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








**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARY**


August
              11, 2006
            By:
            /s/
              Mark GoldwasserMark
              GoldwasserPresident
              and Chief Executive Officer


August
              11, 2006
            By:
            /s/
              Robert H. DaskalRobert
              H. DaskalChief
                Financial Officer




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