UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.   20549
 
 FORM
10-Q
 
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
   For the Quarter
      Ended December
      31, 2008
              Commission
      File Number 001-12629
  NATIONAL
HOLDINGS CORPORATION
 (Exact
name of registrant as specified in its charter)
 Delaware
                              36-4128138(State
      or other jurisdiction of
                              (I.R.S.
      Employerincorporation
      or organization)
                              Identification
      No.)
  120 Broadway,
27th  Floor, New York, NY 10271
 (Address
including zip code of principal executive offices)
  Registrant’s
telephone number, including area code: (212)
417-8000
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]   No [ 
]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one).
  Large
      Accelerated Filer [  ]
                    Accelerated
      Filer [  ]Non-Accelerated
      Filer [  ]
                    Smaller
      Reporting Company [X]
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES [  ]  NO
[X]
 
 As of
February 14, 2009 there were 16,421,538 shares of the registrant's common stock
outstanding.
 
 
 
  NATIONAL
HOLDINGS CORPORATION
 FORM
10-Q
 QUARTERLY
PERIOD ENDED DECEMBER 31, 2008
 
 INDEX
  PART
      I – FINANCIAL INFORMATIONItem
      1 – Financial StatementsUnaudited
      Condensed Consolidated Statements of Financial Conditionas
      of December 31, 2008 and September 30, 2008
                    4Unaudited
      Condensed Consolidated Statements of Operations for theThree
      months Ended December 31, 2008 and 2007
                    5Unaudited
      Condensed Consolidated Statements of Cash Flows for theThree
      Months Ended December 31, 2008 and 2007
                    6Notes
      to Unaudited Condensed Consolidated Financial Statements
                    7Item
      2 – Management’s Discussion and Analysis of Financial
      Conditionand
      Results of Operations
                    13Item
      3 – Quantitative & Qualitative Disclosures About Market
      Risk
                    18Item
      4 – Controls and Procedures
                    18PART
      II – OTHER INFORMATIONItem
      1 – Legal Proceedings
                    19Item
      2 – Unregistered Sales of Equity Securities and Use of
      Proceeds
                    19Item
      6 – Exhibits
                    19Signatures
                    20
  
 -2-
  FORWARD-LOOKING
STATEMENTS
 
 The
following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report.  All
statements that express or involve discussions as to: expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, identified through the use of words or phrases such as we or our
management believes, expects, anticipates or hopes and words or phrases such as
will result, are expected to, will continue, is anticipated, estimated,
projection and outlook, and words of similar import) are not statements of
historical facts and may be forward-looking.  These forward-looking
statements are based largely on our expectations and are subject to a number of
risks and uncertainties including, but not limited to, economic, competitive,
regulatory, growth strategies, available financing and other factors discussed
elsewhere in this report and in the documents filed by us with the Securities
and Exchange Commission ("SEC"). Many of these factors are beyond our control.
Actual results could differ materially from the forward-looking statements we
make in this report or in other documents that reference this report. In light
of these risks and uncertainties, there can be no assurance that the results
anticipated in the forward-looking information contained in this report or other
documents that reference this report will, in fact, occur.
 
 These
forward-looking statements involve estimates, assumptions and uncertainties,
and, accordingly, actual results could differ materially from those expressed in
the forward-looking statements.  These uncertainties include, among
others, the following: (i) the inability of our broker-dealer operations to
operate profitably in the face of intense competition from larger full service
and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity
financing.
 
 Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.  New factors emerge from time to time and it is not possible
for our management to predict all of such factors, nor can our management assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
 
 
 
 -3-
 PART I.          FINANCIAL
INFORMATION
 ITEM I.            FINANCIAL
STATEMENTS
 
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONASSETS
  December
      31,
                                        
                                        
                                        September
      30,2008
                                        
                                        
                                        2008(unaudited)
                                        
                                        
                                        (see
      note below)Cash
                                        
                                        $
                                        7,352,000
                                        
                                        
                                        $
                                        7,387,000Deposit
      with clearing organizations
                                        
                                        
                                        1,261,000
                                        
                                        
                                        
                                        1,210,000Receivables
      from broker dealers and clearing organizations
                                        
                                        
                                        2,711,000
                                        
                                        
                                        
                                        3,691,000Other
      receivables, net of allowance for uncollectible accounts of
      $164,000at
      December 31, 2008 and September 30, 2008, respectively
                                        
                                        
                                        800,000
                                        
                                        
                                        
                                        580,000Advances
      to registered representatives
                                        
                                        
                                        4,236,000
                                        
                                        
                                        
                                        4,463,000Securities
      ownedMarketable,
      at market value
                                        
                                        
                                        2,051,000
                                        
                                        
                                        
                                        976,000Non-marketable,
      at fair value
                                        
                                        
                                        41,000
                                        
                                        
                                        
                                        48,000Fixed
      assets, net
                                        
                                        
                                        1,249,000
                                        
                                        
                                        
                                        1,243,000Secured
      demand note
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        500,000Intangible
      assets, net
                                        
                                        
                                        2,795,000
                                        
                                        
                                        
                                        2,950,000Other
      assets
                                        
                                        
                                        1,444,000
                                        
                                        
                                        
                                        1,429,000Total
      Assets
                                        
                                        $
                                        24,440,000
                                        
                                        
                                        $
                                        24,477,000LIABILITIES
      AND STOCKHOLDERS' EQUITYPayable
      to broker dealers and clearing organizations
                                        
                                        $
                                        300,000
                                        
                                        
                                        $
                                        730,000Securities
      sold, but not yet purchased, at market
                                        
                                        
                                        63,000
                                        
                                        
                                        
                                        63,000Accounts
      payable, accrued expenses and other liabilities
                                        
                                        
                                        13,542,000
                                        
                                        
                                        
                                        12,335,000Convertible
      notes payable, net of debt discounts of  $1,332,000
      and$1,431,000
      at December 31, 2008 and September 30, 2008, respectively
                                        
                                        
                                        4,668,000
                                        
                                        
                                        
                                        4,569,000Notes
      payable, net of debt discounts of  $16,000 and $41,000
      atDecember
      31, 2008 and September 30, 2008, respectively
                                        
                                        
                                        984,000
                                        
                                        
                                        
                                        959,000Total
      Liabilities
                                        
                                        
                                        19,557,000
                                        
                                        
                                        
                                        18,656,000Subordinated
      borrowings
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        500,000Stockholders'
      EquityPreferred
      stock, $.01 par value, 200,000 shares authorized; 50,000
      sharesdesignated
      as Series A and 20,000 shares designated as Series BSeries
      A 9% cumulative convertible preferred stock, $.01 par value,
      50,000shares
      authorized; 37,550 shares issued and outstanding
    (liquidationpreference:
      $3,755,000) at December 31, 2008 and September 30, 2008
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Series
      B 9% cumulative convertible preferred stock, $.01 par value,
      20,000shares
      authorized; 0 shares issued and outstanding (liquidationpreference:
      $0) at December 31, 2008 and September 30, 2008
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common
      stock, $.02 par value, 50,000,000 shares authorized;16,421,538
      shares issued and outstanding, at December 31, 2008and
      September 30, 2008
                                        
                                        
                                        328,000
                                        
                                        
                                        
                                        328,000Additional
      paid-in capital
                                        
                                        
                                        39,483,000
                                        
                                        
                                        
                                        39,279,000Accumulated
      deficit
                                        
                                        
                                        (35,428,000
                                        )
                                        
                                        
                                        (34,286,000
                                        )Total  Stockholders'
      Equity
                                        
                                        
                                        4,383,000
                                        
                                        
                                        
                                        5,321,000Total
      Liabilities and Stockholders' Equity
                                        
                                        $
                                        24,440,000
                                        
                                        
                                        $
                                        24,477,000
  Note:
      The balance sheet at September 30, 2008 has been derived from the audited
      consolidated financial statements at that date.See
      accompanying notes to unaudited condensed consolidated financial
      statements
  -4-
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
  Three
      Months EndedDecember
      31,2008
                                                  
                                                  
                                                  2007Revenues:Commissions
                                                  
                                                  $
                                                  12,273,000
                                                  
                                                  
                                                  $
                                                  13,292,000Net
      dealer inventory gains
                                                  
                                                  
                                                  10,229,000
                                                  
                                                  
                                                  
                                                  4,194,000Investment
      banking
                                                  
                                                  
                                                  667,000
                                                  
                                                  
                                                  
                                                  -Total
      commission and fee revenues
                                                  
                                                  
                                                  23,169,000
                                                  
                                                  
                                                  
                                                  17,486,000Interest
      and dividends
                                                  
                                                  
                                                  697,000
                                                  
                                                  
                                                  
                                                  930,000Transfer
      fees and clearing services
                                                  
                                                  
                                                  2,750,000
                                                  
                                                  
                                                  
                                                  1,311,000Other
                                                  
                                                  
                                                  1,236,000
                                                  
                                                  
                                                  
                                                  638,000Total
      Revenues
                                                  
                                                  
                                                  27,852,000
                                                  
                                                  
                                                  
                                                  20,365,000Expenses:Commissions
      and fees
                                                  
                                                  
                                                  21,067,000
                                                  
                                                  
                                                  
                                                  16,203,000Employee
      compensation and related expenses
                                                  
                                                  
                                                  3,074,000
                                                  
                                                  
                                                  
                                                  2,240,000Clearing
      fees
                                                  
                                                  
                                                  1,193,000
                                                  
                                                  
                                                  
                                                  613,000Communications
                                                  
                                                  
                                                  862,000
                                                  
                                                  
                                                  
                                                  356,000Occupancy
      and equipment costs
                                                  
                                                  
                                                  1,381,000
                                                  
                                                  
                                                  
                                                  864,000Professional
      fees
                                                  
                                                  
                                                  763,000
                                                  
                                                  
                                                  
                                                  588,000Interest
                                                  
                                                  
                                                  325,000
                                                  
                                                  
                                                  
                                                  73,000Taxes,
      licenses, registration
                                                  
                                                  
                                                  259,000
                                                  
                                                  
                                                  
                                                  130,000Other
      administrative expenses
                                                  
                                                  
                                                  70,000
                                                  
                                                  
                                                  
                                                  465,000Total
      Expenses
                                                  
                                                  
                                                  28,994,000
                                                  
                                                  
                                                  
                                                  21,532,000Net
      loss
                                                  
                                                  
                                                  (1,142,000
                                                  )
                                                  
                                                  
                                                  (1,167,000
                                                  )Preferred
      stock dividends
                                                  
                                                  
                                                  (85,000
                                                  )
                                                  
                                                  
                                                  (85,000
                                                  )Net
      loss attributable to common stockholders
                                                  
                                                  $
                                                  (1,227,000
                                                  )
                                                  
                                                  $
                                                  (1,252,000
                                                  )Net
      loss per common shareBasic:Net
      loss attributable to common stockholders
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.15
                                                  )Diluted:Net
      loss attributable to common stockholders
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.15
                                                  )Weighted
      average number of shares outstandingBasic
                                                  
                                                  
                                                  16,421,538
                                                  
                                                  
                                                  
                                                  8,602,628Diluted
                                                  
                                                  
                                                  16,421,538
                                                  
                                                  
                                                  
                                                  8,602,628
  See
      accompanying notes to unaudited condensed consolidated financial
      statements
 -5-
   NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
  Three
      Months EndedDecember
      31,2008
                                          
                                          
                                          2007Cash
      flows from operating activitiesNet
      loss
                                          
                                          $
                                          (1,142,000
                                          )
                                          
                                          $
                                          (1,167,000
                                          )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activitiesDepreciation
      and amortization
                                          
                                          
                                          324,000
                                          
                                          
                                          
                                          56,000Amortization
      of deferred financing costs
                                          
                                          
                                          14,000
                                          
                                          
                                          
                                          3,000Amortization
      of note discount
                                          
                                          
                                          123,000
                                          
                                          
                                          
                                          25,000Compensatory
      element of common stock options issuance
                                          
                                          
                                          237,000
                                          
                                          
                                          
                                          102,000Changes
      in assets and liabilitiesDeposits
      with clearing organizations
                                          
                                          
                                          (51,000
                                          )
                                          
                                          
                                          -Receivables
      from broker-dealers, clearing organizations and others
                                          
                                          
                                          987,000
                                          
                                          
                                          
                                          (182,000
                                          )Securities
      owned: marketable, at market value
                                          
                                          
                                          (1,075,000
                                          )
                                          
                                          
                                          91,000Securities
      owned: non-marketable, at fair value
                                          
                                          
                                          7,000
                                          
                                          
                                          
                                          -Other
      assets
                                          
                                          
                                          (15,000
                                          )
                                          
                                          
                                          (102,000
                                          )Payables
                                          
                                          
                                          723,000
                                          
                                          
                                          
                                          (2,328,000
                                          )Securities
      sold, but not yet purchased, at market
                                          
                                          
                                          -
                                          
                                          
                                          
                                          255,000Net
      cash provided by (used in) operating activities
                                          
                                          
                                          132,000
                                          
                                          
                                          
                                          (3,247,000
                                          )Cash
      flows from investing activitiesPurchase
      of fixed assets
                                          
                                          
                                          (167,000
                                          )
                                          
                                          
                                          (63,000
                                          )Net
      cash (used in) investing activities
                                          
                                          
                                          (167,000
                                          )
                                          
                                          
                                          (63,000
                                          )Cash
      flows from financing activitiesDeferred
      merger costs
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (162,000
                                          )Net
      cash (used in) financing activities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (162,000
                                          )Net
      decrease in cash
                                          
                                          
                                          (35,000
                                          )
                                          
                                          
                                          (3,472,000
                                          )Cash
      balanceBeginning
      of the period
                                          
                                          
                                          7,387,000
                                          
                                          
                                          
                                          4,957,000End
      of the period
                                          
                                          $
                                          7,352,000
                                          
                                          
                                          $
                                          1,485,000Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                                          
                                          $
                                          188,000
                                          
                                          
                                          $
                                          45,000Income
      taxes
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          23,000
  See
      accompanying notes to unaudited condensed consolidated financial
      statements
  -6-
 NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (UNAUDITED)
 
 NOTE
1. BASIS OF PRESENTATION
 
 The
accompanying condensed consolidated financial statements of National Holdings
Corporation (“National” or the “Company”) have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.  Accordingly, they do not include all of the information and
disclosures required for annual financial statements.  In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.  The
condensed consolidated financial statements as of December 31, 2008 and for the
periods ended December 31, 2008 and December 31, 2007 are
unaudited.  The results of operations for the interim periods are not
necessarily indicative of the results of operations for the fiscal
year.  These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
footnotes included thereto in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2008.
 
 NOTE 2. CONSOLIDATION
 
 The
condensed consolidated financial statements include the accounts of National and
its wholly owned subsidiaries.  National operates primarily through
National Securities Corporation (“National Securities”), vFinance Investments,
Inc. (“vFinance Investments”) and EquityStation, Inc. (“EquityStation”)
(collectively, the “Broker Dealer Subsidiaries”).  The Broker Dealer
Subsidiaries conduct a national securities brokerage business through its main
offices in New York, New York, Boca Raton, Florida, and Seattle,
Washington.  On July 1, 2008, National consummated a merger with
vFinance, Inc. (“vFinance”).
  Through
its Broker Dealer Subsidiaries, the Company offers (1) full service retail
brokerage to approximately 45,000 high net worth and institutional clients, (2)
provides investment banking, merger, acquisition and advisory services to micro,
small and mid-cap high growth companies, and (3) engages in trading securities,
including making markets in over 3,500 micro and small cap stocks and provides
liquidity in the United States Treasury marketplace.  The Broker
Dealer Subsidiaries are introducing brokers and clear all transactions through
clearing organizations on a fully disclosed basis.  They are
registered with the Securities and Exchange Commission ("SEC"), are members of
the Financial Industry Regulatory Authority, Inc. ("FINRA") (formerly the
National Association of Securities Dealers) and Securities Investor Protection
Corporation ("SIPC").  vFinance Investments is also a member of the
National Futures Association ("NFA").
 
 In July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc., a Washington corporation ("NAM").  NAM is a
federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed.  In March 2008, all of the issued and outstanding stock of
NAM was transferred from National Securities to National.  National
formed a new wholly owned subsidiary, National Insurance Corporation, a
Washington corporation (“National Insurance”) in the third quarter of fiscal
year 2006.  National Insurance provides fixed insurance products to
its clients, including life insurance, disability insurance, long term care
insurance and fixed annuities.  National Insurance finalized certain
requisite state registrations during the second quarter of fiscal year 2007 and
commenced business operations that to date have been de
minimus.  vFinance Lending Services, Inc. (“vFinance Lending”),
originally formed as a wholly owned subsidiary of vFinance, was established in
May 2002.  It is a mortgage lender focused primarily on the commercial
sector, providing bridge loans and commercial mortgages through its nationwide
network of lenders. Its operations to date have been de minimus.  All
significant inter-company accounts and transactions have been eliminated in
consolidation.
 
 -7-
 NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
addition to those pronouncements shown below, other pronouncements may have been
issued but deemed by management to be outside the scope of relevance to the
Company.
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141(R), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008.  The Company does not expect the provisions of
SFAS 141(R) to have a material impact on the Company's consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities--an amendment of FASB Statement No. 133" ("FAS
161").  FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities.  Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows.  The guidance in FAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged.  This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption.  The
Company does not expect the provisions of FASB 161 to have a material impact on
the Company's consolidated financial statements.
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurement (SFAS 157).  This standard clarifies the
principle that fair value should be based on the assumptions that market
participants would use when pricing an asset or
liability.  Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007.  The Company does not expect the implementation of
SFAS 157 will have a material impact on its results of operations or financial
condition.  The FASB approved the issuance of FASB Staff Position of
157-2, which defers the effective date of SFAS 157 until fiscal years beginning
after November 15, 2008 for non-financial assets and non-financial
liabilities.
 
 The FASB
issued Statement of Financial Accounting Standards No. 159, Fair Value Option
for Financial Assets and Financial Liabilities (SFAS 159).  This
standard addresses earnings volatility caused by existing accounting standards
that require related financial assets and liabilities to be measured using
different measurement attributes (such as historical cost and fair
value).  SFAS 159 is intended to improve financial reporting by giving
all entities the option to recognize most financial assets and liabilities and
certain other items at fair value.  Unrealized gains and losses on
items for which the fair value option has been elected should be reported in
earnings.  SFAS 159 is effective for the first quarter of our fiscal
2009 beginning October 1, 2008.  SFAS 159 did not have any effect on
our financial condition or results of operations.
 
 
 -8-
  NOTE 4. STOCK BASED
COMPENSATION
 
 Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment.”  This statement is a
revision of SFAS Statement No. 123 and supersedes APB Opinion No. 25,
and its related implementation guidance.  SFAS 123R addresses all
forms of share based payment (“SBP”) awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights.  Under SFAS 123R, SBP awards will result in a
charge to operations that will be measured at fair value on the awards grant
date, based on the estimated number of awards expected to vest over the service
period.   During the three months ended December 31, 2008 and December
31, 2007, the Company did not grant any stock options.  A charge of
approximately $237,000 and $102,000 was recorded in the three months ended
December 31, 2008 and 2007, respectively, relating to the amortization of the
fair value associated with stock option grants and restricted stock
grants.
 
 The
Black-Scholes option valuation model is used to estimate the fair value of the
options granted.  The model includes subjective input assumptions that
can materially affect the fair value estimates.  The model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and that are fully transferable.  For example,
the expected volatility is estimated based on the most recent historical period
of time equal to the weighted average life of the options
granted.  Options issued under the Company's option plans have
characteristics that differ from traded options.  In management's
opinion, this valuation model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 A summary
of the stock option activity as of December 31, 2008, and changes during the
three month period then ended is presented below:
  WeightedWeighted
                                                                  
                                                                  
                                                                  AverageAverage
                                                                  
                                                                  
                                                                  Remaining
                                                                  
                                                                  
                                                                  AggregateExercise
                                                                  
                                                                  
                                                                  Contractual
                                                                  
                                                                  
                                                                  IntrinsicShares
                                                                  
                                                                  
                                                                  Price
                                                                  
                                                                  
                                                                  Term
                                                                  
                                                                  
                                                                  ValueOutstanding
      at September 30, 2008
                                                                  
                                                                  
                                                                  6,887,640
                                                                  
                                                                  
                                                                  $
                                                                  1.58
                                                                  
                                                                  
                                                                  
                                                                  0.00
                                                                  
                                                                  
                                                                  $
                                                                  -Granted
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Expired
                                                                  
                                                                  
                                                                  279,475
                                                                  
                                                                  
                                                                  
                                                                  1.42
                                                                  
                                                                  
                                                                  
                                                                  2.05
                                                                  
                                                                  
                                                                  
                                                                  -Outstanding
      at December 31, 2008
                                                                  
                                                                  
                                                                  6,608,165
                                                                  
                                                                  
                                                                  $
                                                                  1.59
                                                                  
                                                                  
                                                                  
                                                                  3.80
                                                                  
                                                                  
                                                                  $
                                                                  -Exerciseable
      at December 31, 2008
                                                                  
                                                                  
                                                                  3,266,053
                                                                  
                                                                  
                                                                  $
                                                                  1.48
                                                                  
                                                                  
                                                                  
                                                                  2.82
                                                                  
                                                                  
                                                                  $
                                                                  -
  As of
December 31, 2008, there was $1,400,000 of total unrecognized deferred
compensation costs related to share-based compensation
arrangements.  The Company has experienced a historic forfeiture rate
of approximately 38% on previously granted stock options and expects that future
forfeitures will be consistent with this experience.
 
 -9-
  A summary
of the status of the Company’s nonvested shares as of December 31, 2008, and
changes during the three month period then ended is presented
below:
  WeightedAverageGrant
      DateNonvested
      Shares
                                
                                Shares
                                
                                
                                Fair
      ValueNonvested
      at September 30, 2008
                                
                                
                                3,828,774
                                
                                
                                $
                                0.92Granted
                                
                                
                                -Vested
                                
                                
                                398,860
                                
                                
                                $
                                1.38Expired
                                
                                
                                87,802
                                
                                
                                $
                                0.90Nonvested
      at December 31, 2008
                                
                                
                                3,342,112
                                
                                
                                $
                                0.79
  NOTE
      5. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
    PURCHASED
 
 The
following table shows the quoted market values of securities owned by the
Company, and securities sold but not yet purchased by the Company, as of
December 31, 2008:
  Securities
                              
                              
                              Securities
      sold, butowned
                              
                              
                              not
      yet purchasedCorporate
      stocks
                              
                              $
                              207,000
                              
                              
                              $
                              15,000Corporate
      bonds
                              
                              
                              34,000
                              
                              
                              
                              15,000Government
      obligations
                              
                              
                              1,810,000
                              
                              
                              
                              33,000Non-marketable
      securities
                              
                              
                              41,000
                              
                              
                              
                              -$
                              2,092,000
                              
                              
                              $
                              63,000
  NOTE 6. CONTINGENCIES
 
 During
the quarter ended December 31, 2008, there were no significant developments in
the Company’s legal proceedings.  For a detailed discussion of the
Company’s legal proceedings, please refer to the Company’s Annual Report on Form
10-K for the fiscal year ended September 30, 2008.
 
 The
Company’s subsidiaries are defendants in various arbitrations and administrative
proceedings, lawsuits and claims together alleging damages of approximately
$18,400,000.  The Company believes most of such claims are
substantially without merit and estimates, to the extent that it can, that its
aggregate liability from these pending actions is approximately $400,000
(exclusive of fees, costs and unspecified punitive damages related to certain
claims and inclusive of expected insurance coverage).  These matters
arise in the normal course of business.  The Company intends to
vigorously defend itself in these actions, and believes that the eventual
outcome of these matters will not have a material adverse effect on the
Company.  However, the ultimate outcome of these matters cannot be
determined at this time.  The amounts related to such matters that are
reasonably estimable and which have been accrued at December 31, 2008 and 2007,
is $228,000 and $124,000 (primarily legal fees), respectively, and have been
included in “Accounts Payable, Accrued Expenses and Other Liabilities” in the
accompanying consolidated statements of financial condition.  The
Company has included in “Professional fees” litigation and FINRA related
expenses of $41,000 and $315,000 for the first quarter of fiscal year 2009 and
2008, respectively.
 
 -10-
 NOTE
7. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
 
 The
holders of the Company’s Series A convertible preferred stock, that are
convertible into the Company’s common stock at $1.25 per share, are entitled to
receive dividends on a quarterly basis at a rate of 9% per annum, per
share.  Such dividends are cumulative and accumulate whether or not
declared by the Company’s Board of Directors, but are payable only when and if
declared by the Company’s Board of Directors.  In the quarter ended
December 31, 2008, the Company accumulated $85,000 of dividends on its Series A
preferred stock, and at December 31, 2008, the total amount of accumulated
dividends on the Company’s 37,550 issued and outstanding shares of Series A
preferred stock was approximately $593,000.
 
 NOTE
8. LOSS PER COMMON SHARE
 
 Basic
loss per share is computed on the basis of the weighted average number of common
shares outstanding.  Diluted loss per share is computed on the basis
of the weighted average number of common shares outstanding plus the potential
dilution that would occur if securities or other contracts to issue common
shares were exercised or converted.
 
 For the
three-month period ended December 31, 2008, 11,624,428 common share equivalents
were excluded from the calculation of diluted net loss per share because their
inclusion would have been anti-dilutive.  For the three-month period
ended December 31, 2007, 5,761,000 common share equivalents were excluded from
the calculation of diluted net loss per share because their inclusion would have
been anti-dilutive.
 
 The
following table sets forth the common share equivalents that were excluded from
the calculation:
 
 Three
      Months EndedDecember
      31, 2008
                              
                              
                              December
      31, 2007Stock
      options
                              
                              
                              3,266,054
                              
                              
                              
                              2,007,000Warrants
                              
                              
                              1,979,374
                              
                              
                              
                              750,000Assumed
      conversion of:Series
      A Preferred Stock
                              
                              
                              3,004,000
                              
                              
                              
                              3,004,000Notes
                              
                              
                              3,375,000
                              
                              
                              
                              -Dilutive
      potential common shares
                              
                              
                              11,624,428
                              
                              
                              
                              5,761,000
 
 -11-
  NOTE
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
 
 Accounts
payable, accrued expenses and other liabilities as of December 31, 2008 and
September 30, 2008, respectively, consist of the following:
  December
      31, 2008
                        
                        
                        September
      30, 2008Commissions
      payable
                        
                        $
                        6,044,000
                        
                        
                        $
                        6,537,000Deferred
      clearing fee credits
                        
                        
                        555,000
                        
                        
                        
                        578,000Telecommunications
      vendors payable
                        
                        
                        42,000
                        
                        
                        
                        209,000Legal
      payable
                        
                        
                        559,000
                        
                        
                        
                        646,000Deferred
      rent payable
                        
                        
                        151,000
                        
                        
                        
                        313,000Accrued
      compensation
                        
                        
                        633,000
                        
                        
                        
                        679,000Commission
      payable - Triparty clearing
                        
                        
                        280,000
                        
                        
                        
                        359,000Capital
      lease liability
                        
                        
                        649,000
                        
                        
                        
                        613,000Other
      vendors
                        
                        
                        4,629,000
                        
                        
                        
                        2,401,000Total
                        
                        $
                        13,542,000
                        
                        
                        $
                        12,335,000
  NOTE
10. NET CAPITAL REQUIREMENTS
 
 National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net
capital.  National Securities has elected to use the alternative
standard method permitted by the rule.  This requires that National
Securities maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security for which
National Securities is a market maker.  At December 31, 2008, National
Securities had net capital of approximately $797,000 which exceeded its
requirement by approximately $547,000
 
 In
addition to the net capital requirements, each of vFinance Investments and
EquityStation are required to maintain a ratio of aggregate indebtedness to net
capital, as defined, of not more than 15 to 1 (and the rule of the “applicable”
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to
1).  At December 31, 2008, vFinance Investments had net capital of
approximately $1,658,000 which was approximately $658,000 in excess of its
required net capital of $1,000,000 and its percentage of aggregate indebtedness
to net capital was 297%.  At December 31, 2008, EquityStation had net
capital of approximately $218,000 which was approximately $118,000 in excess of
its required net capital of $100,000 and its percentage of aggregate
indebtedness to net capital was 281%.  Each of the Broker Dealer
subsidiaries qualifies under the exemptive provisions of Rule 15c3-3 under
Section (k)(2)(ii) of the Rule, as none of them carry the accounts of their
customers on their books nor perform custodial functions related to customer
securities.
 
 Advances,
dividend payments and other equity withdrawals from its broker dealer
subsidiaries are restricted by the regulations of the SEC, and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.
 
 -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 29, 2008.  Any
forward-looking statements contained in or incorporated into this Quarterly
Report speak only as of the date of this Quarterly Report.  The
Company undertakes no obligation to update publicly any forward-looking
statement, whether as a result of new information, future events or
otherwise.
 
 RESULTS
OF OPERATIONS
 
 Three Months Ended December
31, 2008 Compared to Three Months Ended December 31, 2007
 
 The
Company’s first quarter of fiscal year 2009 resulted in an increase in revenues,
but a greater increase in expenses compared to the same period last
year.  As a result, the Company reported a net loss of $1,142,000
compared with a net loss of $1,167,000 for the first quarters of fiscal years
2009 and 2008, respectively.
  Three
      Months EndedDecember
      31,
                                
                                
                                Increase
      (Decrease)2008
                                
                                
                                2007
                                
                                
                                Amount
                                
                                
                                PercentCommissions
                                
                                $
                                12,273,000
                                
                                
                                $
                                13,292,000
                                
                                
                                $
                                (1,019,000
                                )
                                
                                
                                -8%Net
      dealer inventory gains
                                
                                
                                10,229,000
                                
                                
                                
                                4,194,000
                                
                                
                                
                                6,035,000
                                
                                
                                
                                144%Investment
      banking
                                
                                
                                667,000
                                
                                
                                
                                -
                                
                                
                                
                                667,000
                                
                                
                                naInterest
      and dividends
                                
                                
                                697,000
                                
                                
                                
                                930,000
                                
                                
                                
                                (233,000
                                )
                                
                                
                                -25%Transfer
      fees and clearance services
                                
                                
                                2,750,000
                                
                                
                                
                                1,311,000
                                
                                
                                
                                1,439,000
                                
                                
                                
                                110%Other
                                
                                
                                1,236,000
                                
                                
                                
                                638,000
                                
                                
                                
                                598,000
                                
                                
                                
                                94%$
                                27,852,000
                                
                                
                                $
                                20,365,000
                                
                                
                                $
                                7,487,000
                                
                                
                                
                                37%
 Total
revenues increased $7,487,000, or 37%, in the first quarter of fiscal year 2009
to $27,852,000 from $20,365,000 in the first quarter of fiscal year
2008.  The increase in revenues is due primarily to the addition of
vFinance revenues as a result of the merger.  Commission revenue
decreased $1,019,000, or 8%, to $12,273,000 from $13,292,000 during the first
quarter of fiscal year 2009 compared with the same period in fiscal year 2008,
which is attributable to adverse market conditions and the overall state of the
economy.  Net dealer inventory gains which includes profits on
proprietary trading, market making activities and customer mark-ups and
mark-downs, increased $6,035,000, or 144%, to $10,229,000 from $4,194,000 during
the first quarter of fiscal year 2009 compared with the same period in fiscal
year 2008.  The increase is due primarily to the addition of vFinance
revenues as a result of the merger.
 
 -13-
 Investment
banking revenue was $ 667,000 in the first quarter of fiscal year
2009.  These revenues were attributable to advisory and consulting
services provided during the quarter.  The Company did not complete
any investment banking transactions in the first quarter of fiscal year
2008.  Interest and dividend income decreased by $233,000 or 25%, to $
697,000 from $930,000 in the first quarter of fiscal year 2009 compared with the
same period last year.  The decrease in interest income is
attributable to generally lower customer margin account balances, lower customer
free cash balances and lower prevailing interest rates during the
quarter.  Transfer fees increased $1,439,000 or 110%, to $2,750,000 in
the first quarter of fiscal year 2009 from $1,311,000 in the first quarter of
fiscal year 2008.  The increase is due primarily to the addition of
vFinance revenues as a result of the merger.
 
 Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees and other investment income, increased $598,000, or 94%, to
$1,236,000 from $638,000 during the first quarter of fiscal year 2009 compared
to the first quarter of fiscal year 2008.  The increase is due
primarily to the addition of vFinance revenues as a result of the
merger.
 
 In
comparison with the 37% increase in total revenues, total expenses increased 35%
or $7,462,000 to $28,994,000 for the first quarter of fiscal year 2009 compared
to $21,532,000 in the first quarter of fiscal year 2008.  The increase
in total expenses is primarily a result of the addition of vFinance expenses as
a result of the merger.
  Three
      Months EndedDecember
      31,
                                                                          
                                                                          
                                                                          Increase
      (Decrease)2008
                                                                          
                                                                          
                                                                          2007
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          PercentCommissions
                                                                          
                                                                          $
                                                                          21,067,000
                                                                          
                                                                          
                                                                          $
                                                                          16,203,000
                                                                          
                                                                          
                                                                          $
                                                                          4,864,000
                                                                          
                                                                          
                                                                          
                                                                          30%Employee
      compensation
                                                                          
                                                                          
                                                                          3,074,000
                                                                          
                                                                          
                                                                          
                                                                          2,240,000
                                                                          
                                                                          
                                                                          
                                                                          834,000
                                                                          
                                                                          
                                                                          
                                                                          37%Clearing
      fees
                                                                          
                                                                          
                                                                          1,193,000
                                                                          
                                                                          
                                                                          
                                                                          613,000
                                                                          
                                                                          
                                                                          
                                                                          580,000
                                                                          
                                                                          
                                                                          
                                                                          95%Communications
                                                                          
                                                                          
                                                                          862,000
                                                                          
                                                                          
                                                                          
                                                                          356,000
                                                                          
                                                                          
                                                                          
                                                                          506,000
                                                                          
                                                                          
                                                                          
                                                                          142%Occupancy
      and equipment costs
                                                                          
                                                                          
                                                                          1,381,000
                                                                          
                                                                          
                                                                          
                                                                          864,000
                                                                          
                                                                          
                                                                          
                                                                          517,000
                                                                          
                                                                          
                                                                          
                                                                          60%Professional
      fees
                                                                          
                                                                          
                                                                          763,000
                                                                          
                                                                          
                                                                          
                                                                          588,000
                                                                          
                                                                          
                                                                          
                                                                          175,000
                                                                          
                                                                          
                                                                          
                                                                          30%Interest
                                                                          
                                                                          
                                                                          325,000
                                                                          
                                                                          
                                                                          
                                                                          73,000
                                                                          
                                                                          
                                                                          
                                                                          252,000
                                                                          
                                                                          
                                                                          
                                                                          345%Taxes,
      licenses and registration
                                                                          
                                                                          
                                                                          259,000
                                                                          
                                                                          
                                                                          
                                                                          130,000
                                                                          
                                                                          
                                                                          
                                                                          129,000
                                                                          
                                                                          
                                                                          
                                                                          99%Other
      administrative expenses
                                                                          
                                                                          
                                                                          70,000
                                                                          
                                                                          
                                                                          
                                                                          465,000
                                                                          
                                                                          
                                                                          
                                                                          (395,000
                                                                          )
                                                                          
                                                                          
                                                                          -85%$
                                                                          28,994,000
                                                                          
                                                                          
                                                                          $
                                                                          21,532,000
                                                                          
                                                                          
                                                                          $
                                                                          7,462,000
                                                                          
                                                                          
                                                                          
                                                                          35%
  Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $4,864,000, or 30%, to $
21,067,000 in the first quarter of fiscal year 2009 from $16,203,000 in the
first quarter of fiscal year 2008.  The increase is primarily
attributable to an increase in the related commission revenues from the vFinance
merger.  Commission expense includes the amortization of advances to
registered representatives of $402,000 and $491,000 for the first quarter of
fiscal years 2009 and 2008, respectively.  These amounts fluctuate
based upon the amounts of advances outstanding and the time period for which the
registered representatives have agreed to be affiliated with National
Securities.
 
 Employee
compensation expense increased $834,000, or 37%, to $3,074,000 in the first
quarter of fiscal year 2009 from $2,240,000 in the first quarter of fiscal year
2008.  The increase is primarily attributable to costs from vFinance
due to the merger Employee compensation includes the amortization of the fair
value associated with stock based compensation of $237,000 and $102,000 in first
quarter of fiscal years 2009 and 2008, respectively.  Overall,
combined commission and employee compensation expense, as a percentage of
revenue decreased to 87% from 91% in the first quarter of fiscal year 2009 and
2008, respectively.
 
 Clearing
fees increased $580,000 or 95%, to $1,193,000 in the first quarter of fiscal
year 2009 from $613,000 in the first quarter of fiscal year 2008.  The
increase in clearing fees is primarily attributable to costs from vFinance due
to the merger.  The greater increase in clearing fees as compared to
the increase in commission revenue is attributable to lower average commission
revenue per ticket in the first quarter of fiscal year 2009.
 
 -14-
 Communication
expenses increased $506,000 or 142%, to $862,000 from $356,000 in the first
quarter of fiscal year 2009 compared to the first quarter of fiscal year
2008.  The increase is due to costs from vFinance due to the
merger.  Occupancy costs increased $517,000, or 60%, to $1,381,000
from $864,000 in the first quarter of fiscal year 2009 compared to the first
quarter of fiscal year 2008.  The increase in occupancy expense is due
to annual rent increases contained in the Company’s office leases and the
addition of rented office space due to the vFinance merger.
 
 Professional
fees increased $175,000, or 30%, to $763,000 from $588,000 in the first quarter
of fiscal year 2009 compared to the first quarter of fiscal year
2008.  The increase in professional fees is primarily a result of the
filing of a registration statement and generally higher legal costs associated
with the merger with vFinance.
 
 Interest
expense increased $252,000, or 345%, to $325,000 from $73,000 in the first
quarter of fiscal year 2009 compared to the first quarter of fiscal year
2008.  The increase in interest expense is attributable to new
convertible notes issued in fiscal year 2008.  Included in interest
expense is the amortization of deferred financing costs of $137,000 and $28,000
the first quarter of fiscal years 2009 and 2008, respectively.  Taxes,
licenses and registration increased $129,000, or 99%, to $259,000 from $130,000
in the first quarter of fiscal year 2009 compared to the first quarter of fiscal
year 2008.  The increase in taxes, licenses and registration is due to
primarily attributable to costs from vFinance due to the
merger.  Other administrative expenses decreased $395,000 or 85% to
$70,000 from $465,000 in the first quarter of fiscal year 2009 compared to the
first quarter of fiscal year 2008.  The decrease is primarily
attributable to an allocation of certain fees collected from brokers to offset
operating costs of the firm.
 
 The
Company reported a net loss of $1,142,000 in the first quarter of fiscal year
2009 compared to a net loss of $1,167,000 in the first quarter of fiscal year
2008.  The net loss attributable to common stockholders in the first
quarter of fiscal year 2009 was $1,227,000, or $.07 per common share, as
compared to a net loss attributable to common stockholders in the first quarter
of fiscal year 2008 of $1,252,000, or $.15 per common share.  The net
loss attributable to common stockholders for both the first quarter of fiscal
year 2009 and 2008 reflects $85,000 of cumulative preferred stock dividends on
the Company’s preferred stock.
 
 Liquidity
and Capital Resources
 
 Our
Broker Dealer Subsidiaries are subject to the SEC's Uniform Net Capital Rule
15c3-1, which is designed to measure the general financial integrity and
liquidity of a broker-dealer and requires the maintenance of minimum net
capital.  Net capital is defined as the net worth of a broker-dealer
subject to certain adjustments.  In computing net capital, various
adjustments are made to net worth that exclude assets not readily convertible
into cash.  Additionally, the regulations require that certain assets,
such as a broker-dealer's position in securities, be valued in a conservative
manner so as to avoid over-inflation of the broker-dealer's net
capital.  National Securities has elected to use the alternative
standard method permitted by the rule.  This requires that National
Securities maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security for which
National Securities is a market maker.  At December 31, 2008, National
Securities’ net capital exceeded the requirement by $547,000.  Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain $100,000,
and at December 31, 2008 the firms had excess net capital of $658,000 and
$118,000 respectively.
 
 Advances,
dividend payments and other equity withdrawals from the Company’s subsidiary are
restricted by the regulations of the SEC and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.  During the quarter
ended December 31, 2008 the Company did not have any equity
withdrawals.
 
 The
Company extends unsecured credit in the normal course of business to its
brokers.  The determination of the appropriate amount of the reserve
for uncollectible accounts is based upon a review of the amount of credit
extended, the length of time each receivable has been outstanding, and the
specific individual brokers from whom the receivables are due.
 
 -15-
 The
objective of liquidity management is to ensure that the Company has ready access
to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
 
 National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company to borrow
securities that can be used by the Company for collateral
agreements.  In February 2008, upon the maturity of the previously
issued note, National Securities and the holder entered into a new $500,000
secured demand note collateral agreement with a maturity date of March 1, 2009.
The holder also entered into a warrant agreement to purchase 150,000 shares of
common stock at a price of $1.25 per share, with an expiration date of July 31,
2009.
 
 In
February 2007, the Company completed a financing transaction under which certain
investors purchased 10% promissory notes in the principal amount of $1.0
million, with warrants to purchase an aggregate of 250,000 shares of common
stock at an exercise price of $1.40 per share.  The promissory notes
mature in February 2009, and have a stated interest rate of 10% per
annum.  The fair value of the warrants was calculated using the
Black-Scholes Option Valuation Model.  The Company recorded a debt
discount of approximately $195,000 that is being charged to interest expense
over the life of the debt.
 
 The
Company and the investors entered into a registration rights agreement, wherein
the investors received unlimited piggyback registration rights and one demand
registration right for the shares of common stock issuable upon exercise of the
warrants.  The Company has agreed to file the registration statement
within 90 days of such demand.  The Company has agreed to use
commercially reasonable efforts to have the registration statement declared
effective.  There are no penalties for failure to have the
registration statement declared effective.  In October, 2008, the
Company filed a registration statement that includes the securities covered by
the warrants, but it has not yet been declared effective.
 
 The
investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud
Capital Partners, L.P. (“St. Cloud”).  Mr. Dewey, and Marshall S.
Geller, the Senior Managing Partner of St. Cloud, are each members of the
Company’s board of directors.  The Company incurred legal fees and
other costs related to this capital transaction in the amount of $22,000 that
were capitalized and will be amortized to interest expense over the life of the
promissory notes.
 
 On March
31, 2008, the Company completed a financing transaction under which an investor
made an investment in the Company by purchasing a convertible promissory note in
the principal amount of $3.0 million, with a warrant to purchase 375,000 shares
of common stock at an exercise price of $2.50 per share.  The
promissory note matures in March 2012, is convertible into common stock at a
price of $2.00 per share and has a stated interest rate of 10% per
annum.  Under accounting guidance provided by EITF No 98-5 and EITF
No. 00-27 the relative fair value of the warrant was calculated using the
Black-Scholes Option Valuation Model.  The Company also recorded an
additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $791,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 On June
30, 2008, the Company completed a financing transaction under which the same
investor made an additional investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0 million, with a
warrant to purchase 468,750 shares of common stock at an exercise price of $2.00
per share.  The promissory note matures in June 2012, is convertible
into common stock at a price of $1.60 per share and has a stated interest rate
of 10% per annum.  Under accounting guidance provided by EITF No 98-5
and EITF No. 00-27 the relative fair value of the warrant was calculated using
the Black-Scholes Option Valuation Model.  The Company also recorded
an additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $789,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 -16-
 The
Company and the investor entered into registration rights agreements, wherein
the Company agreed to file a registration statement for the shares of common
stock issuable upon conversion of the note and exercise of the warrant within
ninety (90) days of the effective date of the merger with vFinance, and to cause
the registration statement to be declared effective within one hundred eighty
(180) days of the effective date of such merger.  Should the Company
fail to either file the registration statement or have it declared effective
within such time limits then as liquidated damages the interest rate of the note
shall increase 1% per annum for each month the applicable failure is not cured,
up to a maximum of 15%.  The investments were made by an affiliate of
St. Cloud, whose managing partner is Mr. Geller, a member of the Company's board
of directors.  Robert W. Lautz, Jr., a Managing Director of St. Cloud,
became a member of the board of directors of the Company concurrent with the
closing of the June 2008 financing transaction.  The Company incurred
legal fees and other costs related to these capital transactions of
approximately $101,000 and $75,000, respectively that were capitalized and will
be amortized to interest expense over the life of the promissory
notes.  In October, 2008, the Company filed a registration statement
that includes the securities covered by the convertible notes and warrants, but
is has not yet been declared effective.
 
 In April
2005, National Securities entered into a clearing agreement with National
Financial Services LLC (“NFS”) that became effective in June 2005.  In
the first quarter of fiscal year 2007, NFS paid National Securities a $750,000
general business credit that is being amortized over an eight year period ending
November 2014, corresponding with the expiration date of the clearing
agreement.  In the second quarter of fiscal year 2007, NFS provided
National Securities a $250,000 clearing fee waiver that is being amortized over
a two year period ending December 2008, corresponding with the time period that
certain performance standards were to be achieved.  The clearing
agreement includes a termination fee if National Securities terminates the
agreement without cause. The Broker Dealer Subsidiaries currently have clearing
agreements with NFS, Penson Financial Services, Inc., Legent Clearing LLC and
Fortis Securities, LLC.  The Company believes that the overall effect
of its clearing relationships has been beneficial to the Company’s cost
structure, liquidity and capital resources.
 
 The
Company has historically satisfied its capital needs with cash generated from
operations or from financing activities.  The Company believes that it
will have sufficient funds to maintain its current level of business activities
during fiscal year 2009.  If market conditions should weaken, the
Company would need to consider curtailing certain of its business activities,
reducing its fixed overhead costs and/or seek additional sources of
financing.
 
 
 
 
 -17-
  ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The
Company's primary market risk arises from the fact that it engages in
proprietary trading and historically made dealer markets in equity
securities.  Accordingly, the Company may be required to maintain
certain amounts of inventories in order to facilitate customer order
flow.  The Company may incur losses as a result of price movements in
these inventories due to changes in interest rates, foreign exchange rates,
equity prices and other political factors.  The Company is not subject
to direct market risk due to changes in foreign exchange rates. However, the
Company is subject to market risk as a result of changes in interest rates and
equity prices, which are affected by global economic
conditions.   The Company manages its exposure to market risk by
limiting its net long or short positions.  Trading and inventory
accounts are monitored daily by management and the Company has instituted
position limits.
 
 Credit
risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate.  Although credit risk relating to
various financing activities is reduced by the industry practice of obtaining
and maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure.  The Company monitors its exposure to
counterparty risk on a daily basis by using credit exposure information and
monitoring collateral values.  The Company maintains a credit
committee, which reviews margin requirements for large or concentrated accounts
and sets higher requirements or requires a reduction of either the level of
margin debt or investment in high-risk securities or, in some cases, requiring
the transfer of the account to another broker-dealer.
 
 The
Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed.  There can be no assurance, however, that the
Company's risk management procedures and internal controls will prevent losses
from occurring as a result of such risks.
 
 The
following table shows the quoted market values of marketable securities owned
("long") by the Company, securities sold but not yet purchased ("short") the
Company, and net positions as of December 31, 2008:
  Long
                          
                          
                          Short
                          
                          
                          NetCorporate
      stocks
                          
                          $
                          207,000
                          
                          
                          $
                          15,000
                          
                          
                          $
                          192,000Corporate
      bonds
                          
                          
                          34,000
                          
                          
                          
                          15,000
                          
                          
                          
                          19,000Government
      obligations
                          
                          
                          1,810,000
                          
                          
                          
                          33,000
                          
                          
                          
                          1,777,000$
                          2,051,000
                          
                          
                          $
                          63,000
                          
                          
                          $
                          1,988,000
  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 Exchange Act
Rules 13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b)
or 15d-15(b), the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities,
particularly during the period in which this quarterly report on Form 10-Q was
being prepared.
 
 Changes in internal
controls.  There were no significant changes in the Company’s
internal controls or in other factors that could significantly affect those
controls and procedures subsequent to the date of our evaluation nor any
significant deficiencies or material weaknesses in such disclosure controls and
procedures requiring corrective actions.
 
 -18-
 
 PART
II – OTHER INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 During
the quarter ended December 31, 2008, 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,
2008.
 
 ITEM
1A.  RISK FACTORS
 
 There are
no material changes from the risk factors previously disclosed in the Company’s
Form 10-K for the year ended September 30, 2008.
 
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 None.
 
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 ITEM
5. OTHER INFORMATION
 
 None.
 
 ITEM
6. EXHIBITS
 
 31.1
              Chief
      Executive Officer’s Certificate pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 31.2
              Chief
      Financial Officer’s Certificate pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 32.1
              Chief
      Executive Officer’s Certificate pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 32.2
              Chief
      Financial Officer’s Certificate pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
   -19-
 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 SUBSIDIARIESFebruary
      17, 2009
                                  By:
                                  /s/ Mark
      GoldwasserMark
      Goldwasser
                                    Chief
      Executive OfficerFebruary
      17, 2009
                                  By:
                                  /s/
      Alan B. LevinAlan
      B. Levin
                                    Chief
      Financial Officer




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