UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
                the Quarter Ended March 31, 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 o





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 o
              Accelerated
                  Filer oNon-Accelerated
                  Filer o
              Smaller
                  Reporting Company x


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





As
      of May
      13, 2008 there were 8,622,628 shares of the registrant's common stock
      outstanding.








**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**CONDENSED
      CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**





**ASSETS**





March 31,
            
            September 30,2008
            
            2007(unaudited)
            
            (see note below)CASH
            
            $
            4,141,000
            
            $
            4,957,000DEPOSITS
                WITH CLEARING ORGANIZATIONS
            
            
            402,000
            
            
            402,000RECEIVABLES
                FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
            
            
            3,589,000
            
            
            4,739,000OTHER
                RECEIVABLES, net of allowance for uncollectible accounts of $467,000
                at
                March 31, 2008 and September 30, 2007, respectively
            
            
            663,000
            
            
            784,000ADVANCES
                TO REGISTERED REPRESENTATIVES
            
            
            3,594,000
            
            
            4,010,000SECURITIES
                OWNEDMarketable,
                at market value
            
            
            441,000
            
            
            1,191,000FIXED
                ASSETS, net
            
            
            294,000
            
            
            304,000SECURED
                DEMAND NOTE
            
            
            500,000
            
            
            500,000OTHER
                ASSETS
            
            
            833,000
            
            
            396,000TOTAL
                ASSETS
            
            $
            14,457,000
            
            $
            17,283,000**LIABILITIES
                AND STOCKHOLDERS' EQUITY**PAYABLE
                TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
            
            $
            17,000
            
            $
            1,115,000SECURITIES
                SOLD, BUT NOT YET PURCHASED, at market
            
            
            424,000
            
            
            77,000ACCOUNTS
                PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
            
            
            5,090,000
            
            
            7,907,000CONVERTIBLE
                NOTES PAYABLE, net of debt discount of $395,000 at March 31,
                2008
            
            
            2,605,000
            
            
            -NOTES
                PAYABLE, net of debt discounts of $89,000 and $138,000 at March 31,
                2008
                and September 30, 2007, respectively
            
            
            911,000
            
            
            862,000TOTAL
                LIABILITIES
            
            
            9,047,000
            
            
            9,961,000SUBORDINATED
                BORROWINGS
            
            
            500,000
            
            
            500,000COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS'
                EQUITYPreferred
                stock, $.01 par value, 200,000 shares authorized; 50,000 shares designated
                as Series A and 20,000 shares designated as Series BSeries
                A 9% cumulative convertible preferred stock, $.01 par value, 50,000
                shares
                authorized; 37,550 shares issued and outstanding (liquidation preference:
                $3,755,000) at March 31, 2008 and September 30, 2007
            
            
            -
            
            
            -Series
                B 9% cumulative convertible preferred stock, $.01 par value, 20,000
                shares
                authorized; 0 shares issued and outstanding (liquidation preference:
                $0)
                at March 31, 2008 and September 30, 2007
            
            
            -
            
            
            -Common
                stock, $.02 par value, 30,000,000 shares authorized; 8,622,628 and
                8,602,628 shares issued and outstanding, at March 31, 2008 and September
                30, 2007, respectively
            
            
            172,000
            
            
            172,000Additional
                paid-in capital
            
            
            20,538,000
            
            
            19,919,000Accumulated
                deficit
            
            
            (15,800,000
            )
            
            (13,269,000
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            4,910,000
            
            
            6,822,000TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            14,457,000
            
            $
            17,283,000





Note:
      The
      balance sheet at September 30, 2007 has been derived from the audited
      consolidated financial statements at that date.





**See
      notes to condensed consolidated financial statements.**


2





**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**





-------- Three Months Ended ---------
            
            -------- Six Months Ended ---------March 31,
            
            March 31,
            
            March 31,
            
            March 31,2008
            
            2007
            
            2008
            
            2007REVENUES:Commissions
            
            $
            9,924,000
            
            $
            8,522,000
            
            $
            23,216,000
            
            $
            16,944,000Net
                dealer inventory gains
            
            
            3,639,000
            
            
            3,760,000
            
            
            7,833,000
            
            
            7,059,000Investment
                banking
            
            
            67,000
            
            
            3,112,000
            
            
            67,000
            
            
            3,667,000Total
                commission and fee revenues
            
            
            13,630,000
            
            
            15,394,000
            
            
            31,116,000
            
            
            27,670,000Interest
                and dividends
            
            
            880,000
            
            
            796,000
            
            
            1,810,000
            
            
            1,361,000Transfer
                fees and clearing services
            
            
            962,000
            
            
            1,005,000
            
            
            2,273,000
            
            
            2,015,000Other
            
            
            812,000
            
            
            420,000
            
            
            1,450,000
            
            
            853,000TOTAL
                REVENUES
            
            
            16,284,000
            
            
            17,615,000
            
            
            36,649,000
            
            
            31,899,000EXPENSES:Commissions
            
            
            12,551,000
            
            
            12,392,000
            
            
            28,754,000
            
            
            22,176,000Employee
                compensation and related expenses
            
            
            2,308,000
            
            
            1,749,000
            
            
            4,549,000
            
            
            3,262,000Clearing
                fees
            
            
            522,000
            
            
            343,000
            
            
            1,136,000
            
            
            718,000Communications
            
            
            253,000
            
            
            426,000
            
            
            608,000
            
            
            828,000Occupancy
                and equipment costs
            
            
            869,000
            
            
            741,000
            
            
            1,733,000
            
            
            1,476,000Professional
                fees
            
            
            463,000
            
            
            559,000
            
            
            1,051,000
            
            
            1,517,000Interest
            
            
            70,000
            
            
            105,000
            
            
            143,000
            
            
            209,000Taxes,
                licenses, registration
            
            
            77,000
            
            
            164,000
            
            
            207,000
            
            
            342,000Other
                administrative expenses
            
            
            535,000
            
            
            560,000
            
            
            1,000,000
            
            
            880,000TOTAL
                EXPENSES
            
            
            17,648,000
            
            
            17,039,000
            
            
            39,181,000
            
            
            31,408,000NET
                (LOSS) INCOME
            
            
            (1,364,000
            )
            
            576,000
            
            
            (2,532,000
            )
            
            491,000Preferred
                stock dividends
            
            
            (83,000
            )
            
            (103,000
            )
            
            (169,000
            )
            
            (208,000
            )Net
                income attributable to common stockholders
            
            $
            (1,447,000
            )
            $
            473,000
            
            $
            (2,701,000
            )
            $
            283,000NET
                (LOSS) INCOME PER COMMON SHAREBasic:Net
                (loss) income attributable to common stockholders
            
            $
            (0.17
            )
            $
            0.09
            
            $
            (0.31
            )
            $
            0.05Diluted:Net
                (loss) income attributable to common stockholders
            
            $
            (0.17
            )
            $
            0.05
            
            $
            (0.31
            )
            $
            0.05Weighted
                average number of shares outstandingBasic
            
            
            8,609,628
            
            
            5,370,917
            
            
            8,606,090
            
            
            5,310,762Diluted
            
            
            8,609,628
            
            
            11,193,816
            
            
            8,606,090
            
            
            10,909,161





**See
      notes to condensed consolidated financial statements.**


3


**NATIONAL
        HOLDINGS CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**





----------Six
                Months Ended--------------March
                31, 2008
            
            March
                31, 2007CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            (2,532,000
            )
            $
            491,000Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activitiesDepreciation
                and amortization
            
            
            101,000
            
            
            74,000Amortization
                of deferred financing costs
            
            
            6,000
            
            
            4,000Amortization
                of note discount
            
            
            49,000
            
            
            61,000Compensatory
                element of common stock option issuances
            
            
            210,000
            
            
            29,000Changes
                in assets and liabilitiesDeposits
                with clearing organizations
            
            
            -
            
            
            (1,000
            )Receivables
                from broker-dealers, clearing organizations and others
            
            
            1,687,000
            
            
            (1,976,000
            )Securities
                owned: marketable, at market value
            
            
            750,000
            
            
            (415,000
            )Securities
                owned: non-marketable, at fair value
            
            
            -
            
            
            402,000Other
                assets
            
            
            (144,000
            )
            
            (146,000
            )Payables
            
            
            (3,908,000
            )
            
            1,392,000Securities
                sold, but not yet purchased, at market
            
            
            347,000
            
            
            14,000Net
                cash used in operating activities
            
            
            (3,434,000
            )
            
            (71,000
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of fixed assets
            
            
            (91,000
            )
            
            (58,000
            )CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                proceeds from issuance of convertible notes payable
            
            
            3,000,000
            
            
            -Net
                proceeds from issuance of notes payable
            
            
            -
            
            
            1,000,000Cash
                payment of deferred financing costs
            
            
            (80,000
            )
            
            (22,000
            )Payment
                of notes payable
            
            
            -
            
            
            (850,000
            )Dividends
                paid
            
            
            -
            
            
            (50,000
            )Deferred
                offering costs
            
            
            (219,000
            )
            
            -Exercise
                of stock options
            
            
            8,000
            
            
            14,000Exercise
                of warrants
            
            
            -
            
            
            132,000Net
                cash provided by financing activities
            
            
            2,709,000
            
            
            224,000NET
                (DECREASE) INCREASE IN CASH
            
            
            (816,000
            )
            
            95,000CASH
                BALANCEBeginning
                of the period
            
            
            4,957,000
            
            
            1,441,000End
                of the period
            
            $
            4,141,000
            
            $
            1,536,000SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the period for:Interest
            
            $
            107,000
            
            $
            163,000Income
                taxes
            
            $
            23,000
            
            $
            -Series
                B preferred stock dividends
            
            $
            -
            
            $
            50,000SUPPLEMENTAL
                DISCLOSURES OF NONCASH INVESTING ANDFINANCING
                ACTIVITIESWarrants
                issued in connection with debt
            
            $
            395,000
            
            $
            195,000Series
                A Preferred stock dividends
            
            $
            -
            
            $
            317,000


**See
      notes to condensed consolidated financial statements.**


4


**NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIES**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**


**(UNAUDITED)**





**NOTE
      1. BASIS OF PRESENTATION**





The
      accompanying condensed consolidated financial statements of National Holdings
      Corporation (“National Holdings” or the “Company”) have been prepared in
      accordance with generally accepted accounting principles for interim financial
      statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation
      S-X. Accordingly, they do not include all of the information and disclosures
      required for annual financial statements. In the opinion of management, all
      adjustments (consisting of normal recurring accruals) considered necessary
      for a
      fair presentation have been included. The condensed consolidated financial
      statements as of March 31, 2008 and for the periods ended March 31, 2008 and
      March 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, 2007.





**NOTE
      2.**  **CONSOLIDATION**





The
      condensed consolidated financial statements include the accounts of National
      Holdings and its wholly owned subsidiaries. National Securities Corporation
      (“National Securities”) is a
      Washington corporation organized in 1947 . National
      Securities conducts a national securities brokerage business through its main
      offices in Seattle, Washington and New York, New York. The
      Company’s business includes securities brokerage for individual and
      institutional clients, market-making trading activities, asset management and
      corporate finance services. National Securities is an introducing broker and
      clears all transactions through clearing
      organizations on a fully disclosed basis. National Asset Management, Inc. (“NAM”) , a
      Washington corporation, is a
      federally-registered investment adviser that provides asset management advisory
      services to high net worth clients for a fee based upon a percentage of assets
      managed. National Insurance Corporation (“National
      Insurance”) , a
      Washington corporation, provides
      fixed insurance products to its clients, including life insurance, disability insurance, long term care insurance and fixed annuities. National
      Insurance commenced business operations during the second quarter of fiscal
      year
      2007 that have been diminimus. National Securities Futures Corporation
      (“National Futures”), National Holdings Mortgage Corporation (“National
      Mortgage”), and National Group Benefits Corporation (“National Group Benefits”),
      each a Washington corporation, have not commenced active business operations.
      All significant inter-company accounts and transactions have been eliminated
      in
      consolidation.





**NOTE
      3. RECENT ACCOUNTING PRONOUNCEMENTS**





Effective
      October 1, 2007, the Company adopted the provisions of FASB Interpretation
      No.
      48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and
      a
      measurement attribute for the financial statement recognition and measurement
      of
      tax positions taken or expected to be taken in a tax return. For those benefits
      to be recognized, a tax position must be more-likely-than-not to be sustained
      upon examination by taxing authorities. Differences between tax positions taken
      or expected to be taken in a tax return and the benefit recognized and measured
      pursuant to the interpretation are referred to as "unrecognized benefits".
      A
      liability is recognized (or amount of net operating loss carry forward or amount
      of tax refundable is reduced) for an unrecognized tax benefit because it
      represents an enterprise's potential future obligation to the taxing authority
      for a tax position that was not recognized as a result of applying the
      provisions of FIN 48.





5




In
      accordance with FIN 48, interest costs related to unrecognized tax benefits
      are
      required to be calculated (if applicable) and would be classified as “Interest”
expense in the consolidated statements of operations. Penalties would be
      recognized as a component of "Other administrative expenses".





In
      many
      cases the Company's uncertain tax positions are related to tax years that remain
      subject to examination by relevant tax authorities. The Company files income
      tax
      returns in the United States (federal) and in various state and local
      jurisdictions. In most instances, the Company is no longer subject to federal,
      state and local income tax examinations by tax authorities for years prior
      to
      the fiscal year ended September 30, 2004.





The
      adoption of the provisions of FIN 48 did not have a material impact on the
      Company's financial position and results of operations. As of March 31, 2008,
      no
      liability for unrecognized tax benefits was required to be
      recorded.





The
      Company recognized a deferred tax asset of approximately $5.0 million as of
      March 31, 2008, primarily relating to net operating loss carryovers of
      approximately $12.0 million, available to offset future taxable income through
      2025.





The
      ultimate realization of deferred tax assets is dependent upon the generation
      of
      future taxable income during the periods in which those temporary differences
      become deductible. The Company considers projected future taxable income and
      tax
      planning strategies in making this assessment. At present, the Company does
      not
      have a sufficient history of income to conclude that it is more likely than
      not
      that the Company will be able to realize all of its tax benefits in the near
      future and therefore a valuation allowance was established in the full value
      of
      the deferred tax asset. A valuation allowance will be maintained until
      sufficient positive evidence exists to support the reversal of any portion
      or
      all of the valuation allowance net of appropriate reserves.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business
      Combinations”, and is effective for the Company for business combinations
      for which the acquisition date is on or after the beginning of the first annual
      reporting period beginning on or after December 15, 2008. SFAS 141(R)
      requires the new acquiring entity to recognize all assets acquired and
      liabilities assumed in the transactions; establishes an acquisition-date fair
      value for acquired assets and liabilities; and fully discloses to investors
      the
      financial effect the acquisition will have.  The Company is evaluating
      the impact of this pronouncement on the Company’s condensed consolidated
      financial position, results of operations and cash flows.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities
      to report minority interests in subsidiaries as equity in the consolidated
      financial statements, and requires that transactions between entities and
      noncontrolling interests be treated as equity.  SFAS 160 is effective
      for fiscal years, and interim periods within those fiscal years, beginning
      on or
      after December 15, 2008, and earlier adoption is prohibited. The Company is
      evaluating the impact of this pronouncement on the Company’s condensed
      consolidated financial position, results of operations and cash
      flows.




In
      March
      2008, the FASB issued Statement of Financial Accounting Standards No. 161
      "Disclosures about Derivative Instruments and Hedging Activities - an amendment
      of FASB Statement No. 133 "("SFAS 161"). SFAS 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 SFAS No. 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 SFAS 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. At this time, management is evaluating the
      implications of SFAS 161 and its impact on the condensed consolidated financial
      statements has not yet been determined.





6




**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 and
      six months ended March 31, 2007, the Company granted 570,000 and 720,000
      stock options, respectively, with a fair value of approximately $478,000 and
      $574,000, respectively. A charge of approximately $23,000 and $30,000 was
      recorded in the three and six months ended March 31, 2007, respectively,
      relating to the amortization of the fair value associated with stock option
      grants. During the three and six months ended March 31, 2008, the Company
      granted 180,000 stock options with a fair value of approximately $201,000.
      A
      charge of approximately $108,000 and $210,000 was recorded in the three and
      six
      months ended March 31, 2008, respectively, relating to the amortization of
      the fair value associated with stock option 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.
      Principal assumptions used in applying the Black-Scholes model along with the
      results from the model were as follows:


2008
              
              2007Assumptions:Risk-free
                  interest rate
              
              
              1.47%
                  - 2.19%
              
              
              4.40%Expected
                  life, in years
              
              
              3.0
              
              
              3.0Expected
                  volatility
              
              
              81%
              
              
              83%




7




A
      summary
      of the stock option activity as of March 31, 2008, and changes during the six
      month period then ended is presented below:





WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contractual
            
            IntrinsicShares
            
            Price
            
            Term
            
            ValueOutstanding
                at September 30, 2007
            
            
            2,007,000
            
            $
            1.62
            
            
            3.64
            
            $
            2,359,000Granted
            
            
            180,000
            
            $
            2.10
            
            
            4.95
            
            $
            18,000Exercised
            
            
            (20,000
            )
            $
            0.40Expired
            
            
            (75,000
            )
            $
            2.00Outstanding
                at March 31, 2008
            
            
            2,092,000
            
            $
            1.66
            
            
            3.29
            
            $
            1,204,000Exerciseable
                at March 31, 2008
            
            
            1,293,250
            
            $
            1.40
            
            
            2.89
            
            $
            1,045,000





As
      of
      March 31, 2008, there was $919,000 of total unrecognized deferred compensation
      costs related to share-based compensation arrangements, that will be amortized
      over periods ranging from six months to four years. The Company expects that
      future forfeitures will be diminimus.





A
      summary
      of the status of the Company’s nonvested shares as of March
      31 ,
      2008,
      and changes during the six month period then ended is presented
      below:




WeightedAverageGrant DateNonvested Shares
            
            Shares
            
            Fair ValueNonvested
                at September 30, 2007
            
            
            900,000
            
            $
            0.95Granted
            
            
            180,000
            
            $
            2.10Vested
            
            
            (206,250
            )
            $
            0.71Expired
            
            
            (75,000
            )
            $
            2.00Nonvested
                at March 31, 2008
            
            
            798,750
            
            $
            1.20





**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 March
      31, 2008:





Securities held
            
            Securities sold, butfor resale
            
            not yet purchasedCorporate
                stocks
            
            $
            441,000
            
            $
            38,000Corporate
                bonds
            
            
            -
            
            
            34,000Government
                obligations
            
            
            -
            
            
            352,000$
            441,000
            
            $
            424,000





8




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





In
      September 2006, the former
      chairman and chief executive officer of the Company, Steven A. Rothstein,
      commenced an arbitration against the current chairman and chief executive
      officer of the Company, Mark Goldwasser, in the matter *Rothstein
      et al. vs. Goldwasser* ,
      FINRA
      No. 06-04000.  Rothstein is alleging fraud and inequitable conduct relating
      to his attempts to sell his investment in the Company in calendar year
      2001, and is seeking approximately $5,750,000 in damages.  The
      Company is indemnifying Mr. Goldwasser in this action.  The Company
      and Mr. Goldwasser believe this action is without merit, and intend to
      vigorously defend this action. As of March 31, 2008, the outcome of this
      arbitration is not determinable and accordingly the Company has not established
      a provision for this matter.





The
      Company is a defendant in various other arbitrations and administrative
      proceedings, lawsuits and claims seeking
      in the aggregate damages of approximately $800,000. The Company believes
      such claims are substantially without merit, and estimates that its liability,
      primarily for attorney representation, will be less than $200,000 (exclusive
      of
      unspecified punitive damages related to certain claims and inclusive of expected
      insurance coverage). These matters arise in the normal course of business.
      The
      Company intends to vigorously defend itself in these actions, and believes
      that
      the eventual outcome of these matters will not have a material adverse effect
      on
      the Company. However,
      the ultimate outcome of these matters cannot be determined at this time. The
      amounts related to such matters that are reasonably estimable and which have
      been accrued at March 31, 2008 and 2007, is $91,000 and $331,000 (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 $175,000 and $344,000 for the second quarter of fiscal year 2008
      and
      2007, respectively, and $490,000 and $1,133,000 for the first six months of
      fiscal year 2008 and 2007, respectively.





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





The
      holders of the Company’s Series A convertible preferred stock, that are
      convertible into the Company’s common stock at $1.25 per share, are entitled to
      receive dividends on a quarterly basis at a rate of 9% per annum, per share.
      Such dividends are cumulative and accrue whether or not declared by the
      Company’s Board of Directors, but are payable only when, as and if declared by
      the Company’s Board of Directors. At March 31, 2008, the accumulated unpaid
      dividends on the Company’s 37,550 issued and outstanding shares of Series A
      preferred stock was $338,000.





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





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





9




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





Three Months Ended
            
            Six Months EndedMarch 31, 2008
            
            March 31, 2007
            
            March 31, 2008
            
            March 31, 2007Numerator:Net
                income (loss)
            
            $
            (1,364,000
            )
            $
            576,000
            
            $
            (2,532,000
            )
            $
            491,000Preferred
                stock dividends
            
            
            (83,000
            )
            
            (103,000
            )
            
            (169,000
            )
            
            (208,000
            )Numerator
                for basic earnings per share—
                net income (loss) attributable to common stockholders - as
                reported
            
            
            (1,447,000
            )
            
            473,000
            
            
            (2,701,000
            )
            
            283,000Effect
                of dilutive securities:Interest
                on convertible notes
            
            
            -
            
            
            27,000
            
            
            -
            
            
            54,000Preferred
                stock dividends
            
            
            -
            
            
            103,000
            
            
            -
            
            
            208,000Numerator
                for basic earnings per share—
                net income (loss) attributable to common stockholders - as
                adjusted
            
            $
            (1,447,000
            )
            $
            603,000
            
            $
            (2,701,000
            )
            $
            545,000Denominator:Denominator
                for basic earnings per share—weighted average shares
            
            
            8,609,628
            
            
            5,370,917
            
            
            8,606,090
            
            
            5,310,762Effect
                of dilutive securities:Stock
                options
            
            
            -
            
            
            207,934
            
            
            -
            
            
            104,786Warrants
            
            
            -
            
            
            277,632
            
            
            -
            
            
            156,280Assumed
                conversion of:Series
                A Preferred Stock
            
            
            -
            
            
            3,004,000
            
            
            -
            
            
            3,004,000Series
                B Preferred Stock
            
            
            -
            
            
            1,333,333
            
            
            -
            
            
            1,333,333Notes
            
            
            -
            
            
            1,000,000
            
            
            -
            
            
            1,000,000Dilutive
                potential common shares
            
            
            -
            
            
            5,822,899
            
            
            -
            
            
            5,598,399Denominator
                for diluted earnings per share—adjusted weighted-average shares and
                assumed conversions
            
            
            8,609,628
            
            
            11,193,816
            
            
            8,606,090
            
            
            10,909,161Net
                income available to common stockholdersBasic:
            
            $
            (0.17
            )
            $
            0.09
            
            $
            (0.31
            )
            $
            0.05Diluted:
            
            $
            (0.17
            )
            $
            0.05
            
            $
            (0.31
            )
            $
            0.05





For
      both
      the three and six month periods ended March 31, 2008, 7,721,000 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 and six
      month periods ended March 31, 2007, 2,744,715 and 2,969,215, respectively,
      common share equivalents were excluded from the calculation of diluted net
      loss
      per share because their inclusion would have been anti-dilutive.





10




The
      following table sets forth the common share equivalents that were excluded
      from
      the calculation:




Three Months Ended
            
            Six Months EndedMarch 31, 2008
            
            March 31, 2007
            
            March 31, 2008
            
            March 31, 2007Stock
                options
            
            
            2,092,000
            
            
            1,399,066
            
            
            2,092,000
            
            
            1,502,214Warrants
            
            
            1,125,000
            
            
            1,345,649
            
            
            1,125,000
            
            
            1,467,001Assumed
                conversion of:Series
                A Preferred Stock
            
            
            3,004,000
            
            
            -
            
            
            3,004,000
            
            
            -Series
                B Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -Notes
            
            
            1,500,000
            
            
            -
            
            
            1,500,000
            
            
            -Dilutive
                potential common shares
            
            
            7,721,000
            
            
            2,744,715
            
            
            7,721,000
            
            
            2,969,215





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





Accounts
      payable, accrued expenses and other liabilities as of March 31, 2008 and
      September 30, 2007, respectively, consist of the following:





March 31, 2008
            
            September 30, 2007Commissions
                payable
            
            $
            2,747,000
            
            $
            5,128,000Deferred
                clearing fee credits
            
            
            637,000
            
            
            828,000Telecommunications
                vendors payable
            
            
            248,000
            
            
            366,000Legal
                payable
            
            
            111,000
            
            
            84,000Deferred
                rent payable
            
            
            277,000
            
            
            133,000Other
                vendors
            
            
            1,070,000
            
            
            1,368,000Total
            
            $
            5,090,000
            
            $
            7,907,000





**NOTE
      10. NOTES PAYABLE**





In
      February 2008, National Securities and the holder of a $500,000 secured demand
      note that was scheduled to mature on March 1, 2008, extended the term of the
      secured demand note to March 1, 2009.




**NOTE
      11. PRIVATE PLACEMENT OF 10% 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. The relative fair value of the warrant of approximately $395,000 was
      calculated using the Black-Scholes Option Valuation Model. This amount has
      been
      recorded as a debt discount that will be charged to interest expense over the
      life of the promissory
      note .





The
      Company and the investor entered into a registration rights agreement, wherein
      the Company has 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 proposed merger with vFinance,
      Inc. (See Note 14), 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%.





11




The
      investment was made by St. Cloud Capital Partners II, L.P. (“St. Cloud II”),
      whose managing partner is Marshall S. Geller, a member of the Company's board
      of
      directors. The
      Company incurred legal fees and other costs related to this capital transaction of
      approximately $101,000
      that were capitalized and will be amortized to interest expense over the life
      of
      the promissory note.





**NOTE
      12. STOCKHOLDERS’ EQUITY**





In
      the
      three and six months ended March 31, 2008 the Company received proceeds of
      $8,000 from the exercise of 20,000 outstanding stock options.





**NOTE
      13. 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
      March
      31, 2008, National Securities’ net capital exceeded the requirement by
      $2,951,000.





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





**NOTE
      14. MERGER AGREEMENT**





In
      November 2007, the Company entered into a definitive merger agreement with
      vFinance, Inc., a
      publicly traded company with two wholly owned subsidiaries which are also
      registered broker-dealers with a similar business to National Securities. The
      merger agreement is subject to numerous conditions, including: execution of
      definitive transaction documents, compliance with state and federal securities
      laws and regulations, the completion of an equity or equity related financing
      with gross proceeds of at least $3.0 million, and corporate, shareholder and
      regulatory approvals. The Company has completed the equity related financing
      (See Note 11), and a Form S-4 Registration Statement was filed with the SEC
      on
      April 18, 2008 and declared effective on May 9, 2008. The merger must be
      approved by the stockholders of vFinance, Inc. at a special meeting to be held
      on June 13, 2008, and is subject to other usual closing conditions. However,
      n o
      assurance can be given that the Company will consummate the merger with vFinance,
      Inc.





The
      Company has capitalized approximately $219,000 of costs associated with this
      merger that have been included in “Other Assets” in the condensed consolidated
      statements of financial condition as of March 31, 2008. Upon the completion
      of
      the merger these costs will be included as part of the purchase price, and
      if
      the merger is not consummated the Company will record a charge to operations.





**NOTE
      15. LIQUIDITY**





During
      the six months ended March 31, 2008, the Company has incurred a net loss of
      $2,532,000. The Company has historically satisfied its capital needs with cash
      generated from operations or from financing activities. On
      March
      31, 2008, the Company issued a convertible promissory note in the principal amount of $3 .0
      million (See Note 11). The Company believes that it will have sufficient funds
      to maintain its current level of business activities during fiscal year 2008.
      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.





12




**NOTE
      16. SUBSIDIARIES**





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 the Company.





13




**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 10, 2007. Any forward-looking statements contained in
      or
      incorporated into this Quarterly Report speak only as of the date of this
      Quarterly Report. The Company undertakes no obligation to update publicly any
      forward-looking statement, whether as a result of new information, future events
      or otherwise.*





**RESULTS
      OF OPERATIONS**





Three
      Months Ended March 31, 2008 Compared to Three Months Ended March 31,
      2007





The
      Company’s second quarter of fiscal year 2008 resulted in a decrease in revenues,
      and an increase in expenses compared
      to the same period last year. As
      a
      result, the Company reported a net loss of $1,364,000 compared with net income
      of $576,000 for the second quarter of fiscal years 2008 and 2007, respectively.





Three Months EndedMarch 31,
            
            Increase (Decrease)2008
            
            2007
            
            Amount
            
            PercentCommissions
            
            $
            9,924,000
            
            $
            8,522,000
            
            $
            1,402,000
            
            
            16
            %Proprietary
                trading
            
            
            3,580,000
            
            
            3,498,000
            
            
            82,000
            
            
            2
            %Market
                making
            
            
            8,000
            
            
            168,000
            
            
            (160,000
            )
            
            (95
            %)Mark-ups
                and mark-downs
            
            
            51,000
            
            
            94,000
            
            
            (43,000
            )
            
            (46
            %)Net
                dealer inventory gains
            
            
            3,639,000
            
            
            3,760,000
            
            
            (121,000
            )
            
            (3
            %)Investment
                banking
            
            
            67,000
            
            
            3,112,000
            
            
            (3,045,000
            )
            
            (98
            %)Interest
                and dividends
            
            
            880,000
            
            
            796,000
            
            
            84,000
            
            
            11
            %Transfer
                fees and clearance services
            
            
            962,000
            
            
            1,005,000
            
            
            (43,000
            )
            
            (4
            %)Other
            
            
            812,000
            
            
            420,000
            
            
            392,000
            
            
            93
            %$
            16,284,000
            
            $
            17,615,000
            
            $
            (1,331,000
            )
            
            (8
            %)





Total
      revenues decreased $1,331,000, or 8%, in the second quarter of fiscal year
      2008
      to $16,284,000 from $17,615,000 in the second quarter of fiscal year 2007.
      This
      decrease is due to a decline in investment banking revenue, partially offset
      by
      an increase in commission revenue. During the second quarter of fiscal year
      2008, total trading volume increased 3%, compared to the second quarter of
      fiscal year 2007. The increase in revenues and trading volume is due to an
      increase in the number of registered representatives associated with the
      Company, offset in part by a decline in market making activities. Trading volume
      in this period related to retail brokerage increased 10%. Commission revenue
      increased $1,402,000, or 16%, to $9,924,000 from $8,522,000 during the second
      quarter of fiscal year 2008 compared with the same period in fiscal year 2007.
      Net dealer inventory gains, which includes profits on proprietary trading,
      market making activities and customer mark-ups and mark-downs, decreased
      $121,000, or 3%, to $3,639,000 from $3,760,000 during the second quarter of
      fiscal year 2008 compared with the same period in fiscal year 2007. The decrease
      is due to a decline in market making activities and customer mark-ups and
      mark-downs. During the second quarter of fiscal year 2008, revenues from
      proprietary trading increased $82,000, or 2%, to $3,580,000 from $3,498,000
      in
      the same period of fiscal year 2007, revenues from market making activities
      decreased $160,000, or 95%, to $8,000 from $168,000 in the second quarter of
      fiscal year 2007, and revenues from customer mark-ups and mark-downs decreased
      $43,000, or 46%, to $51,000 from $94,000 in the second quarter of fiscal year
      2007. ****





14




Investment
      banking revenue decreased $3,045,000, or 98%, to $67,000 from $3,112,000 in
      the
      second quarter of fiscal year 2008 compared with the second quarter of fiscal
      year 2007. The Company did not complete any investment banking transactions
      in
      the second quarter of fiscal year 2008, and received only modest fee income.
      Interest and dividend income increased $84,000, or 11%, to $880,000 from
      $796,000 in the second quarter of fiscal year 2008 compared with the same period
      last year. The increase in interest income is attributable to an increase in
      the
      amount of debit balances in National Securities’ customer accounts from the same
      period last year. Transfer fees decreased $43,000, or 4%, to $962,000 in the
      second quarter of fiscal year 2008 from $1,005,000 in the second quarter of
      fiscal year 2007. The decrease reflects certain production that does not
      generate a charge for transfer fees.





Other
      revenue, consisting of asset management fees, miscellaneous transaction fees,
      trading fees and other investment income, increased $392,000, or 93%, to
      $812,000 from $420,000 during the second quarter of fiscal year 2008 compared
      to
      the second quarter of fiscal year 2007. The increase is due to an increase
      in
      fee based assets under management.





In
      comparison with the 8% decrease in total revenues, total expenses increased
      4%,
      or $609,000, to $17,648,000 for the second quarter of fiscal year 2008 compared
      to $17,039,000 in the second quarter of fiscal year 2007. The increase in total
      expenses is primarily the result of greater employee compensation.





Three Months EndedMarch 31,
            
            Increase (Decrease)2008
            
            2007
            
            Amount
            
            PercentCommission
                expense related to:Commission
                revenue
            
            $
            9,430,000
            
            $
            7,629,000
            
            $
            1,801,000
            
            
            24
            %Net
                dealer inventory gains
            
            
            3,121,000
            
            
            2,927,000
            
            
            194,000
            
            
            7
            %Investment
                banking
            
            
            -
            
            
            1,836,000
            
            
            (1,836,000
            )
            
            (100
            %)Commissions
            
            
            12,551,000
            
            
            12,392,000
            
            
            159,000
            
            
            1
            %Employee
                compensation
            
            
            2,308,000
            
            
            1,749,000
            
            
            559,000
            
            
            32
            %Clearing
                fees
            
            
            522,000
            
            
            343,000
            
            
            179,000
            
            
            52
            %Communications
            
            
            253,000
            
            
            426,000
            
            
            (173,000
            )
            
            (41
            %)Occupancy
                and equipment costs
            
            
            869,000
            
            
            741,000
            
            
            128,000
            
            
            17
            %Professional
                fees
            
            
            463,000
            
            
            559,000
            
            
            (96,000
            )
            
            (17
            %)Interest
            
            
            70,000
            
            
            105,000
            
            
            (35,000
            )
            
            (33
            %)Taxes,
                licenses and registration
            
            
            77,000
            
            
            164,000
            
            
            (87,000
            )
            
            (53
            %)Other
                administrative expenses
            
            
            535,000
            
            
            560,000
            
            
            (25,000
            )
            
            (4
            %)$
            17,648,000
            
            $
            17,039,000
            
            $
            609,000
            
            
            4
            %





Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $159,000, or 1%, to
      $12,551,000 in the second quarter of fiscal year 2008 from $12,392,000 in the
      second quarter of fiscal year 2007. Commission expense related to
      commission  revenue
      increased $1,801,000, or 24%, to $9,430,000 in the second quarter of fiscal
      year
      2008 from $7,629,000 in the second quarter of fiscal year 2007; and commission
      expense related to net dealer inventory gains increased $194,000, or 7%, to
      $3,121,000 in the second quarter of fiscal year 2008 from $2,927,000 in the
      second quarter of fiscal year 2007. Commission expense as a percentage of
      commission revenues  increased
      to 95% in the second quarter of fiscal year 2008 from 90% in the second quarter
      of fiscal year 2007. This increase is attributable to changes in the production
      of particular brokers, not all of who are paid at the same commission rate
      and
      higher payouts for registered representatives recently affiliated with the
      Company. Commission expense as a percentage of net dealer inventory gains
      increased to 86% in the second quarter of fiscal year 2008 from 78% in the
      second quarter of fiscal year 2007. This increase is attributable to changes
      in
      the securities traded, and their related commission payouts. Commission expense
      includes the amortization of advances to registered representatives of $313,000
      and $346,000 for the second quarter of fiscal years 2008 and 2007, 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.





15




Employee
      compensation expense increased $559,000, or 32%, to $2,308,000 in the second
      quarter of fiscal year 2008 from $1,749,000 in the second quarter of fiscal
      year
      2007. The increase is attributable to new employees hired during fiscal years
      2008 and 2007, and salary increases for certain employees. Overall, combined
      commission and employee compensation expense, as a percentage of revenue
      increased to 91% from 80% in the second quarter of fiscal years 2008 and 2007,
      respectively.





Clearing
      fees increased $179,000, or 52%, to $522,000 in the second quarter of fiscal
      year 2008 from $343,000 in
      the
      second quarter of fiscal year 2007. The increase in clearing fees is
      attributable to the increase in commission revenue in the second quarter of
      fiscal year 2008 as compared to the second quarter of fiscal year 2007. 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
      second quarter of fiscal year 2008.





Communications
      expense decreased $173,000, or 41%, to $253,000 from $426,000 in the second
      quarter of fiscal year 2008 compared to the second quarter of fiscal year 2007.
      The decrease is due to the Company’s ability to acquire certain of these
      services at a lower price. Occupancy costs increased $128,000, or 17%, to
      $869,000 from $741,000 in the second quarter of fiscal year 2008 compared to
      the
      second quarter of fiscal year 2007. The increase in occupancy expense is
      primarily due to annual rent increases contained in the Company’s office leases.
      Professional fees decreased $96,000, or 17%, to $463,000 from $559,000 in the
      second quarter of fiscal year 2008 compared to the second quarter of fiscal
      year
      2007. The decrease in professional fees is primarily a result of legal fees
      and
      costs incurred to settle certain arbitrations in the second quarter of fiscal
      year 2007.





Interest
      expense decreased $35,000, or 33%, to $70,000 from $105,000 in the second
      quarter of fiscal year 2008 compared to the second quarter of fiscal year 2007.
      The decrease in interest expense is due to the retirement of certain debt in
      fiscal year 2007. Taxes, licenses and registration decreased $87,000, or 53%,
      to
      $77,000 from $164,000 in the second quarter of fiscal year 2008 compared to
      the
      second quarter of fiscal year 2007. The decrease in taxes, licenses and
      registration is due to lower registration fees paid on behalf of brokers in
      the
      second quarter of fiscal year 2008 compared to the second quarter of fiscal
      year
      2007. Other administrative expenses decreased $25,000, or 4%, to $535,000 from
      $560,000 in the second quarter of fiscal year 2008 compared to the second
      quarter of fiscal year 2007.





The
      Company reported a net loss of $1,364,000 in the second quarter of fiscal year
      2008 compared to net income of $576,000 in
      the
      second quarter of fiscal year 2007 .
      The net
      loss attributable to common stockholders in the second quarter of fiscal year
      2008 was $1,447,000, or $.17 per common share, as compared to the diluted
      earnings attributable to common stockholders of $473,000, or $.05 per common
      share, in the second quarter of fiscal year 2007. The net income attributable
      to
      common stockholders reflects $83,000 and $103,000 of cumulative preferred stock
      dividends on the Company’s preferred stock for the second quarter of fiscal
      years 2008 and 2007, respectively.





Six
      Months Ended March 31, 2008 Compared to Six Months Ended March 31,
      2007





The
      Company’s first six months of fiscal year 2008 resulted in an increase in
      revenues, and a greater increase in expenses compared
      to the same period last year. As
      a
      result, the Company reported a net loss of $2,532,000 compared with net income
      of $491,000 for the first six months of fiscal years 2008 and 2007,
      respectively.




16




Six Months EndedMarch 31,
            
            Increase (Decrease)2008
            
            2007
            
            Amount
            
            PercentCommissions
            
            $
            23,216,000
            
            $
            16,944,000
            
            $
            6,272,000
            
            
            37
            %Proprietary
                trading
            
            
            7,679,000
            
            
            6,299,000
            
            
            1,380,000
            
            
            22
            %Market
                making
            
            
            143,000
            
            
            615,000
            
            
            (472,000
            )
            
            (77
            %)Mark-ups
                and mark-downs
            
            
            11,000
            
            
            145,000
            
            
            (134,000
            )
            
            (92
            %)Net
                dealer inventory gains
            
            
            7,833,000
            
            
            7,059,000
            
            
            774,000
            
            
            11
            %Investment
                banking
            
            
            67,000
            
            
            3,667,000
            
            
            (3,600,000
            )
            
            (98
            %)Interest
                and dividends
            
            
            1,810,000
            
            
            1,361,000
            
            
            449,000
            
            
            33
            %Transfer
                fees and clearance services
            
            
            2,273,000
            
            
            2,015,000
            
            
            258,000
            
            
            13
            %Other
            
            
            1,450,000
            
            
            853,000
            
            
            597,000
            
            
            70
            %$
            36,649,000
            
            $
            31,899,000
            
            $
            4,750,000
            
            
            15
            %





Total
      revenues increased $4,750,000, or 15%, in the first six months of fiscal year
      2008 to $36,649,000 from $31,899,000 in the first six months of fiscal year
      2007. This increase is due to increases in commissions and net dealer inventory
      gains, partially offset by a decline in investment banking revenue. During
      the
      first six months of fiscal year 2008, total trading volume increased 28%,
      compared to the first six months of fiscal year 2007. The increase in revenues
      and trading volume is due to an increase in the number of registered
      representatives associated with the Company, offset in part by a decline in
      market making activities. Trading volume in this period related to retail
      brokerage increased 38%. Commission revenue increased $6,272,000, or 37%, to
      $23,216,000 from $16,944,000 during the first six months of fiscal year 2008
      compared with the same period in fiscal year 2007. Net dealer inventory gains,
      which includes profits on proprietary trading, market making activities and
      customer mark-ups and mark-downs, increased $774,000, or 11%, to $7,833,000
      from
      $7,059,000 during the first six months of fiscal year 2008 compared with the
      same period in fiscal year 2007. The increase is due to increased trading
      activity in foreign securities partially offset set by a decline in market
      making activities and customer mark-ups and mark-downs. During the first six
      months of fiscal year 2008, revenues from proprietary trading increased
      $1,380,000, or 22%, to $7,679,000 from $6,299,000 in the same period of fiscal
      year 2007, revenues from market making activities decreased $472,000, or 77%,
      to
      $143,000 from $615,000 in the first six months of fiscal year 2007, and revenues
      from customer mark-ups and mark-downs decreased $134,000, or 92%, to $11,000
      from $145,000 in the first six months of fiscal year 2007. ****





Investment
      banking revenue decreased $3,600,000, or 98%, to $67,000 from $3,667,000 in
      the
      first six months of fiscal year 2008 compared with the first six months of
      fiscal year 2007. The Company did not complete any investment banking
      transactions in the first six months of fiscal year 2008, and received only
      modest fee income. Interest and dividend income decreased $449,000, or 33%,
      to
      $1,810,000 from $1,361,000 in the first six months of fiscal year 2008 compared
      with the same period last year. The increase in interest income is attributable
      to an increase in the amount of debit balances in National Securities’ customer
      accounts from the same period last year, and an
      adjustment of the interest sharing agreement with one of the Company’s clearing
      firms. Transfer
      fees increased $258,000, or 13%, to $2,273,000 in the first six months of fiscal
      year 2008 from $2,015,000 in the first six months of fiscal year 2007. The
      increase is due to the higher trading volume experienced during the first
      quarter of fiscal year 2008.





Other
      revenue, consisting of asset management fees, miscellaneous transaction fees,
      trading fees and other investment income, increased $597,000, or 70%, to
      $1,450,000 from $853,000 during the first six months of fiscal year 2008
      compared to the first six months of fiscal year 2007. The increase is due to
      an
      increase in fee based assets under management.




17


In
        comparison with the 15% increase in total revenues, total expenses increased
        25%, or $7,773,000, to $39,181,000 for the first six months of fiscal year
        2008
        compared to $31,408,000 in the first six months of fiscal year 2007. The
        increase in total expenses is primarily the result of greater commission
        expense
        and employee compensation.


Six Months EndedMarch 31,
            
            Increase (Decrease)2008
            
            2007
            
            Amount
            
            PercentCommission
                expense related to:Commission
                revenue
            
            $
            22,190,000
            
            $
            14,962,000
            
            $
            7,228,000
            
            
            48
            %Net
                dealer inventory gains
            
            
            6,564,000
            
            
            5,368,000
            
            
            1,196,000
            
            
            22
            %Investment
                banking
            
            
            -
            
            
            1,846,000
            
            
            (1,846,000
            )
            
            (100
            %)Commissions
            
            
            28,754,000
            
            
            22,176,000
            
            
            6,578,000
            
            
            30
            %Employee
                compensation
            
            
            4,549,000
            
            
            3,262,000
            
            
            1,287,000
            
            
            39
            %Clearing
                fees
            
            
            1,136,000
            
            
            718,000
            
            
            418,000
            
            
            58
            %Communications
            
            
            608,000
            
            
            828,000
            
            
            (220,000
            )
            
            (27
            %)Occupancy
                and equipment costs
            
            
            1,733,000
            
            
            1,476,000
            
            
            257,000
            
            
            17
            %Professional
                fees
            
            
            1,051,000
            
            
            1,517,000
            
            
            (466,000
            )
            
            (31
            %)Interest
            
            
            143,000
            
            
            209,000
            
            
            (66,000
            )
            
            (32
            %)Taxes,
                licenses and registration
            
            
            207,000
            
            
            342,000
            
            
            (135,000
            )
            
            (39
            %)Other
                administrative expenses
            
            
            1,000,000
            
            
            880,000
            
            
            120,000
            
            
            14
            %$
            39,181,000
            
            $
            31,408,000
            
            $
            7,773,000
            
            
            25
            %




Commission
      expense, which includes expenses related to commission revenue, net dealer
      inventory gains and investment banking, increased $6,578,000, or 30%, to
      $28,754,000 in the first six months of fiscal year 2008 from $22,176,000 in
      the
      first six months of fiscal year 2007. Commission expense related to commission
      revenue increased $7,228,000, or 48%, to $22,190,000 in the first six months
      of
      fiscal year 2008 from $14,962,000 in the first six months of fiscal year 2007;
      and commission expense related to net dealer inventory gains increased
      $1,196,000, or 22%, to $6,564,000 in the first six months of fiscal year 2008
      from $5,368,000 in the first six months of fiscal year 2007. Commission expense
      as a percentage of commission revenues increased to 96% in the first six months
      of fiscal year 2008 from 88% in the first six months of fiscal year 2007. This
      increase is attributable to changes in the production of particular brokers,
      not
      all of who are paid at the same commission rate and higher payouts for
      registered representatives recently affiliated with the Company, and an increase
      in the amortization of advances to registered representatives. Commission
      expense as a percentage of net dealer inventory gains increased to 84% in the
      first six months of fiscal year 2008 from 76% in the first six months of fiscal
      year 2007. This increase is attributable to changes in the securities traded,
      and their related commission payouts. Commission expense includes the
      amortization of advances to registered representatives of $804,000 and $576,000
      for the first six months of fiscal years 2008 and 2007, 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 $1,287,000, or 39%, to $4,549,000 in the first
      six months of fiscal year 2008 from $3,262,000 in the first six months of fiscal
      year 2007. The increase is attributable to new employees hired during fiscal
      years 2008 and 2007, and salary increases for certain employees. Overall,
      combined commission and employee compensation expense, as a percentage of
      revenue increased to 91% from 80% in the first six months of fiscal years 2008
      and 2007, respectively.





Clearing
      fees increased
      $418,000, or 58%, to $1,136,000 in the first six months of fiscal year 2008
      from
      $718,000 in the first six months of fiscal year 2007. The increase in clearing
      fees is attributable to the increase in commission revenue in the first quarter
      of fiscal year 2008 as compared to the first quarter of fiscal year 2007. 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 six months of fiscal year 2008.





18




Communications
      expense decreased $220,000, or 27%, to $608,000 from $828,000 in the first
      six
      months of fiscal year 2008 compared to the first six months of fiscal year
      2007.
      The decrease is due to the Company’s ability to acquire certain of these
      services at a lower price. Occupancy costs increased $257,000, or 17%, to
      $1,733,000 from $1,476,000 in the first six months of fiscal year 2008 compared
      to the first six months of fiscal year 2007. The increase in occupancy expense
      is primarily due to annual rent increases contained in the Company’s office
      leases. Professional fees decreased $466,000, or 31%, to $1,051,000 from
      $1,517,000 in the first six months of fiscal year 2008 compared to the first
      six
      months of fiscal year 2007. The decrease in professional fees is primarily
      a
      result of legal fees and costs incurred to settle certain arbitrations in the
      first six months of fiscal year 2007.





Interest
      expense decreased $66,000, or 32%, to $207,000 from $342,000 in the first six
      months of fiscal year 2008 compared to the first six months of fiscal year
      2007.
      The decrease in interest expense is due to the retirement of certain debt in
      fiscal year 2007. Taxes, licenses and registration decreased $135,000, or 39%,
      to $207,000 from $342,000 in the first six months of fiscal year 2008 compared
      to the first six months of fiscal year 2007. The decrease in taxes, licenses
      and
      registration is due to lower registration fees paid on behalf of brokers in
      the
      second quarter of fiscal year 2008 compared to the second quarter of fiscal
      year
      2007. Other administrative expenses increased $120,000, or 14%, to $1,000,000
      from $880,000 in the first six months of fiscal year 2008 compared to the first
      six months of fiscal year 2007. The other administrative expenses increase
      is
      primarily attributable due to an increase in marketing and other promotional
      expenses in the first quarter of fiscal year 2008.





The
      Company reported a net loss of $2,532,000 in the first six months of fiscal
      year
      2008 compared to net income of $491,000 in
      the first
      six
      months of
      fiscal
      year 2007 .
      The net
      loss attributable to common stockholders in the first six months of fiscal
      year
      2008 was $2,701,000, or $.31 per common share, as compared to the diluted
      earnings attributable to common stockholders of $283,000, or $.05 per common
      share, in the first six months of fiscal year 2007. The net income attributable
      to common stockholders reflects $169,000 and $208,000 of cumulative preferred
      stock dividends on the Company’s preferred stock for the second quarter of
      fiscal years 2008 and 2007, respectively.





**Liquidity
      and Capital Resources**





National
      Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
      Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
      National Securities has elected to use the alternative standard method permitted
      by the rule. This requires that National Securities maintain minimum net capital
      equal to the greater of $250,000 or a specified amount per security based on
      the
      bid price of each security for which National Securities is a market maker. At
      March
      31, 2008, National Securities’ net capital exceeded the requirement by
      $2,951,000.





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





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





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





19




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.
      In June 2005, National Securities entered into a clearing agreement with Penson
      Financial Services, Inc. (“Penson”) for the purpose of providing clearing
      services that are not provided by NFS. Additionally, in June 2007, National
      Securities entered into a clearing agreement with Legent Clearing LLC (“Legent”)
      for the purpose of providing clearing services that are not provided by NFS
      and
      to maintain a pre-existing clearing relationship for brokers newly associated
      with National Securities. The Company believes that the overall effect of its
      clearing relationships has been beneficial to the Company’s cost structure,
      liquidity and capital resources. ****





In
      February 2007, the Company completed a
      financing transaction under which certain investors made an investment in the
      Company by purchasing 10 %
      promissory notes in the principal amount of $1 .0
      million ,
      with warrants
      to purchase an aggregate of 250,000 shares of common stock at an exercise price
      of $1.40 per share. The promissory notes mature in February 2009, and have
      a
      stated interest rate of 10% per annum. The relative fair value of the warrants
      was calculated using the Black-Scholes Option Valuation Model. The Company
      recorded a debt discount of approximately $195,000 that will be charged to
      interest expense over the life of the promissory
      notes .
      The
      investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud
      Capital Partners, L.P. (“St. Cloud”). Mr. Dewey, and Marshall S. Geller, the
      Co-Founder and Senior Managing Partner of St. Cloud, are each members of the
      Company’s board of directors. The
      Company incurred legal fees and other costs related to this capital transaction
      in the amount of $22,000 that were capitalized and will be amortized to interest
      expense over the life of the promissory notes. The Company
      used $850,000 of the proceeds to pay in full promissory notes that had maturity
      dates in February 2007.





In
      February 2008, National Securities and the holder of a $500,000 secured demand
      note that was scheduled to mature on March 1, 2008, extended the term of the
      secured demand note to March 1, 2009.





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. The relative fair value of the warrant of approximately $395,000 was
      calculated using the Black-Scholes Option Valuation Model. This amount has
      been
      recorded as a debt discount that will be charged to interest expense over the
      life of the promissory
      note .
      The
      Company and the investor entered into a registration rights agreement, wherein
      the Company has 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 proposed 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 investment was made by St. Cloud II, an affiliate of
      St.
      Cloud. The
      Company incurred legal fees and other costs related to this capital transaction of
      approximately $101,000
      that were capitalized and will be amortized to interest expense over the life
      of
      the promissory note.





In
      the
      three and six months ended March 31, 2008 the Company received proceeds of
      $8,000 from the exercise of outstanding stock options.





20




**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 March 31, 2008:




Long
            
            Short
            
            NetCorporate
                stocks
            
            $
            441,000
            
            $
            38,000
            
            $
            403,000Corporate
                bonds
            
            
            -
            
            
            34,000
            
            
            (34,000
            )Government
                obligations
            
            
            -
            
            
            352,000
            
            
            (352,000
            )$
            441,000
            
            $
            424,000
            
            $
            17,000





**ITEM
      4. CONTROLS AND PROCEDURES**





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





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





21







**PART
      II – OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





During
      the quarter ended March 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, 2007.





**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, 2007.





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





Previously
      reported in the Company’s Current Report on Form 8-K filed with the SEC on April
      2, 2008.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





The
      Company held its annual meeting of shareholders on March 12, 2008. Proxies
      were
      solicited by the Company pursuant to Regulation 14A under the Exchange Act
      of
      1934, as amended. At the annual meeting, the Company’s shareholders approved the
      following proposals:





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




WithholdFor
            
            AuthorityIn
                Person
            
            -
            
            -By
                Proxy
            
            
            6,290,349
            
            
            266,293Total
            
            
            6,290,349
            
            
            266,293


22





The
      number of shares voted “for” and “withhold authority” in connection with the
      election of Christopher C. Dewey as a Class I Director to the Board of Directors
      of the Company was as follows:







WithholdFor
            
            AuthorityIn
                Person
            
            
            -
            
            
            -By
                Proxy
            
            
            6,479,969
            
            
            76,673Total
            
            
            6,479,969
            
            
            76,673





The
      terms
      of Robert J. Rosan and Norman J. Kurlan, Class II Directors, and Mark Goldwasser
      and Gary A. Rosenberg, Class III Directors, continued after the annual
      meeting.





2.  The
      number of shares voted “for”, “against” and “abstain” in connection with the
      approval of the Company's 2008 Stock Option Plan was as follows:




For
            
            Against
            
            AbstainIn
                Person
            
            
            -
            
            
            -
            
            
            -By
                Proxy
            
            
            3,960,492
            
            
            72,839
            
            
            198,027Total
            
            
            3,960,492
            
            
            72,839
            
            
            198,027





3.  The
      number of shares voted “for”, “against” and “abstain” in connection with the
      ratification of Marcum & Kliegman LLP as the Company’s independent public
      accountants for the fiscal year ending September 30, 2008 was as
      follows:




For
            
            Against
            
            AbstainIn
                Person
            
            
            -
            
            
            -
            
            
            -By
                Proxy
            
            
            6,553,944
            
            
            70
            
            
            2,628Total
            
            
            6,553,944
            
            
            70
            
            
            2,628





**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.


23





**SIGNATURES**





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





**NATIONAL
                HOLDINGS CORPORATION AND SUBSIDIARY**May
                15, 2008
            By:
            /s/
                Mark GoldwasserMark
                GoldwasserPresident
                and Chief Executive OfficerMay
                15, 2008
            By:
            /s/
                Robert H. DaskalRobert
                H. DaskalChief
                Financial Officer


24