UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 FORM
10-K
 
 ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 For the
Fiscal Year Ended
 September
30, 2008
 Commission
File No:  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
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.02 par
value
 (Title of
class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o   NO
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES o   NO
x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  YES x  NO o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (check one):  Large Accelerated Filer o   Accelerated
Filer o  Non-Accelerated
Filer o  Smaller
Reporting Company x
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III or any amendment to this Form 10-K. YES
o   NO
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
March 31, 2008, the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant, based on the closing sales
price for the registrant's common stock, as quoted on the Over-the-Counter
Bulletin Board was approximately $6,600,000 (calculated by excluding shares
owned beneficially by directors, officers and 10% shareholders).  As
of December 26, 2008 there were 16,421,538 shares of the registrant's common
stock outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions
of the Company’s Proxy Statement filed with the Securities and Exchange
Commission (the “SEC”) in connection with the Company’s Annual Meeting of
Shareholders to be held on or about March 16, 2009 (the “Company’s 2009 Proxy
Statement”) are incorporated by reference into Part III hereof.
  
 PART
I
 
 FORWARD-LOOKING
STATEMENTS
 
 The
information contained in this Annual Report on Form 10-K includes
forward-looking statements as defined in the Private Securities Reform Act of
1995.  These forward  looking statements are
often  identified by words such as
"may,"  "will,"  "expect,"  "intend,"  "anticipate,"  "believe,"
“estimate," "continue," "plan" and similar expressions.  These
statements involve estimates, assumptions and  uncertainties that
could cause actual results to differ materially from those expressed for the
reasons described in this Annual Report on Form 10-K.  You should not
place undue reliance on these forward-looking statements.
 
 You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
 
 ●
              general
      economic conditions;
 ●
              our
      ability to obtain future financing or funds when
  needed;
 ●
              the
      inability of our broker-dealer operations to operate profitably in the
      face of intense competition from larger full-service and discount
      brokers;
 ●
              a
      general decrease in financing and merger and acquisition activities and
      our potential inability to receive success fees as a result of
      transactions not being completed;
 ●
              increased
      competition from business development
portals;
 ●
              technological
      changes;
 ●
              our
      potential inability to implement our growth strategy through acquisitions
      or joint ventures;
 ●
              our
      potential failure to realize the anticipated benefits of the merger with
      vFinance, Inc.;
 ●
              acquisitions,
      business combinations, strategic partnerships, divestures, and other
      significant transactions may involve additional uncertainties;
      and
 ●
              our
      ability to maintain and execute a successful business
      strategy.
 
 You
should also consider carefully the statements under "Risk Factors" and other
sections of this Annual Report on Form 10-K, which address additional factors
that could cause our actual results to differ from those, set forth in the
forward-looking statements and could materially and adversely affect our
business, operating results and financial condition. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the applicable cautionary
statements.
 
 The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.  In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, or factors we are unaware of, may cause actual results
to differ materially from those contained in any forward-looking
statements.
 
 Item
1. BUSINESS
 
 General
  National
Holdings Corporation (“National” or the “Company”), a Delaware corporation
organized in 1996, is a financial services organization, operating primarily
through its wholly owned subsidiaries, National Securities Corporation
(“National Securities”), vFinance Investments, Inc. (“vFinance Investments”) and
EquityStation, Inc. (“EquityStation”) (collectively, the “Broker Dealer
Subsidiaries”).  The Broker Dealer Subsidiaries conduct a national
securities brokerage business through its main offices in New York, New York,
Boca Raton, Florida, and Seattle, Washington.  On March 15, 2006, the
Company changed its name from “Olympic Cascade Financial Corporation” to
“National Holdings Corporation.”  On July 1, 2008, National
consummated a merger with vFinance, Inc. (“vFinance”).
 
 
 Through
its Broker Dealer Subsidiaries, the Company (1) offers full service retail
brokerage to approximately 45,000 high net worth and institutional clients, (2)
provides investment banking, merger, acquisition and advisory services to micro,
small and mid-cap high growth companies, and (3) engages in trading securities,
including making markets in over 3,500 micro and small cap stocks and provides
liquidity in the United States Treasury marketplace.  The Broker
Dealer Subsidiaries are introducing brokers and clear all transactions through
clearing organizations on a fully disclosed basis.  They are
registered with the Securities and Exchange Commission ("SEC"), are members of
the Financial Industry Regulatory Authority ("FINRA") (formerly the National
Association of Securities Dealers) and Securities Investor Protection
Corporation ("SIPC").  vFinance Investments is also a member of the
National Futures Association ("NFA").
 
 Our
brokers operate primarily as independent contractors.  An independent
contractor registered representative who becomes an affiliate of a Broker Dealer
Subsidiary typically establishes his own office and is responsible for the
payment of expenses associated with the operation of such office, including
rent, utilities, furniture, equipment, stock quotation machines and general
office supplies.  The independent contractor registered representative
is entitled to retain a higher percentage of the commissions generated by his
sales than an employee registered representative at a traditional employee-based
brokerage firm.  This arrangement allows us to operate with a reduced
amount of fixed costs and lowers the risk of operational losses for
non-production.
 
 In July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc., a Washington corporation ("NAM").  NAM is a
federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed. In March 2008, all of the issued and outstanding stock of NAM was
transferred from National Securities to National.
 
 In the
third quarter of fiscal year 2006, we formed a wholly owned subsidiary, National
Insurance Corporation, a Washington corporation ("National
Insurance").  National Insurance provides fixed insurance products to
its clients, including life insurance, disability insurance, long term care
insurance and fixed annuities.  National Insurance finalized certain
requisite state registrations during the second quarter of fiscal year 2007 and
commenced business operations that have been de minimus.
 
 vFinance
Lending Services, Inc. (“vFinance Lending”), originally formed as a wholly owned
subsidiary of vFinance, Inc. (“vFinance”), was established in May
2002.  It is a mortgage lender focused primarily on the commercial
sector, providing bridge loans and commercial mortgages through its nationwide
network of lenders. Its operations to date have been de minimus.
 
 Merger
with vFinance, Inc.
 
 On
November 7, 2007, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with vFinance, and vFin Acquisition Corporation ("Merger Sub"), a
wholly-owned subsidiary of ours.
 
 Under the
terms and subject to the conditions set forth in the Merger Agreement, Merger
Sub was merged with and into vFinance (the "Merger"), the separate corporate
existence of Merger Sub ceased and vFinance continued as a surviving corporation
of the Merger and as a wholly-owned subsidiary of ours.
 
 Pursuant
to the Merger Agreement, upon the closing of the Merger which occurred at 12:01
a.m. July 1, 2008 (the "Effective Date"), each share of vFinance common stock
outstanding immediately prior to the closing of the Merger were automatically
converted into the right to receive 0.14 shares of our common stock, rounded up
to the nearest whole share.
 
 -3-
 Each
option or warrant to purchase shares of vFinance common stock outstanding upon
the Effective Date were converted into options or warrants, as the case may be,
to acquire the number of shares of our common stock determined by multiplying
(i) the number of shares of vFinance common stock underlying each outstanding
stock option or warrant immediately prior to the effective time of the Merger by
(ii) 0.14, at a price per share of our common stock equal to (a) the exercise
price per share of each stock option or warrant otherwise purchasable pursuant
to the stock option or warrant divided by (b) 0.14.
 
 On the
Effective Date, our board of directors consisted of Mark Goldwasser (Chairman of
the Board), Leonard J. Sokolow (Vice Chairman of the Board), Christopher C.
Dewey (Vice Chairman of the Board), Marshall S. Geller, Robert W. Lautz, Jr.,
Charles R. Modica and Jorge A. Ortega.  Messrs. Geller, Lautz, Modica
and Ortega are independent directors.
 
 Pursuant
to the Merger Agreement, Mr. Goldwasser, our Chairman of the board of directors,
Mr. Dewey, a Vice Chairman of our board of directors, and Mr. Sokolow, the
Chairman and Chief Executive Officer of vFinance (and now a Vice Chairman of our
board of directors and our President), entered into an agreement (the "Director
Voting Agreement") on the Effective Date to vote their shares of our common
stock for the election of each other and up to three designees
of Mr. Goldwasser and up to three designees of Mr. Sokolow
until the earlier to occur of: (i) the Company’s merger, consolidation or
reorganization whereby the holders of our voting stock own less than 50% of the
voting power of the Company after such transaction, (ii) by mutual consent of
the parties thereto, (iii) the date that Messrs. Goldwasser, Sokolow and Dewey
own in the aggregate less than one percent of our outstanding voting securities,
(iv) upon the fifth anniversary of the Director Voting Agreement or (v) upon
listing of our common stock on AMEX, the NASDAQ Capital Market or the NASDAQ
Global Market.
 
 On the
Effective Date, Mr. Sokolow's employment as Chairman and Chief Executive Officer
of vFinance and his employment agreement with vFinance dated November 16, 2004,
as amended, was terminated and vFinance’s principal office was relocated to New
York City, New York. Accordingly, pursuant to the terms of Mr. Sokolow's former
employment agreement with vFinance, Mr. Sokolow received a lump sum cash
payment of $1,150,000 as of the Effective Date. On the Effective Date, vFinance
entered into an employment termination agreement ("Termination Agreement") with
Mr. Sokolow.
 
 Notwithstanding
the fact that Mr. Sokolow’s stock options to purchase shares of vFinance common
stock that had not vested as of the Effective Date would have vested pursuant to
his former employment agreement with vFinance, Mr. Sokolow agreed to waive such
accelerated vesting. However, if: (i) Mr. Sokolow's employment is terminated by
us with cause or (ii) Mr. Sokolow voluntarily resigns his employment with us,
all stock options Mr. Sokolow received in exchange for his stock options
pursuant to the terms of the Merger Agreement will become 100% vested and will
remain exercisable by Mr. Sokolow or his beneficiaries for a period of nine
months from the date of such event; provided, however, such period of nine
months will not exceed the earlier of (a) the latest date upon which such
options could have expired by the original terms under the circumstances or (b)
the tenth anniversary of the original date of the grant of the
options.
 
 Pursuant
to the terms of the Termination Agreement, if any payments made to Mr. Sokolow,
including the acceleration of the vesting of his National stock options, will be
subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended, vFinance agreed to pay Mr. Sokolow an additional amount such that
the net amount retained by him, after deduction of any tax on such payment, will
equal the payments received by Mr. Sokolow under the Termination
Agreement.
 
 -4-
 On the
Effective Date, Messrs. Goldwasser and Sokolow each entered into substantially
identical five-year employment agreements with us, pursuant to which Mr.
Goldwasser is employed by us as Chairman and Chief Executive Officer and Mr.
Sokolow is employed by us as Vice Chairman and President. Under the terms of the
employment agreements, Messrs. Goldwasser and Sokolow will each receive an
annual base salary of $450,000, which will increase 5% per year, and a
non-accountable automobile expense allowance of $1,000 per month. In addition,
each of them will be entitled to receive on a fiscal year basis a cash bonus
determined in the discretion of our Compensation Committee of not less than: (i)
$225,000, (ii) 5% of our fiscal year consolidated net income in excess of $4.5
million, up to 100% of the difference between their then current base salaries
and $225,000 and (iii) such additional bonuses as the board of directors may
determine based upon the Board's assessment of their performance in the
following areas: revenue growth, new business development, investor relations,
communications with the board of directors, and special projects as assigned by
the board of directors.
 
 Each employment
agreement terminates upon the earliest to occur of: (i) the death of the
employee; (ii) a termination by National by reason of the disability of the
employee; (iii) a termination by National with or without cause; (iv) a
termination by the employee with or without good reason; (v) upon a "Change in
Control" (as defined in the employment agreements); or (vi) the non-renewal of
the agreement. Upon the termination due to the death or disability of the
employee, by National without cause, by the employee with good reason, (upon a
"Change of Control") or upon the expiration of the employment agreement if
National or the employee refuses to extend the term of the employment agreement,
the employee will be entitled to: (i) any accrued but unpaid salary or bonus or
unreimbursed expenses; (ii) any bonus payable for the portion of the fiscal year
during which the termination occurs; (iii) 100% of the employee's base salary
(150% in the event of termination by National without cause or by the employee
with good reason); (iv) the continuation of health benefits until the earlier of
(a) 18 months after termination and (b) the date the employee accepts other
employment; and (v) all unvested options granted pursuant to the employment
agreements will become immediately vested and be exercisable for a period of
nine months.
  Pursuant
to each employment agreement, on the Effective Date, each of Messrs. Goldwasser
and Sokolow were granted non-qualified stock options to purchase 1,000,000
shares of National's common stock at an exercise price of $1.64 per share, which
was equal to the average of the 10-day closing market price of National's common
stock prior to the Effective Date. The options vested 25% upon the date of grant
and become exercisable as to 25% of the shares underlying the options on the
second, third and fourth anniversaries of the date of grant. The options expire
seven years from the effective date of the Merger.
 
 In
accordance with the terms of the Merger Agreement, on the Effective Date, Alan
B. Levin, the Chief Financial Officer of vFinance, entered into a one-year
employment agreement with us, pursuant to which he is employed as the Chief
Financial Officer of the Company. Under the terms of the agreement, Mr. Levin
will receive an annual base salary of $180,000. In addition, he will be entitled
to receive an annual cash bonus determined in the discretion of the Compensation
Committee of the board of directors of National based upon its assessment
by the President of National of Mr. Levin's performance in the following areas:
revenue, net income and revenue growth, new business development, investor
relations, communications with the board of directors, and other factors
including, without limitation, special projects as assigned by the Chief
Executive Officer or the board of directors of National.
 
 Clearing
Relationships
 
 The
Broker Dealer Subsidiaries have clearing arrangements with National Financial
Services LLC (“NFS”), Penson Financial Services, Inc. (“Penson”), Legent
Clearing LLC (“Legent”) and Fortis Securities, LLC (“Fortis”).  We
believe that the overall effect of our clearing relationships has been
beneficial to our cost structure, liquidity and capital resources.
 
 -5-
 Financial
Information about Industry Segments
 
 The
Company realized approximately 84% of its total revenues in fiscal year 2008
from brokerage services, principal and agency transactions, and investment
banking.  During fiscal year 2008, brokerage services that consist of
retail brokerage commissions represent 61% of total revenues, principal and
agency transactions that consist of net dealer inventory gains represent 20% of
total revenues, and investment banking, that consist of corporate finance
commissions and fees, represent 2% of total revenues.  For a more
detailed analysis of our results by segment, see Item 7, “Management Discussion
and Analysis of Financial Condition and Results of Operation.”
 
 Brokerage
Services
 
 Our
Broker Dealer Subsidiaries are each registered as a broker-dealer with the SEC
and are licensed in all 50 states, the District of Columbia and Puerto
Rico.  The Broker Dealer Subsidiaries are also members of the
Financial Industry Regulatory Authority, Inc. (“FINRA”), the Municipal
Securities Rulemaking Board ("MSRB") and the Securities Investor Protection
Corporation ("SIPC"), and vFinance Investments is also a member of the National
Futures Association (“NFA”).  Brokerage services to retail clients are
provided through our sales force of investment executives at the Broker Dealer
Subsidiaries.
 
 Our goal
is to meet the needs of its investment executives and their
clients.  To foster individual service, flexibility and efficiency and
to reduce fixed costs, our investment executives primarily act as independent
contractors responsible for providing their own office facilities, sales
assistants, telephone and quote service, supplies and other items of
overhead.  Investment executives are given broad discretion to
structure their own practices and to specialize in different areas of the
securities market subject to supervisory procedures.  In addition,
investment executives have direct access to research materials, management,
traders, and all levels of support personnel.
 
 The
brokerage services provided by our investment executives include execution of
purchases and sales of stocks, bonds, mutual funds, annuities and various other
securities for individual and institutional customers.  In fiscal year
2008, stocks and options represented approximately 85% of our business, bonds
represent approximately 9% of our business, and mutual funds and annuities make
up approximately 6%of our business.  The percentage of each type of
business varies over time as the investment preferences of our customers change
based on market conditions.
 
 Typically,
our Broker Dealer Subsidiaries do not recommend particular securities to
customers.  Rather, recommendations to customers are determined by
individual investment executives based upon their own research and analysis,
subject to applicable FINRA customer suitability standards. Most investment
executives perform fundamental (as opposed to technical)
analysis.  Solicitations may be by telephone, seminars or
newsletters.
 
 We
generally act as an agent in executing customer orders to buy or sell listed and
over-the-counter securities in which it does not make a market, and charges
commissions based on the services we provides to our customers.  In
executing customer orders to buy or sell a security in which we make a market,
we may sell to, or purchase from, customers at a price that is substantially
equal to the current inter-dealer market price plus or minus a mark-up or
mark-down.  We may also act as agent and execute a customer's purchase
or sale order with another broker-dealer market-maker at the best inter-dealer
market price available and charge a commission.  We believe our
mark-ups, mark-downs and commissions are competitive based on the services we
provide to our customers.  In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by
FINRA.  In order to increase revenues generated from these activities,
we continuously seek to hire additional registered representatives, and work
with our current registered representatives to increase their
productivity.
 
 -6-
 Our
registered representatives are primarily independent contractors, not salaried
employees.  As such, payments to these persons are based on
commissions generated, and represent a variable cost rather than a fixed cost of
operating our business.  Commission expense represents a significant
majority of our total expenses.  We work to control its fixed costs in
order to achieve profitability based upon our expectation of market conditions
and the related level of revenues.  Additionally, we require most of
our registered representatives to absorb their own overhead and expenses,
thereby reducing our share of the fixed costs.
 
 Investment
executives in the brokerage industry are traditionally compensated on the basis
of set percentages of total commissions and mark-ups generated.  Most
brokerage firms bear substantially all of the costs of maintaining their sales
forces, including providing office space, sales assistants, telephone service
and supplies.  The average commission paid to investment executives in
the brokerage industry generally ranges from 30% to 50% of total commissions
generated.
 
 Since we
require most of our investment executives to absorb their own overhead and
expenses, we pay a higher percentage of the net commissions and mark-ups
generated by our investment executives, as compared to traditional investment
executives in the brokerage industry.  This arrangement also reduces
fixed costs and lowers the risk of operational losses for
non-production.  Our operations include execution of orders,
processing of transactions, internal financial controls and compliance with
regulatory and legal requirements.
 
 As of
September 30, 2008, we had a total of 914 associates of which 175 were employees
and were 739 independent contractors.  Of these totals 674 were
registered representatives.  Persons who have entered into independent
contractor agreements are not considered employees for purposes of determining
our obligations for federal and state withholding, unemployment and social
security taxes.  Our independent contractor arrangements conform to
accepted industry practice, and therefore, we do not believe there is a material
risk of an adverse determination from the tax authorities that would have a
significant effect on our ability to recruit and retain investment executives or
on our current operations and financial results of operations.  No
employees are covered by collective bargaining agreements, and we believe our
relations are good with both our employees and independent
contractors.
 
 Our
business plan includes the growth of its retail and institutional brokerage
business, while recognizing the volatility of the financial
markets.  In response to historical market fluctuations, we have
periodically adjusted certain business activities, including, proprietary
trading and market-making trading.  We believe that consolidation
within the industry is inevitable.  Concerns attributable to the
volatile market, and increased competition, result in a number of acquisition
opportunities being introduced to us.  We are focused on maximizing
the profitability of its existing operations, while it continues to seek
selective strategic acquisitions.
 
 Periodic
reviews of controls are conducted and administrative and operations personnel
meet frequently with management to review operating
conditions.  Compliance and operations personnel monitor compliance
with applicable laws, rules and regulations.
 
 Principal
and Agency Transactions
 
 We buy
and maintain inventories in equity securities as a "market-maker" for sale of
those securities to other dealers and to our customers.  We may also
maintain inventories in corporate, government and municipal debt securities for
sale to customers.  The level of our market-making trading activities
will increase or decrease depending on the relative strength or weakness of the
broader markets.  As of September 30, 2008, wemade markets in over
3,500 micro and small-cap stocks.  We anticipate that we will continue
market-making trading activity in the future, which may include companies for
which we managed or co-managed a public offering.
 
 Our
trading departments require a commitment of capital.  Most principal
transactions place our capital at risk.  Profits and losses are
dependent upon the skill of the traders, price movements, trading activity and
the size of inventories.  Since our trading activities occasionally
may involve speculative and thinly capitalized stocks, including stabilizing the
market for securities which we have underwritten, we impose position limits to
reduce our potential for loss.
 
 -7-
 In
executing customer orders to buy or sell a security in which we make a market,
we may sell to, or purchase from, customers at a price that is substantially
equal to the current inter-dealer market price plus or minus a mark-up or
mark-down.  We may also act as agent and execute a customer's purchase
or sale order with another broker-dealer market-maker at the best inter-dealer
market price available and charge a commission.  We believe our
mark-ups, mark-downs and commissions are competitive based on the services we
provide to our customers.
 
 In
executing customer orders to buy or sell listed and over-the-counter securities
in which we do not make a market, we generally act as an agent and charge
commissions that we believe are competitive, based on the services we provide to
our customers.
 
 Investment
Banking
 
 We
provide corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors.  Our corporate finance
operations provide a broad range of financial and corporate advisory services,
including mergers and acquisitions, project financing, capital structure and
specific financing opportunities.  We also act as an underwriter of
equity securities in both initial and secondary public
offerings.  Corporate finance revenues will vary depending on the
number of private and public offerings completed by us during a particular
fiscal year.
 
 Institutional
Services
 
 A
critical element of our business strategy is to identify institutional quality
investments that offer above market returns.  We support that mission
by providing institutional investment managers, primarily hedge fund managers, a
complete array of services designed to enhance portfolio
performance.  Hedge funds represent the fastest growing segment of the
money management market and by definition are focused on achieving positive
returns for their investors while controlling risk. We offer fund managers
access to advanced direct market access trading platforms, investment
opportunities and independent research products that boost return on
investment.  Additionally, we offer fund managers the ability to
reduce their transaction costs by offering them access to our trading desk for
illiquid securities and automated trading systems for their liquid
transactions.  We have a mutually beneficial relationship with our
Investment  Banking  Division ("IBD") as fund managers
looking for investment opportunities fund IBD's corporate clients and having
relationships with fund managers creates opportunities to increase the number
and quality of IBD clients.
 
 As of
September 30, 2008, we employed or had contractual relationships with
approximately 10 people providing institutional services, approximately ten of
which provide hedge fund related services.  We service approximately
200 institutional customers, of which approximately 85 are hedge
funds.  For the fiscal year ended September 30, 2008, hedge fund
related services accounted for approximately $5 million in revenue.
 
 Internet
Strategy
 
 Our www.vfinance.com
website is available to an audience of entrepreneurs, corporate executives and
private and institutional investors in over 150 countries with an estimated
35,000 unique visitors monthly. The website provides sales leads to our
investment banking, brokerage and institutional services divisions, giving
visitors convenient access to a variety of financial services, proprietary
business development tools, searchable databases and daily news. The website has
over 60,000 "opted in" subscribers that receive a newsletter on private funding
several times a week.  The website features our database of venture
capital firms and angel investors accessible with vSearch, a proprietary
web-based data mining tool that allows entrepreneurs to search potential funding
sources by different criteria, including geography, amount of funds required,
industry, stage of corporate development or keyword. Much of the information on
the website is provided free of charge, however, we charge nominal fees for the
use of proprietary search engines and premium services such as our business
planning services.
 
 -8-
 Administration,
Operations, Securities Transactions Processing and Customer
Accounts
 
 Our
Broker Dealer Subsidiaries do not hold any funds or securities for
customers.  Instead, they use the services of clearing agents on a
fully-disclosed basis.  These clearing agents process all securities
transactions and maintain customer accounts. Customer accounts are protected
through the SIPC for up to $500,000, of which coverage for cash balances is
limited to $100,000. In addition, all customer accounts carried at NFS are fully
protected by an Excess Securities Bond providing protection for the account's
entire net equity (both cash and securities).  The services of our
subsidiaries' clearing agents include billing and credit control as well as
receipt, custody and delivery of securities.  The clearing agents
provide the operational support necessary to process, record and maintain
securities transactions for our subsidiary's brokerage
activities.  They provide these services to our subsidiary's customers
at a total cost that we believe is less than it would cost us to process such
transactions on our own.  The clearing agents also lend funds to our
subsidiaries' customers through the use of margin credit.  These loans
are made to customers on a secured basis, with the clearing agents maintaining
collateral in the form of saleable securities, cash or cash
equivalents.  Our Broker Dealer Subsidiaries have agreed to indemnify
the clearing brokers for losses they incur on these credit
arrangements.
 
 Competition
 
 The
Company is engaged in a highly competitive business.  With respect to
one or more aspects of its business, its competitors include member
organizations of the New York Stock Exchange and other registered securities
exchanges in the United States and Canada, and members of FINRA.  Many
of these organizations have substantially greater personnel and financial
resources and more sales offices than the Company. Discount brokerage firms
affiliated with commercial banks provide additional competition, as well as
companies that provide electronic on-line trading. In many instances, the
Company is also competing directly for customer funds with investment
opportunities offered by real estate, insurance, banking, and savings and loans
industries.
  The
securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other
firms.  In addition, companies not engaged primarily in the securities
business, but with substantial financial resources, have acquired leading
securities firms.  These developments have increased competition from
firms with greater capital resources than ours.
  Since the
adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
institutions have been able to engage in traditional brokerage and investment
banking services, thus increasing competition in the securities industry and
potentially increasing the rate of consolidation in the securities
industry.
 
 We also
compete with other securities firms for successful sales representatives,
securities traders and investment bankers.  Competition for qualified
employees in the financial services industry is intense. Our continued ability
to compete effectively depends on our ability to attract new employees and to
retain and motivate our existing employees.  For a further discussion
of risks facing the Company, please see “Risk Factors.”
 
 -9-
 Government
Regulation and Supervision
 
 The
securities industry and our Broker Dealer Subsidiaries businesses are subject to
extensive regulation by the SEC, FINRA, NFA and state securities regulators and
other governmental regulatory authorities.  The principal purpose of
these regulations is the protection of customers and the securities
markets.  The SEC is the federal agency charged with the
administration of the federal securities laws.  Much of the regulation
of broker-dealers, however, has been delegated to self-regulatory organizations,
such as the FINRA, that adopt rules, subject to approval by the SEC, which
govern their members and conduct periodic examinations of member firms'
operations. Securities firms are also subject to regulation by state securities
commissions in the states in which they are registered.  All of our
Broker Dealer Subsidiaries are registered broker-dealers with the SEC and
members of FINRA.  It is licensed to conduct activities as a
broker-dealer in all 50 states, the District of Columbia and Puerto
Rico.
 
 In
addition, as registered broker-dealers and members of FINRA, our Broker Dealer
Subsidiaries are subject to the SEC's Uniform Net Capital Rule 15c3-1, which is
designed to measure the general financial integrity and liquidity of a
broker-dealer and requires the maintenance of minimum net
capital.  Net capital is defined as the net worth of a broker-dealer
subject to certain adjustments.  In computing net capital, various
adjustments are made to net worth that exclude assets not readily convertible
into cash. Additionally, the regulations require that certain assets, such as a
broker-dealer's position in securities, be valued in a conservative manner so as
to avoid over-inflation of the broker-dealer's net capital.
 
 National
Securities has elected to use the alternative standard method permitted by the
rule.  This requires that National Securities maintain minimum net
capital equal to the greater of $250,000 or a specified amount per security
based on the bid price of each security for which National Securities is a
market maker.  At September 30, 2008, the Company had net capital of
approximately $693,000 which was approximately $443,000 in excess of its
required net capital of $250,000.
 
 In
addition to the net capital requirements, each of vFinance Investments and
EquityStation are required to maintain a ratio of aggregate indebtedness to net
capital, as defined, of not more than 15 to 1 (and the rule of the “applicable”
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to 1). At
September 30, 2008, vFinance Investments had net capital of approximately
$1,337,000, which was approximately $337,000 in excess of its required net
capital of $1,000,000, and its percentage of aggregate indebtedness to net
capital was 485.0%.  At September 30, 2008, EquityStation had net
capital of approximately $363,000, which was approximately $263,000 in
excess of its required net capital of $100,000, and its percentage of aggregate
indebtedness to net capital was 160.5%.  Each of the Broker Dealer
Subsidiaries qualifies under the exemptive provisions of Rule 15c3-3 which
relates to the custody of securities for the account of customers pursuant to
Section (k)(2)(ii) of the Rule as none of them carry security accounts of
customers or perform custodial functions related to customer
securities.
 
 The
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the FINRA
Conduct Rules require National Securities to supervise the activities of its
investment executives.  As part of providing such supervision,
National Securities maintains Written Supervisory Procedures and a Compliance
Manual.  Compliance personnel and outside auditors conduct inspections
of branch offices periodically to review compliance with the Company's
procedures.  A registered principal provides onsite supervision at
each of the Company's larger offices.  The other offices (averaging
two investment executives per office) are not required by FINRA rules to have a
registered principal on site and are therefore supervised by registered
principals of National Securities.  Designated principals review
customer trades to ensure compliance with FINRA Conduct Rules including mark-up
guidelines.
 
 Application
of Laws and Rules to Internet Business and Other Online Services
 
 Due to
the  increasing  popularity  and use of
the  Internet  and  other  online
services, various regulatory authorities are considering laws and/or regulations
with respect to the Internet or other
online  services  covering  issues such as user
privacy,  pricing, content copyrights and quality of services. In
addition, the growth and development of the market for online commerce may
prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. When the Securities Act,
which governs the offer and sale of securities, and the Exchange Act, which
governs, among other things, the operation of the securities markets and
broker-dealers, were enacted, such acts did not contemplate the conduct of a
securities business through the Internet and other online
services.  The recent increase in the number of complaints by online
traders could lead to more stringent regulations of online trading firms and
their practices by the SEC, FINRA and other regulatory agencies.
 
 -10-
 Although
the SEC, in releases and no-action letters, has provided guidance on various
issues related to the offer and sale of securities and the conduct of a
securities business through the Internet, the application of the laws to the
conduct of a securities business through the Internet continues to
evolve.  Furthermore, the  applicability to the
Internet  and other online  services of
existing  laws
in  various  jurisdictions  governing  issues
such as property ownership,  sales and other taxes and personal
privacy is uncertain and may take years to resolve.  Uncertainty
regarding these issues may adversely affect the viability and profitability of
our business.
 
 As our
services, through our subsidiaries, are available over the Internet in multiple
jurisdictions, and as we, through our subsidiaries, have numerous clients
residing in these jurisdictions, these jurisdictions may claim that our
subsidiaries are required to qualify to do business as a foreign corporation in
each such jurisdiction. While vFinance Investments and EquityStation are
currently registered as broker-dealers in the jurisdictions described in this
Annual Report on Form 10-K, vFinance Investments, EquityStation and our
non-broker dealer subsidiaries are qualified to do business as corporations in
only a few jurisdictions.  Failure to qualify as an out-of-state or
foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties for the failure to qualify.
 
 Intellectual
Property
 
 We own
the following federally registered marks: vFinance, Inc.(R), vFinance.com,
Inc.(R), AngelSearch(R), Direct2Desk(R) and Hedge Fund
Accelerator(R).
 
 Employees
 
 As of
September 30, 2008, we employed the following personnel:
  Salaried
                
                
                IndependentPosition
                
                Employees
                
                
                Contractors
                
                
                TotalOfficers
                
                
                17
                
                
                
                0
                
                
                
                17Administration
                
                
                87
                
                
                
                130
                
                
                
                217Brokers
                
                
                32
                
                
                
                592
                
                
                
                624Traders
                
                
                27
                
                
                
                2
                
                
                
                29Investment
      Bankers
                
                
                12
                
                
                
                9
                
                
                
                21Lenders
                
                
                0
                
                
                
                6
                
                
                
                6Totals
                
                
                175
                
                
                
                739
                
                
                
                914
 None of
our personnel are covered by a collective bargaining agreement.  We
consider our relationships with our employees to be good. Any future increase in
the number of employees will depend upon the growth of our
business.  Our registered representatives are required to take
examinations administered by FINRA and state authorities in order to qualify to
transact business and are required to enter into agreements with us obligating
them, among other things, to adhere to industry rules and regulations, our
supervisory procedures and not to solicit customers, other employees or brokers
in the event of termination.
 
 -11-
 Seasonality
and Backlog
 
 Our
business is not subject to significant seasonal fluctuations, and there are no
material backlogs in our business.
 
 Research
and Development and Environmental Matters
 
 We did
not incur any research and development expenses during the last three fiscal
years.  We do not incur any significant costs or experience any
significant effects as a result of compliance with federal, state and local
environmental laws.
 
 Item
1A. RISK FACTORS
 
 The
financial statements contained in this report and the related discussions
describe and analyze the Company’s financial performance and condition for the
periods indicated. For the most part, this information is historical. The
Company’s prior results, however, are not necessarily indicative of the
Company’s future performance or financial condition. The Company, therefore, has
included the following discussion of certain factors that could affect the
Company’s future performance or financial condition.  These factors
could cause the Company’s future performance or financial condition to differ
materially from its prior performance or financial condition or from
management’s expectations or estimates of the Company’s future performance or
financial condition. These factors, among others, should be considered in
assessing the Company’s future prospects and prior to making an investment
decision with respect to the Company’s stock.  The risks described
below are not the only ones facing us.  Additional risks not presently
known to us or that we currently believe are immaterial may also impair our
business operations.
 
 Risks
Related to Our Business
 
 Our
operating results have resulted in reporting losses.
  Although
National was profitable in fiscal years 2007, 2006 and 2004, it reported losses
of approximately $21.0 million, $1.2 million, $843 thousand, $3.4 million and
$7.9 million in fiscal years 2008, 2005, 2003, 2002 and 2001,
respectively.  National’s losses were primarily attributable to the
market slowdowns and reduced trading activity and volatility, and the cessation
of National’s market making activities prior to the Merger.  In
addition, vFinance had sustained substantial losses in almost every year since
its inception due to ongoing operating expenses and a lack of revenues
sufficient to offset those operating expenses.  For the year ended
December 31, 2004, when vFinance earned a substantial profit for the first time
in its history, vFinance's results amounted to net income of $2.2 million (as
revised), including a $1.5 million non-cash gain on debt
forgiveness.  For the years ended December 31, 2007, 2006 and 2005,
however, vFinance's results amounted to net losses of approximately $1.7
million, $2.2 million and $1.1 million, respectively.  There is no
assurance that we will be profitable in the future. If we are unable to achieve
or sustain profitability, we may need to curtail, suspend or terminate certain
operations.
  We
may fail to realize the anticipated benefits of the Merger.
 
 The
success of the Merger will depend, in part, on our ability to realize the
anticipated growth opportunities and synergies from combining National and
vFinance. The integration of National and vFinance will be a time consuming and
expensive process and may disrupt our operations if it is not completed in a
timely and efficient manner. In addition, we may not achieve anticipated
synergies or other benefits of the Merger.  National and vFinance must
operate as a combined organization utilizing common information and
communication systems, operating procedures, financial controls and human
resources practices. We may encounter the following difficulties, costs and
delays involved in integrating these operations:
 
 -12-
 ·
              failure
      to integrate National's and vFinance's businesses and
      operations;
 ·
              failure
      to successfully manage relationships with customers and other important
      relationships;
 ·
              failure
      of customers to continue using the services of the combined
      company;
 ·
              difficulties
      in successfully integrating the management teams and employees of National
      and vFinance;
 ·
              challenges
      encountered in managing larger operations;
 ·
              the
      loss of key employees and registered
  representatives;
 ·
              failure
      to manage the growth and growth strategies of National and
      vFinance;
 ·
              diversion
      of the attention of management from other ongoing business concerns;
 ·
              potential
      incompatibility of technologies and
  systems;
 ·
              potential
      impairment charges incurred to write down the carrying amount of
      intangible assets generated as a result of the Merger;
  and
 ·
              potential
      incompatibility of business
cultures.
  If the
combined company's operations after the Merger do not meet the expectations of
existing customers of National and vFinance, then these customers may cease
doing business with the combined company altogether, which would harm our
results of operations and financial condition.
  If the
management team is not able to develop strategies and implement a business plan
that successfully addresses these difficulties, we may not realize the
anticipated benefits of the Merger. In particular, National is likely to realize
lower earnings per share, which may have an adverse impact on National and the
market price of its common stock.
 
 The
Merger may result in disruption of National's and vFinance's existing
businesses, distraction of our management and diversion of other
resources.
 
 The
integration of National's and vFinance's businesses may divert management time
and resources from the main businesses of both companies. This diversion of time
and resources could cause the market price of our common stock to decrease. The
new management will need to spend some of their time integrating vFinance's and
National's operations. This could cause our business to suffer.
 
 We
may require additional financing.
 
 In order
for us to have the opportunity for future success and profitability, we
periodically may need to obtain additional financing, either through borrowings,
public offerings, private offerings, or some type of business combination (e.g.,
merger, buyout, etc.).  We have actively pursued a variety of funding
sources, and have consummated certain transactions in order to address its
capital requirements. We may need to seek to raise additional capital through
other available sources, including borrowing additional funds from third parties
and there can be no assurance that it will be successful in such
pursuits.  Additionally, the issuance of new securities to raise
capital will cause the dilution of shares held by current stockholders.
Accordingly, if we are unable to generate adequate cash from its operations, and
if it is unable to find sources of funding, such an event would have an adverse
impact on our liquidity and operations.
 
 If
we are unable to pay our outstanding debt obligations when due, our operations
may be materially adversely affected.
 
 At
September 30, 2008, we had total indebtedness of $7,500,000, $1,500,000 of which
matures during fiscal year 2009.  We cannot assure you that our
operations will generate funds sufficient to repay our existing debt obligations
as they come due.  Our failure to repay our indebtedness and make
interest payments as required by our debt obligations could have a material
adverse affect on our operations.
 
 -13-
 We
are exposed to risks due to its investment banking activities.
 
 Participation
in an underwriting syndicate or a selling group involves both economic and
regulatory risks. An underwriter may incur losses if it is unable to resell the
securities it is committed to purchase, or if it is forced to liquidate its
commitment at less than the purchase price.  In addition, under
federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings.  Acting as a managing
underwriter increases these risks.  Underwriting commitments
constitute a charge against net capital and our ability to make underwriting
commitments may be limited by the requirement that it must at all times be in
compliance with the net capital rule.
 
 Our
risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.
  The
policies and procedures we employ to identify, monitor and manage risks may not
be fully effective. Some methods of risk management are based on the use of
observed historical market behavior.  As a result, these methods may
not accurately predict future risk exposures, which could be significantly
greater than the historical measures indicate.  Other risk management
methods depend on evaluation of information regarding markets, clients or other
matters that are publicly available or otherwise accessible by
us.  This information may not be accurate, complete, up-to-date or
properly evaluated.  Management of operational, legal and regulatory
risks requires, among other things, policies and procedures to properly record
and verify a large number of transactions and events.  We cannot
assure that our policies and procedures will effectively and accurately record
and verify this information.
  We seek
to monitor and control our risk exposure through a variety of separate but
complementary financial, credit, operational and legal reporting
systems.  We believe that we are able to evaluate and manage the
market, credit and other risks to which it is exposed.  Nonetheless,
our ability to manage risk exposure can never be completely or accurately
predicted or fully assured.  For example, unexpectedly large or rapid
movements or disruptions in one or more markets or other unforeseen developments
could have a material adverse effect on our results of operations and financial
condition.  The consequences of these developments can include losses
due to adverse changes in inventory values, decreases in the liquidity of
trading positions, higher volatility in earnings, increases in our credit risk
to customers as well as to third parties and increases in general systemic
risk.
 
 We
depend on senior employees and the loss of their services could harm our
business.
 
 We depend
on the continued services of its management team, particularly Mr. Goldwasser,
our Chairman and Chief Executive Officer, Mr. Sokolow, our Vice Chairman and
President, and Mr. Dewey, our Vice Chairman, as well as our ability to hire
additional members of management, and to retain and motivate other officers and
key employees.  We may not be able to find an appropriate replacement
for Messrs. Goldwasser, Sokolow or Dewey or any other executive officer if the
need should arise.  We currently maintain a $2,000,000 of life
insurance policy on Mr. Goldwasser.  Due to the regulated nature of
some of our businesses, some of our executive officers, or other key personnel
could become subject to suspensions or other limitations on the scope of their
services to the Company from time to time.  If we lose the services of
any executive officers or other key personnel, we may not be able to manage and
grow our operations effectively, enter new brokerage markets or develop new
products.
 
 -14-
 Our
Broker Dealer Subsidiaries are subject to various risks associated with the
securities industry.
 
 As
securities broker-dealers, our Broker Dealer Subsidiaries are subject to
uncertainties that are common in the securities industry. These uncertainties
include:
 
 ·
              the
      volatility of domestic and international financial, bond and stock
      markets;
 ·
              extensive
      governmental regulation;
 ·
              litigation;
 ·
              intense
      competition;
 ·
              substantial
      fluctuations in the volume and price level of securities;
    and
 ·
              dependence
      on the solvency of various third
parties.
 
 As a
result, revenues and earnings may vary significantly from quarter to quarter and
from year to year.  In periods of low volume, profitability is
impaired because certain expenses remain relatively fixed.  In the
event of a market downturn, our business could be adversely affected in many
ways.  Our revenues are likely to decline in such circumstances and,
if it were unable to reduce expenses at the same pace, its profit margins would
erode.
 
 Failure
to comply with the net capital requirements could subject us to sanctions
imposed by the SEC or FINRA.
 
 Our
Broker Dealer Subsidiaries are subject to the SEC's net capital rule which
requires the maintenance of minimum net capital.  National Securities,
vFinance Investments, and EquityStation are each required to maintain $250,000,
$250,000 and $100,000 in minimum net capital, respectively.  Due to
their market maker status, National Securities and vFinance Investments are
required to maintain a specified amount per security that they make a market in,
based on the bid price of each stock.  This required amount can exceed
the minimum net capital requirement, and in the case of vFinance Investments,
the minimum Net Capital Requirement has been $1,000,000 (the limit) in recent
years.  The net capital rule is designed to measure the general
financial integrity and liquidity of a broker-dealer.  Compliance with
the net capital rule limits those operations of broker-dealers that require the
intensive use of their capital, such as underwriting commitments and principal
trading activities.  The rule also limits the ability of securities
firms to pay dividends or make payments on certain indebtedness, such as
subordinated debt, as it matures.  FINRA may enter the offices of a
broker-dealer at any time, without notice, and calculate the firm's net
capital.  If the calculation reveals a deficiency in net capital,
FINRA may immediately restrict or suspend certain or all of the activities of a
broker-dealer.  Our Broker Dealer Subsidiaries may not be able to
maintain adequate net capital, or its net capital may fall below requirements
established by the SEC, and subject us to disciplinary action in the form of
fines, censure, suspension, expulsion or the termination of business
altogether.  In addition, if these net capital rules are changed or
expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be
limited.  A large operating loss or charge against net capital could
adversely affect our ability to expand or even maintain its present levels of
business, which could have a material adverse effect on our
business.  In addition, we may become subject to net capital
requirements in other foreign jurisdictions in which we currently operate or
which it may enter. We cannot predict its future capital needs or its ability to
obtain additional financing.
 
 Our
business could be adversely affected by a breakdown in the financial
markets.
 
 As a
securities broker-dealer, the business of each of our Broker Dealer Subsidiaries
is materially affected by conditions in the financial markets and economic
conditions generally, both in the United States and elsewhere around the
world.  Many factors or events could lead to a breakdown in the
financial markets including war, terrorism, natural catastrophes and other types
of disasters.  These types of events could cause people to begin to
lose confidence in the financial markets and their ability to function
effectively.  If the financial markets are unable to effectively
prepare for these types of events and ease public concern over their ability to
function, our revenues are likely to decline and our operations are likely to be
adversely affected.
 
 -15-
 Our revenues may decline in adverse
market or economic conditions.
 
 Unfavorable
financial or economic conditions may reduce the number and size of the
transactions in which we provide underwriting services, merger and acquisition
consulting and other services.  Our investment banking revenues, in
the form of financial advisory, placement agent and underwriting fees, are
directly related to the number and size of the transactions in which it
participates and would therefore be adversely affected by a sustained market
downturn.  Additionally, a downturn in market conditions could lead to
a decline in the volume of transactions that we execute for our customers and,
therefore, to a decline in the revenues it receives from commissions and
spreads.  We must review customer relationships for impairment
whenever events or circumstances indicate that impairment may be present, which
may result in a material, non-cash write down of customer
relationships.  A significant decrease in revenues or cash flows
derived from acquired customer relationships could result in a material,
non-cash write-down of customer relationships. Such impairment would have a
material adverse impact on our results of operations and stockholders'
equity.
 
 Market
fluctuations and volatility may reduce our revenues and
profitability.
 
 Our
revenue and profitability may be adversely affected by declines in the volume of
securities transactions and in market liquidity.  Additionally, our
profitability may be adversely affected by losses from the trading or
underwriting of securities or failure of third parties to meet
commitments.  We act as a market maker in publicly traded common
stocks.  In market making transactions, we undertake the risk of price
changes or being unable to resell the common stock it holds or being unable to
purchase the common stock it has sold.  These risks are heightened by
the illiquidity of many of the common stocks we trade and/or make a
market.  Any losses from our trading activities, including as a result
of unauthorized trading by our employees, could have a material adverse effect
on our business, financial condition, results of operations or cash
flows.
 
 Lower
securities price levels may also result in a reduced volume of transactions, as
well as losses from declines in the market value of common stocks held for
trading purposes.  During periods of declining volume and revenue, our
profitability would be adversely affected.  Declines in market values
of common stocks and the failure of issuers and third parties to perform their
obligations can result in illiquid markets.
 
 We
generally maintain trading and investment positions in the equity markets. To
the extent that we own assets, i.e., have long positions, a downturn in those
markets could result in losses from a decline in the value of such long
positions. Conversely, to the extent that we have sold assets that we do not
own, i.e., have short positions in any of those markets, an upturn could expose
it to potentially unlimited losses as it attempts to cover its short positions
by acquiring assets in a rising market.
 
 We may,
from time to time, have a trading strategy consisting of holding a long position
in one asset and a short position in another from which it expects to earn
revenues based on changes in the relative value of the two assets. If, however,
the relative value of the two assets changes in a direction or manner that we
did not anticipate or against which we have not hedged, we might realize a loss
in those paired positions. In addition, we maintain trading positions that can
be adversely affected by the level of volatility in the financial markets, i.e.,
the degree to which trading prices fluctuate over a particular period, in a
particular market, regardless of market levels.
 
 -16-
 Competition
with other financial firms may have a negative effect on our
business.
 
 We
compete directly with national and regional full-service broker-dealers and a
broad range of other financial service firms, including banks and insurance
companies.  Competition has increased as smaller securities firms have
either ceased doing business or have been acquired by or merged into other
firms.  Mergers and acquisitions have increased competition from these
firms, many of which have significantly greater financial, technical, marketing
and other resources than the Company.  Many of these firms offer their
customers more products and research than currently offered by
us.  These competitors may be able to respond more quickly to new or
changing opportunities, technologies and client requirements.  We also
face competition from companies offering discount and/or electronic brokerage
services, including brokerage services provided over the Internet, which we are
currently not offering and do not intend to offer in the foreseeable
future.  These competitors may have lower costs or provide more
services, and may offer their customers more favorable commissions, fees or
other terms than those offered by the Company.  To the extent that
issuers and purchasers of securities transact business without our assistance,
our operating results could be adversely affected.
 
 If
we do not continue to develop and enhance our services in a timely manner, our
business may be harmed.
 
 Our
future success will depend on our ability to develop and enhance our services
and add new services.  We operate in a very competitive industry in
which the ability to develop and deliver advanced services through the Internet
and other channels is a key competitive factor. There are significant risks in
the development of new or enhanced services, including the risks that we will be
unable to:
 
 ·
              effectively
      use new technologies;
 ·
              adapt
      its services to emerging industry or regulatory standards;
    or
 ·
              market
      new or enhanced services.
 
 If we are
unable to develop and introduce new or enhanced services quickly enough to
respond to market or customer requirements or to comply with emerging industry
standards, or if these services do not achieve market acceptance, our business
could be seriously harmed.
 
 We
are currently subject to extensive securities regulation and the failure to
comply with these regulations could subject us to penalties or
sanctions.
 
 The
securities industry and our business are subject to extensive regulation by the
SEC, state securities regulators and other governmental regulatory
authorities.  We are also regulated by industry self-regulatory
organizations, including FINRA, the MSRB and the NFA.  Our Broker
Dealer Subsidiaries are registered broker-dealers with the SEC and member firms
of FINRA.  Broker-dealers are subject to regulations which cover all
aspects of the securities business, including sales methods and supervision,
trading practices among broker-dealers, use and safekeeping of customers' funds
and securities, capital structure of securities firms, record keeping, and the
conduct of directors, officers and employees.  Changes in laws or
regulations or in governmental policies could cause use to change the way we
conducts our business, which could adversely affect the Company.
 
 Compliance
with many of the regulations applicable to the Company involves a number of
risks, particularly in areas where applicable regulations may be subject to
varying interpretation.  These regulations often serve to limit our
activities, including through net capital, customer protection and market
conduct requirements.  If we are found to have violated an applicable
regulation, administrative or judicial proceedings may be initiated against us
that may result in a censure, fine, civil penalties, issuance of
cease-and-desist orders, the deregistration or suspension of our broker-dealer
activities, the suspension or disqualification of our officers or employees, or
other adverse consequences.  The imposition of any of these or other
penalties could have a material adverse effect on our operating results and
financial condition.
 
 -17-
 We
rely on clearing brokers and unilateral termination of the agreements with these
clearing brokers could disrupt our business.
 
 Our
Broker Dealer Subsidiaries are introducing brokerage firms, using third party
clearing brokers to process its securities transactions and maintain customer
accounts.  The clearing brokers also provide billing services, extend
credit and provide for control and receipt, custody and delivery of securities.
We depend on the operational capacity and ability of the clearing brokers for
the orderly processing of transactions.  In addition, by engaging the
processing services of a clearing firm, we are exempt from some capital reserve
requirements and other regulatory requirements imposed by federal and state
securities laws.  If the clearing agreements are unilaterally
terminated for any reason, we would be forced to find alternative clearing firms
without adequate time to negotiate the terms of a new clearing agreement and
without adequate time to plan for such change.  There can be no
assurance that if there were a unilateral termination of its clearing agreement
that we would be able to find an alternative clearing firm on acceptable terms
to it or at all.
 
 We permit
our clients to purchase securities on a margin basis or sell securities short,
which means that the clearing firm extends credit to the client secured by cash
and securities in the client's account.  During periods of volatile
markets, the value of the collateral held by the clearing brokers could fall
below the amount borrowed by the client.  If margin requirements are
not sufficient to cover losses, the clearing brokers sell or buy securities at
prevailing market prices, and may incur losses to satisfy client
obligations.  We have agreed to indemnify the clearing brokers for
losses they incur while extending credit to its clients.
 
 Credit
risk exposes us to losses caused by financial or other problems experienced by
third parties.
 
 We are
exposed to the risk that third parties that owe us money, securities or other
assets will not perform their obligations. These parties include trading
counterparts, customers, clearing agents, exchanges, clearing houses, and other
financial intermediaries as well as issuers whose securities we hold. These
parties may default on their obligations owed to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. This risk may arise, for
example, from holding securities of third parties, executing securities trades
that fail to settle at the required time due to non-delivery by the counterparty
or systems failure by clearing agents, exchanges, clearing houses or other
financial intermediaries, and extending credit to clients through bridge or
margin loans or other arrangements. Significant failures by third parties to
perform their obligations owed to us could adversely affect our revenues and
perhaps our ability to borrow in the credit markets.
 
 Adverse
results of current litigation and potential securities law liability would
result in financial losses and divert management's attention to
business.
 
 Many
aspects of our business involve substantial risks of liability.  There
is a risk of litigation and arbitration within the securities industry,
including class action suits seeking substantial damages.  We are
subject to potential claims by dissatisfied customers, including claims alleging
they were damaged by improper sales practices such as unauthorized trading, sale
of unsuitable securities, use of false or misleading statements in the sale of
securities, mismanagement and breach of fiduciary duty.  We may be
liable for the unauthorized acts of its retail brokers if it fails to adequately
supervise their conduct.  As an underwriter, we may be subject to
substantial potential liability under federal and state law and court decisions,
including liability for material misstatements and omissions in securities
offerings.  We may be required to contribute to a settlement, defense
costs or a final judgment in legal proceedings or arbitrations involving a past
underwriting and in actions that may arise in the future.  We carry
"Errors and Omissions" insurance to protect against arbitrations; however, the
policy is limited in items and amounts covered and there can be no assurance
that it will cover a particular complaint.  The adverse resolution of
any legal proceedings involving us and/or our subsidiaries could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
 
 -18-
 We
face significant competition for registered representatives.
 
 We are
dependent upon the independent contractor model for its retail brokerage
business.  A significant percentage of our retail registered
representatives are independent contractors.  We are exposed to the
risk that a large group of independent contractors could leave the firm or
decide to affiliate with another firm and that it will be unable to recruit
suitable replacements.  A loss of a large group of our independent
contractors could have a material adverse impact on our ability to generate
revenue in the retail brokerage business.
 
 The
precautions we take to prevent and detect employee misconduct may not be
effective, and we could be exposed to unknown and unmanaged risks or
losses.
 
 We run
the risk that employee misconduct could occur.  Misconduct by
employees could include:
 
 ·
              employees
      binding us to transactions that exceed authorized limits or present
      unacceptable risks to us;
 ·
              employees
      hiding unauthorized or unsuccessful activities from us;
  or
 ·
              the
      improper use of confidential
information.
 
 These
types of misconduct could result in unknown and unmanaged risks or losses to us
including regulatory sanctions and serious harm to our
reputation.  The precautions we take to prevent and detect these
activities may not be effective.  If employee misconduct does occur,
our business operations could be materially adversely affected.
 
 Internet
and internal computer system failures or compromises of our systems or security
could damage our reputation and harm our business.
 
 Although
a significant portion of our business is conducted using traditional methods of
contact and communications such as face-to-face meetings, a portion of its
business is conducted through the Internet. We could experience system failures
and degradations in the future.  We cannot assure you that we will be
able to prevent an extended system failure if any of the following events
occur:
 
 ·
              human
      error;
 ·
              subsystem,
      component, or software failure;
 ·
              a
      power or telecommunications
failure;
 ·
              an
      earthquake, fire, or other natural disaster or act of
  God;
 ·
              hacker
      attacks or other intentional acts of vandalism;
  or
 ·
              terrorist
      acts or war.
 
 Failure
to adequately protect the integrity of our computer systems and safeguard the
transmission of confidential information could harm our business.
 
 The
secure transmission of confidential information over public networks is a
critical element of our operations.  We rely on encryption and
authentication technology to provide the security and authentication necessary
to effect secure transmission of confidential information over the
Internet.  We do not believe that we have experienced any security
breaches in the transmission of confidential information.  We cannot
assure you that advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments will not result in a compromise
of the technology or other algorithms used by our vendors and us to protect
client transaction and other data.  Any compromise of our systems or
security could harm our business.
 
 -19-
 Our
success and ability to compete may depend in part on vFinance's intellectual
property.
 
 vFinance
relies on copyright and trademark law, as well as confidentiality arrangements,
to protect its intellectual property.  vFinance owns the following
federally registered marks: vFinance, Inc.®, vFinance.com, Inc.®, AngelSearch®,
Direct2Desk® and Hedge Fund Accelerator®. vFinance currently does not have any
patents. The concepts and technologies vFinance uses may not be patentable.
vFinance's competitors or others may adopt product or service names similar to
"vFinance.com," thereby impeding vFinance's ability to build brand identity and
possibly leading to client confusion.  vFinance's inability to adequately
protect the name "vFinance.com" would seriously harm its business.
 Policing unauthorized use of vFinance's intellectual property is made
especially difficult by the global nature of the Internet and the inherent
difficulty in controlling the ultimate destination or security of software or
other data transmitted on it.
 
 The laws
of other countries may afford vFinance little or no effective protection for its
intellectual property. vFinance cannot assure you that the steps it takes will
prevent misappropriation of its intellectual property or that agreements entered
into for that purpose will be enforceable.  In addition, litigation may be
necessary in the future to:
 
 ·
              enforce
      vFinance's intellectual property
rights;
 ·
              determine
      the validity and scope of the proprietary rights of others;
    or
 ·
              defend
      against claims of infringement or
invalidity.
 
 Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm
vFinance's business.
 
 ·
              enforce
      vFinance's intellectual property
rights;
 ·
              determine
      the validity and scope of the proprietary rights of others;
    or
 ·
                defend
      against claims of infringement or
invalidity.
 
 Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm
vFinance's business.
 
 The
"National" brand may not achieve the broad recognition necessary to
succeed.
 
 We
believe that broader recognition and positive perception of the "National" brand
is essential to our future success.  Accordingly, we intend to
continue to pursue an aggressive brand enhancement strategy, which will include
multimedia advertising, promotional programs and public relations
activities.  These initiatives will require significant
expenditures.  If our brand enhancement strategy is unsuccessful,
these expenses may never be recovered and we may be unable to increase future
revenues.  Successful positioning of our brand will depend in a large
part on:
 
 ·
              the
      success of our advertising and promotional
  efforts;
 ·
              an
      increase in the number of users and page views of our subsidiaries’
      website; and
 ·
              the
      ability to continue to provide a website and services useful to our
      clients.
 
 -20-
 Risks
Related to our Common Stock
 
 Our
common stock has low trading volume and any sale of a significant number of
shares is likely to depress the trading price.
 
 Our
common stock is quoted on the OTC Bulletin Board.  Traditionally, the
trading volume of the common stock has been limited. For example, for the 30
trading days ending on September 30, 2008, the average daily trading volume was
approximately 8,400 shares per day and on certain days there was no trading
activity.  During such
30-day period the closing price of the National common stock ranged from a high
of $1.14 to a low of $0.70.  Because of this limited trading volume,
holders of our securities may not be able to sell quickly any significant number
of such shares, and any attempted sale of a large number of our shares will
likely have a material adverse impact on the price of our common stock. Because
of the limited number of shares being traded, the per share price is subject to
volatility and may continue to be subject to rapid price swings in the
future.
 
 The
conversion or exercise of our outstanding convertible securities stock may
result in dilution to our common stockholders.
 
 Dilution
of the per share value of our common shares could result from the conversion of
most or all of the currently outstanding shares of our preferred stock and from
the exercise of the currently outstanding convertible securities.
 
 Preferred
Stock-Wecurrently have 37,550
shares of Series A preferred stock outstanding, which are convertible, in total,
into 3,004,000 shares of common stock.
 
 Warrants
and Options-We
currently have outstanding: warrants to purchase 1,979,374 shares of common
stock at exercise prices ranging from $0.79 to $16.07 per share and options to
purchase 7,037,640 shares of common stock at exercise prices ranging from $1.00
to $2.57per
share.
 
 Convertible
Notes - We currently have outstanding $6,000,000 principal amount of convertible
promissory notes which are convertible into an aggregate of 3,375,000 shares of
common stock at conversion prices of $1.60 or $2.00 per share.
 
 The
exercise of these warrants and options, and conversion of the Series A preferred
shares and convertible notes, and the sale of the underlying common stock, or
even the potential of such conversion or exercise and sale, may have a
depressive effect on the market price of our securities and the exercise or
conversion of such securities will cause dilution to our stockholders. Moreover,
the terms upon which we will be able to obtain additional equity capital may be
adversely affected, since the holders of the outstanding convertible securities
can be expected to convert or exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us
than the exercise terms provided by the outstanding options and warrants.
Dilution could create significant downward pressure on the trading price of our
common stock if the conversion or exercise of these securities encouraged short
sales. Even the mere perception of eventual sales of common shares issued on the
conversion of these securities could lead to a decline in the trading price of
our common stock.
 
 The price of our common stock is
volatile.
 
 The price
of our common stock has fluctuated substantially.  The market price of
its common stock may be highly volatile as a result of factors specific to us
and the securities markets in general.  Factors affecting volatility
may include: variations in our annual or quarterly financial results or those of
its competitors; economic conditions in general; and changes in applicable laws
or regulations, or their judicial or administrative interpretations affecting us
or our subsidiaries or the securities industry.  In addition,
volatility of the market price of our common stock is further affected by its
thinly traded nature.
 
 -21-
 We
have restricted shares outstanding that may depress the price of our common
stock.
 
 As of
September 30, 2008, of the 16,421,538 outstanding shares of our common stock,
approximately 3,265,000 shares may be deemed restricted shares and, in the
future, may be sold in compliance with Rule 144 under the Securities
Act.  Rule 144, as amended, provides that a person who is not
affiliated with the Company holding restricted securities for six months may
sell such shares without restriction.  A person who is affiliated with
us and who has held restricted securities for six months may sell such shares in
brokerage transactions, subject to limitations based on the number of shares
outstanding and trading volume.  Such sales may have a depressive
effect on the price of our common stock in the open market.
 
 Our
principal stockholders including its directors and officers control a large
percentage of shares of our common stock and can significantly influence our
corporate actions.
 
 As of
September 30, 2008, our executive officers, directors and/or entities that these
individuals are affiliated with, owned approximately 22% of our outstanding
common stock, including shares of common stock issuable upon conversion of our
Series A preferred stock, and excluding stock options, warrants and convertible
notes, or approximately 45% on a fully-diluted basis.  Accordingly,
these individuals and entities will be able to significantly influence most, if
not all, of our corporate actions, including the election of directors, the
appointment of officers, and potential merger or acquisition
transactions
 
 Because
our common stock may be subject to "penny stock" rules, the market for our
common stock may be limited.
 
 If our
common stock becomes subject to the SEC's penny stock rules, broker-dealers may
experience difficulty in completing customer transactions and trading activity
in our securities may be adversely affected.  If at any time the
common stock has a market price per share of less than $5.00, and we do not have
net tangible assets of at least $2,000,000 or average revenue of at least
$6,000,000 for the preceding three years, transactions in the common stock may
be subject to the "penny stock" rules promulgated under the Exchange
Act.  Under these rules, broker-dealers that recommend such securities
to persons other than institutional accredited investors:
 
 ·
              must
      make a special written suitability determination for the
      purchaser;
 ·
              receive
      the purchaser's written agreement to a transaction prior to
      sale;
 ·
              provide
      the purchaser with risk disclosure documents which identify certain risks
      associated with investing in "penny stocks" and which describe the market
      for these "penny stocks" as well as a purchaser's legal remedies;
      and
 ·
              obtain
      a signed and dated acknowledgment from the purchaser demonstrating that
      the purchaser has actually received the required risk disclosure document
      before a transaction in a "penny stock" can be
  completed.
 
 If our
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected.  As a result, the market price
of our securities may be depressed, and stockholders may find it more difficult
to sell our securities.
 
 -22-
 There
are risks associated with our common stock trading on the OTC Bulletin Board
rather than on a national exchange.
  There may
be significant consequences associated with our common stock trading on the OTC
Bulletin Board rather than a national exchange.  The effects of not
being able to list our common stock securities on a national exchange
include:
  ·
              limited
      release of the market price of our
securities;
 ·
              limited
      news coverage;
 ·
              limited
      interest by investors in our
securities;
 ·
              volatility
      of our common stock price due to low trading
  volume;
 ·
              increased
      difficulty in selling our securities in certain states due to "blue sky"
      restrictions; and
 ·
              limited
      ability to issue additional securities or to secure additional
      financing.
 
 Our
board of directors can issue shares of "blank check" preferred stock without
further action by our stockholders.
 
 Our board
of directors has the authority, without further action by our stockholders, to
issue up to 200,000 shares of preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions in each series of the
preferred stock, including:
 
 ·
              dividend
      rights;
 ·
              conversion
      rights;
 ·
              voting
      rights, which may be greater or lesser than the voting rights of our
      common stock;
 ·
              rights
      and terms of redemption;
 ·
              liquidation
      preferences; and
 ·
              sinking
      fund terms.
 
 There are
currently 50,000 shares of Series A preferred stock authorized, with 37,550 of
such shares issued and outstanding.  The issuance of additional shares
of preferred stock could adversely affect the voting power of holders of our
common stock and the likelihood that these holders will receive dividends and
payments upon our liquidation and could have the effect of delaying, deferring
or preventing a change in control of the Company. Other than the issuance of
additional shares of our Series A preferred stock as in-kind dividends, we have
no current plans to issue any additional preferred stock in the next twelve
months, although the issuance of preferred stock may be necessary in order to
raise additional capital.
 
 We
will be subject to new requirements that we evaluate our internal controls over
financial reporting under Section 404 of the Sarbanes-Oxley Act and other
corporate governance initiatives that may expose certain risks.
  For the
year ended September 30, 2008, we are subject to the requirements of
Section 404 of the Sarbanes-Oxley Act and the SEC rules and
regulations that require an annual management report on its internal controls
over financial reporting, including, among other matters, management's
assessment of the effectiveness of its internal control over financial
reporting.  For the year ending September 30, 2010, an attestation
report by our independent registered public accounting firm regarding our
internal controls will also be required.
  We cannot
be certain as to the timing of the completion of our evaluation, testing and
remediation actions or the impact of the same on our operations.  If
we are not able to implement the requirements of Section 404 in a timely
manner or with adequate compliance, we may be subject to sanctions or
investigation by regulatory authorities, including the SEC.  Moreover,
if we are unable to assert that our internal control over financial reporting is
effective in any future period (or if its auditors are unable to express an
opinion on the effectiveness of its internal controls), we could lose investor
confidence in the accuracy and completeness of our financial reports, which may
have an a material adverse effect on our business.
 
 -23-
 Our
compliance with the Sarbanes-Oxley Act may require significant expenses and
management resources that would need to be diverted from our other operations
and could require a restructuring of our internal controls over financial
reporting.  Any such expenses, time reallocations or restructuring
could have a material adverse effect on its operations.  The
applicability of the Sarbanes-Oxley Act could make it more difficult and more
expensive for us to obtain director and officer liability insurance, and also
make it more difficult for us to attract and retain qualified individuals to
serve on our boards of directors, or to serve as executive
officers.
 
 We
do not expect to pay any dividends on our common stock in the foreseeable
future.
 
 We do not
anticipate that it will pay any dividends to holders of our common stock in the
foreseeable future. Other than dividends paid on its Series A preferred stock,
we expect to retain all future earnings, if any, for investment in its
business.  In addition, our Certificates of Designation setting forth
the relative rights and preferences of its Series A preferred stock, as well as
our outstanding convertible notes may limit our ability to pay dividends to the
holders of our common stock.
 
 Item
1B.  UNRESOLVED STAFF COMMENTS
 
 None.
 
 Item
2. PROPERTIES
 
 The
Company owns no real property.  Its corporate headquarters are shared
with National Securities in leased space in New York, New York and Chicago,
Illinois.  The Company leases office space in Boca Raton, Florida, and
through its subsidiaries, the Company leases office space in Chicago, New York,
Seattle, Washington and Tinton Falls, New Jersey.  Independent
contractors individually lease the branch offices that are operated by those
independent contractors.
 
 Leases
expire at various times through August 2014.  The Company believes the
rent at each of its locations is reasonable based on current market rates and
conditions.
 
 The
Company leases office space in the following locations.  The following
chart provides information related to these lease obligations:
  Office
      Location
                
                Approximate
                  Square
      Footage
                
                
                Approximate
      Annual Lease Rental
                
                Expiration
      Date120
      Broadway, New York, NY
                
                
                30,699
                
                
                $
                1,326,197
                
                8/31/2013875
      N. Michigan Ave., Chicago, IL
                
                
                1,868
                
                
                
                63,512
                
                12/31/20111001
      Fourth Ave, Seattle, WA
                
                
                16,421
                
                
                
                511,308
                
                6/30/20122424
      N. Federal Highway, Boca Raton, FL
                
                
                10,177
                
                
                
                173,004
                
                12/31/20134000
      Rt. 66, Tinton Falls, NJ
                
                
                3,798
                
                
                
                96,852
                
                9/30/20123010
      N. Military Trail, Boca Raton, FL
                
                
                18,390
                
                
                
                666,930
                
                2/28/2009131
      Gaither Drive, Mount Laurel, NJ
                
                
                1,400
                
                
                
                19,600
                
                9/30/20091200
      N. Federal Highway, Boca Raton FL
                
                
                16,250
                
                
                
                542,100
                
                8/21/2014330
      Madison Ave New York City, NY
                
                
                6,484
                
                
                
                310,050
                
                4/29/2011
  We
consider the facilities of our company and those of our subsidiaries to be
reasonably insured and adequate for the foreseeable needs of our company and its
subsidiaries.
 
 -24-
 Item
3. LEGAL PROCEEDINGS
 
 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 alleged fraud and
inequitable conduct relating to his attempts to sell his investment in the
Company in calendar year 2001, and was seeking approximately $5,750,000 in
damages.  On August 27, 2008, we received
notification from FINRA that Rothstein’s claim had been dismissed.
 
 In
November 2007, Nupetco Associates, LLC filed a customer arbitration action
(FINRA Case No. 07-03152) with FINRA, naming vFinance Investments as a
co-respondent.  Nupetco alleged violations of various state and
federal securities laws and sought compensatory damages of $508,787 against
vFinance Investments in addition to costs, attorneys’ fees and punitive
damages.  In response, vFinance Investments filed an answer and
affirmative defenses and requested discovery from
the  arbitration  claimant.  vFinance Investments,
in cooperation with its insurance carrier has since agreed to settle this
case.  The settlement documents are being finalized and the Company
estimates its liability associated with this case at approximately
$27,000.
 
 In July
2005, the Securities and Exchange Commission contacted vFinance regarding an
investigation into Lexington Resources, Inc.  On May 4, 2006 the
Commission issued an Order Directing Investigation advising vFinance that the
Division of Enforcement staff were investigating possible violations of Sections
5(a) and 5(c)of the Securities Act of 1933, Rule 10(b)5 of the Exchange Act,
Section 17b of the Securities Act, Section 17(a) of the Exchange Act, Section
15(c)(l)(a) of the Exchange Act, Section 13(d) of the Exchange Act, and Section
16(a) of the Exchange Act from the period of November 2003 through May 4,
2006.  From July 2005 through and including March 2007, multiple
document and information requests and responses to those requests were exchanged
between the SEC staff and vFinance.  In total more than 5,000 pages of
documents were produced to the SEC staff in both electronic and hard copy
form.  On January 3, 2008, the SEC issued and Order Instituting
Administrative Proceedings against vFinance Investments, Inc., Richard
Campanella and a former registered representative.  The Order alleges
that vFinance violated the federal securities laws by failing to preserve and
produce customer correspondence of one of its registered
representative.  The SEC also alleges that the registered
representative repeatedly failed to produce records and deliberately deleted
data from his hard drive relating to a matter under investigation by the
SEC.  The SEC separately alleges that Campanella failed to respond
promptly to the SEC's document requests, as required under Section 17(a) of the
Exchange Act, and failed to address the registered representative’s
non-compliance with the firm document retention policies.  The alleged
violations were isolated occurrences related to this registered representative
and were limited to the Flemington, New Jersey branch office.  The
registered representative terminated his employment with vFinance on August 4,
2006, and has not been associated with vFinance since that date.  On
November 7, 2008, a ruling in this matter was issued which found that
vFinance willfully violated Section 17(a) of the Exchange Act and Rules
17a-4(b)(4) and 17a-4(j) thereunder, and that Campanella aided and abetted and
caused vFinance's violations.  As a consequence, a Cease and Desist
Order was issued against vFinance with a civil monetary penalty
against vFinance in the amount of $100,000.00.  On November 17, 2008
vFinance filed a Motion to Correct Manifest Errors of Fact in the Initial
Decision in an effort to correct possible errors in the ruling’s findings
of fact.  The Judge denied the motion.   The Company
may choose to file a Petition for Review of the decision by the
Commission.
 
 -25-
 On March
4, 2008, vFinance received a customer arbitration action (FINRA Case No.
08-00472) from Claimants, Donald and Patricia Halfmann. As indicated under
FINRA's Code of Arbitration Procedure, vFinance filed a responsive
pleading.  The Halfmanns' Statement of Claim alleges that Jeff
Lafferty, a former broker working for vFinance Investments, opened accounts for
the Halfmanns and misappropriated approximately $110,000 of the Halfmanns' funds
via check alteration and forgery while he was employed by vFinance as the
Halfmanns' financial advisor. The Halfmanns also contend vFinance is liable for
an additional $150,000 for investments made by the Halfmanns directly with Jeff
Lafferty after their account transferred out of vFinance and after Lafferty's
resignation from vFinance, with a form U-5 filed with NASD by vFinance on August
27, 2004. Finally, the Halfmanns' Statement of Claim requests punitive damages,
costs and attorney's fees incurred for this action.  The Company is
currently engaged in the discovery process with a final hearing scheduled in
February 2009. While vFinance intends to vigorously defend against the
allegations made in the Halfmanns' Statement of Claim, a prediction of the
likely outcome cannot be made at this time.
 
 The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, seeking in the aggregate damages of
approximately $3,400,000.  The Company believes such claims are
substantially without merit, and estimates that its liability, primarily for
attorney representation, will approximate $295,000 (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 September 30, 2008 and 2007, is $587,000 and $62,000 (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 other FINRA related expenses of $1,820,000 and $1,444,000 for the
fiscal years ended September 30, 2008 and 2007 respectively.
 
 Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 There
were no matters submitted to a vote of security holders in the fourth quarter of
fiscal year ended September 30, 2008.
 
 PART
II
 
 Item
5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 Market
Information
 
 Our
common stock trades under the symbol “NHLD” on the OTCBB.  Quotations
on the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
 
 The
following table sets forth the high and low closing sales prices for the common
stock as reported on the OTCBB for the period from October 1, 2006 to
September 30, 2008.
  Period
                High
                LowOctober
      1, 2006/December 31, 2006
                $1.65
                $1.10January
      1, 2007/March 31, 2007
                $1.80
                $1.40April
      1, 2007/June 30, 2007
                $3.30
                $1.56July
      1, 2007/September 30, 2007
                $2.85
                $1.85
   -26-
 Period
                High
                LowOctober
      1, 2007/December 31, 2007
                $2.55
                $1.42January
      1, 2008/March 31, 2008
                $2.80
                $1.96April
      1, 2008/June 30, 2008
                $2.25
                $1.50July
      1, 2008/September 30, 2008
                $1.68
                $0.70
  The
closing price of the common stock on December 26, 2008, as quoted on the OTCBB,
was $0.30per share.
 
 Shareholders
 
 As of
September 30, 2008, the Company had approximately 1,000 shareholders, including
those shareholders holding stock in street name and trust accounts.
 
 Dividends
 
 Delaware
law authorizes the Company’s Board of Directors to declare and pay dividends
with respect to the common stock either out of its surplus (as defined in the
Delaware Corporation Law) or, in case there is no such surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year; provided, however, that no dividend may be paid out of
net profits unless the Company’s capital exceeds the aggregate amount
represented by the issued and outstanding stock of all classes having a
preference in the distribution of assets.  The Company’s ability to
pay dividends in the future also may be restricted by its operating subsidiary's
obligation to comply with the net capital requirements imposed on broker-dealers
by the SEC and FINRA.  Prior to the issuance of the Series A and
Series B preferred stock, no shareholder held preferential rights in
liquidation.  We do not anticipate that we will pay any dividends to
holders of our common stock in the foreseeable future.
 
 The
holders of the Series A Convertible preferred stock are entitled to receive
dividends on a quarterly basis at a rate of 9% per annum, per
share.  Such dividends are cumulative and accumulate whether or not
declared by the Company’s Board of Directors, but are payable only when and if
declared by the Company’s Board of Directors.   In the years
ended September 30, 2007, 2006 and 2005, the Company’s Board of Directors
declared in-kind dividends in the aggregate of 2,537, 1,996 and 2,143 shares of
Series A preferred stock, in payment of approximately $317,000, $300,000 and
$322,000, respectively, for dividends accumulated through March 31 of each
year.  No dividends have been declared subsequent to March
2007.  In March 2006, the Company’s shareholders approved an amendment
to decrease the conversion price of the Series A preferred stock to $1.25 per
share from $1.50 per share.  As of September 30, 2008 and 2007, the
amount of accumulated dividends for the Company’s 37,550 issued and outstanding
shares of Series A preferred stock was approximately $507,000 and $169,000,
respectively.
 
 The
holders of the Company’s Series B Convertible preferred stock, convertible into
the Company’s common stock at $.75 per share, were entitled to receive dividends
on a quarterly basis at a rate of 10% per annum per share.  Such
dividends were cumulative and were payable only when declared by the Company’s
Board of Directors.  The Company declared and paid cash dividends on
its Series B preferred stock in fiscal years 2007 and 2006.  In the
fourth quarter of fiscal year 2007, the Company exercised the conversion option
contained in its Series B preferred stock, and is no longer obligated to pay
dividends on its Series B preferred stock.
 
 The
holders of the Company’s Series A convertible preferred stock have voting rights
equal to the number of shares of common stock into which such shares of
preferred stock could be converted at a particular record date.
 
 -27-
 Securities
Authorized for Issuance under Equity Compensation Plans
 
 Item 12
of Part III contains information concerning securities authorized for issuance
under our equity compensation plans.
 
 Issuer
Purchases of Equity Securities
  We have
not announced any currently effective authorization to repurchase shares of our
common stock.
 
 Item
6. SELECTED FINANCIAL DATA
 
 Set forth
below is the historical financial data with respect to the Company for the
fiscal years ended 2008, 2007, 2006, 2005 and 2004.  This information
has been derived from, and should be read in conjunction with, the audited
financial statements, which appear elsewhere in this report.  This
information includes financial information of vFinance for only the fourth
quarter of fiscal year 2008.  All information is expressed in
thousands of dollars except for per share information.
  Fiscal
      Year2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Net
      revenues
                
                $
                82,143
                
                
                $
                72,819
                
                
                $
                58,727
                
                
                $
                45,730
                
                
                $
                62,460Net
      income (loss)
                
                
                (21,017
                )
                
                
                1,372
                
                
                
                595
                
                
                
                (1,183
                )
                
                
                566Preferred
      stock dividends
                
                
                (338
                )
                
                
                (409
                )
                
                
                (381
                )
                
                
                (290
                )
                
                
                (266
                )Net
      income (loss) per common shareBasic
                
                
                (2.02
                )
                
                
                0.16
                
                
                
                0.04
                
                
                
                (0.29
                )
                
                
                0.08Diluted
                
                
                (2.02
                )
                
                
                0.13
                
                
                
                0.04
                
                
                
                (0.29
                )
                
                
                0.07Weighted
      average number of sharesused
      in computing income (loss)per
      shareBasic
                
                
                10,579,778
                
                
                
                6,042,646
                
                
                
                5,146,422
                
                
                
                5,024,643
                
                
                
                3,580,446Diluted
                
                
                10,579,778
                
                
                
                9,669,531
                
                
                
                5,278,299
                
                
                
                5,024,643
                
                
                
                4,106,742Total
      assets
                
                
                24,477
                
                
                
                17,283
                
                
                
                9,707
                
                
                
                7,960
                
                
                
                9,722Total
      liabilities
                
                
                19,156
                
                
                
                10,461
                
                
                
                6,864
                
                
                
                7,030
                
                
                
                7,793Stockholders’
      equity (deficit)
                
                
                5,321
                
                
                
                6,822
                
                
                
                2,843
                
                
                
                930
                
                
                
                1,929Cash
      dividends
                
                
                -
                
                
                
                82
                
                
                
                46
                
                
                
                -
                
                
                
                -
 Item
7. 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 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 Item 1 above.  Any forward-looking
statements contained in or incorporated into this Report speak only as of the
date of this Report.  The Company undertakes no obligation to update
publicly any forward-looking statement, whether as a result of new information,
future events or otherwise.
 
 -28-
 Critical
Accounting Policies and Estimates
 
 The SEC
recently issued proposed guidance for disclosure of critical accounting policies
and estimates.   The Company’s most critical accounting policies
relate to income recognition, income taxes, and stock-based
compensation.  The SEC defines “critical accounting estimates” as
those that require application of management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effects of matters that are inherently uncertain and may change in subsequent
periods.
 
 The
Company’s critical accounting policies are as follows:
 
 Revenue Recognition -
Customer security transactions and the related commission income and expense are
recorded as of the trade date.  Investment banking revenues include
gains, losses, and fees, net of syndicate expenses, arising from securities
offerings in which the Company acts as an underwriter or agent. Investment
banking revenues also include fees earned from providing financial advisory
services. Investment banking management fees are recorded on the offering
date, sales concessions on the settlement date, and underwriting fees at the
time the underwriting is completed and the income is reasonably
determinable.  Customers who are financing their transaction on margin
are charged interest.  The Company’s margin requirements are in
accordance with the terms and conditions mandated by its clearing firms, NFS,
Penson and Legent.  The interest is billed on the customer’s average
daily balance of the margin account.
 
 Net
dealer inventory gains result from securities transactions entered into for the
account and risk of the Company.  Net dealer inventory gains are
recorded on a trade date basis.  Transfer fees are charged for each
customer’s security transaction, and are recognized as of the trade
date.  Investment advisory fees are account management fees for high
net worth clients based on the amount of the assets under
management.  These fees are billed quarterly and recognized at such
time that the service is performed and collection is probable.
 
 The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market, and
charges commissions based on the services the Company provides to its
customers.  In executing customer orders to buy or sell a security in
which the Company makes a market, the Company may sell to, or purchase from,
customers at a price that is substantially equal to the current inter-dealer
market price plus or minus a mark-up or mark-down.  The Company may
also act as agent and execute a customer's purchase or sale order with another
broker-dealer market-maker at the best inter-dealer market price available and
charge a commission.  Mark-ups, mark-downs and commissions are
generally priced competitively based on the services it provides to its
customers.  In each instance the commission charges, mark-ups or
mark-downs, are in compliance with guidelines established by FINRA.
 
 Common Stock Purchase
Warrants - The Company accounts for the issuance of common stock purchase
warrants issued in connection with capital financing transactions in accordance
with the provisions of Emerging Issues Task Force Issue No. 00-19 “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock” (“EITF 00-19”).  Based on the provisions of EITF
00-19, the Company classifies as equity any contracts that (i) require physical
settlement or net-share settlement or (ii) gives the Company a choice of
net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement).  The Company classifies as assets or
liabilities any contracts that (i) require net-cash settlement (including a
requirement to net-cash settle the contract if an event occurs and if that event
is outside the control of the Company) or (ii) gives the counterparty a choice
of net-cash settlement or settlement in shares (physical settlement or net-share
settlement).
 
 The
Company assessed the classification of its derivative financial instruments as
of September 30, 2008, which consist of common stock purchase warrants, and
determined that such derivatives meet the criteria for equity classification
under EITF 00-19.
 
 -29-
 Convertible
Instruments - The Company evaluates and accounts for conversion options
embedded in its convertible instruments in accordance with
SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”) and EITF 00-19.
 
 SFAS 133
generally provides three criteria that, if met, require companies to bifurcate
conversion options from their host instruments and account for them as free
standing derivative financial instruments in accordance with EITF 00-19. These
three criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at fair value
under otherwise applicable generally accepted accounting principles with changes
in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be
considered a derivative instrument subject to the requirements of SFAS 133.
SFAS 133 and EITF 00-19 also provide an exception to this rule when the
host instrument is deemed to be conventional (as that term is described in the
implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The
Meaning of “Conventional Convertible Debt Instrument” in
EITF 00-19).
 
 The
Company accounts for convertible instruments (when it has determined that the
embedded conversion options should not be bifurcated from their host
instruments) in accordance with the provisions of EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible notes
for the intrinsic value of conversion options embedded in debt instruments based
upon the differences between the fair value of the underlying common stock at
the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized over
the term of the related debt to their earliest date of redemption. The Company
also records when necessary deemed dividends for the intrinsic value of
conversion options embedded in preferred shares based upon the differences
between the fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in the
note.
 
 The
Company evaluated the conversion option embedded in the convertible preferred
stock and determined, in accordance with the provisions of these statements,
that such conversion option does not meet the criteria requiring bifurcation of
these instruments. The characteristics of the common stock that is issuable upon
a holder’s exercise of the conversion option embedded in the convertible
preferred stock are deemed to be clearly and closely related to the
characteristics of the preferred shares (as that term is clarified in
paragraph 61.l. of the implementation guidance included in Appendix A
of SFAS 133).  Additionally, the Company’s conversion options, if
free standing, would not be considered derivatives subject to the accounting
guidelines prescribed under SFAS 133.
 
 Other Receivables -
The Company extends unsecured credit in the normal course of business to its
registered representatives. The determination of the amount of uncollectible
accounts is based on the amount of credit extended and the length of time each
receivable has been outstanding, as it relates to each individual registered
representative.  The allowance for doubtful accounts reflects the
amount of loss that can be reasonably estimated by management, and is included
in other expenses in the accompanying consolidated statements of
operations.
 
 Stock-Based
Compensation - Prior to October 1, 2005, the Company accounted for
employee stock transactions in accordance with Accounting Principle Board, APB
Opinion No. 25, “Accounting for Stock Issued to Employees.”  The
Company had adopted the pro forma disclosure requirements of Statement of
Financial Accounting Standards No. 123, “Accounting For Stock-Based
Compensation.”
 
 -30-
 Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment.”  This statement is a
revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
and its related implementation guidance.  SFAS 123R addresses all
forms of share based payment (“SBP”) awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights.  Under SFAS 123R, SBP awards will result in a
charge to operations that will be measured at fair value on the awards grant
date, based on the estimated number of awards expected to vest over the service
period.
 
 The
Black-Scholes option valuation model was used to estimate the fair value of the
options granted during the fiscal years ended September 30, 2008 and
2007.  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 the Company's
opinion, this valuation model does not necessarily provide a reliable single
measure of the fair value of its employee stock options
 
 Results
of Operations
 
 The
results of operations for fiscal year 2008 include the results of vFinance for
only the fourth quarter of the fiscal year.
 
 Fiscal
Year 2008 Compared with Fiscal Year 2007
 
 The
Company’s fiscal year 2008 resulted in an increase in revenues, and a greater
increase in expenses, compared with fiscal year 2007.  As a result,
the Company reported a net loss of $21,017,000 compared with net income of
$1,372,000 for the fiscal years 2008 and 2007, respectively.
  Fiscal
      Year
                
                
                Increase
      (Decrease)2008
                
                
                2007
                
                
                Amount
                
                
                PercentCommissions
                
                $
                50,128,000
                
                
                $
                39,237,000
                
                
                $
                10,891,000
                
                
                
                28%Net
      dealer inventory gains
                
                
                16,810,000
                
                
                
                15,729,000
                
                
                
                1,081,000
                
                
                
                7%Investment
      banking
                
                
                1,906,000
                
                
                
                9,134,000
                
                
                
                (7,228,000
                )
                
                
                -79%Interest
      and dividends
                
                
                3,862,000
                
                
                
                2,824,000
                
                
                
                1,038,000
                
                
                
                37%Transfer
      fees and clearing services
                
                
                5,529,000
                
                
                
                4,075,000
                
                
                
                1,454,000
                
                
                
                36%Other
                
                
                3,908,000
                
                
                
                1,820,000
                
                
                
                2,088,000
                
                
                
                115%$
                82,143,000
                
                
                $
                72,819,000
                
                
                $
                9,324,000
                
                
                
                13%
 Total
revenues increased $9,324,000, or 13%, in fiscal year 2008 to $82,143,000 from
$72,819,000 in fiscal year 2007.  The increase in revenues is due to
higher commission revenue and net dealer inventory gains which consist of
trading, market making and markup and mark downs, primarily resulting from the
merger with vFinance, partially offset by a decline in investment banking
revenues due to adverse market conditions. Commission revenue increased
$1,081,000, or 7%, to $16,810,000 from $15,729,000 during fiscal year 2008
compared with fiscal year 2007.  Total net dealer inventory gains
increased $1,081,000, or 7%, to $16,810,000 from $15,729,000 during fiscal year
2008 compared with fiscal year 2007.  The increase is primarily due to
the merger with vFinance.
 
 -31-
 Investment
banking revenue decreased $7,228,000, or 79%, to $1,906,000 from $9,134,000 in
fiscal year 2008 compared with fiscal year 2007.  The decrease in
investment banking revenues is attributable to the Company completing fewer and
smaller investment banking transactions in fiscal year 2008 compared to fiscal
year 2007 due to adverse market conditions and tightening
credit.  Interest and dividend income increased $1,038,000, or 37%, to
$3,862,000 from $2,824,000 in fiscal year 2008 compared with fiscal year
2007.  The increase in interest income is attributable to an increase
in the amount of debit balances in customer accounts, an adjustment of the
interest sharing agreement with one of the Company’s clearing firms and the
merger with vFinance.  Transfer fees increased $1,454,000, or 36%, to
$5,529,000 in fiscal year 2008 from $4,075,000 in fiscal year
2007.  The increase is primarily due to the higher trading volume
experienced during the first quarter of fiscal year 2008 and the merger with
vFinance
 
 Other
revenue, consisting of asset management fees, miscellaneous transaction fees and
trading fees, and other investment income, increased $2,088,000, or 115%, to
$3,908,000 from $1,820,000 during fiscal year 2008 compared to fiscal year
2007.  The increase is primarily due to having more fee based assets
under management and the merger the merger with vFinance.
 
 Fiscal
      Year
                
                
                Increase
      (Decrease)2008
                
                
                2007
                
                
                Amount
                
                
                PercentCommissions
                
                $
                64,910,000
                
                
                $
                52,271,000
                
                
                $
                12,639,000
                
                
                
                24%Employee
      compensation
                
                
                9,699,000
                
                
                
                7,464,000
                
                
                
                2,235,000
                
                
                
                30%Clearing
      fees
                
                
                2,952,000
                
                
                
                1,745,000
                
                
                
                1,207,000
                
                
                
                69%Communications
                
                
                1,632,000
                
                
                
                1,719,000
                
                
                
                (87,000
                )
                
                
                -5%Occupancy
      and equipment costs
                
                
                3,844,000
                
                
                
                2,996,000
                
                
                
                848,000
                
                
                
                28%Professional
      fees
                
                
                2,986,000
                
                
                
                2,266,000
                
                
                
                720,000
                
                
                
                32%Interest
                
                
                680,000
                
                
                
                531,000
                
                
                
                149,000
                
                
                
                28%Taxes,
      licenses and registration
                
                
                533,000
                
                
                
                666,000
                
                
                
                (133,000
                )
                
                
                -20%Other
      administrative expenses
                
                
                2,925,000
                
                
                
                1,789,000
                
                
                
                1,136,000
                
                
                
                63%Intangible
      impairment
                
                
                12,999,000
                
                
                
                -
                
                
                
                12,999,000
                
                
                
                -$
                103,160,000
                
                
                $
                71,447,000
                
                
                $
                31,713,000
                
                
                
                44%
 
 In
comparison with the 13% increase in total revenues, total expenses increased
44%, or $31,713,000, to $103,160,000
for fiscal year 2008 compared to $71,447,000 in fiscal year 2007.  The
increase in total expenses is primarily the result of an intangible impairment
of $12,999,000, greater commission expense directly associated with commission
revenues and net dealer inventory gain, and increases in employee compensation
and legal fees, and the merger with vFinance, partially offset by a decline in
commission expense directly associated with investment banking.
 
 Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $12,639,000, or 24%, to
$64,910,000 in fiscal year 2008 from $52,271,000 in 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, an
increase in the amortization of advances to registered representatives and the
merger with vFinance.  Commission expense includes the amortization of
advances to registered representatives of $1,448,000 and $1,406,000 for 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 $2,235,000, or 30%, to $9,699,000 in fiscal year
2008 from $7,464,000 in fiscal year 2007.  The increase is primarily
attributable to employee salaries associated with the merger with vFinance and
an increase in the amortization of the fair value associated with stock based
compensation.  This was partially offset by the Company’s efforts to
reduce unnecessary staff due to the duplication of resources post
merger.  The amortization of stock based compensation is $ 564,000 and
$171,000 for fiscal years 2008 and 2007, respectively.  Overall,
combined commission and employee compensation expense, as a percentage of
revenue increased to 91% from 82% in fiscal years 2008 and 2007,
respectively.
 
 -32-
 Clearing
fees increased $1,207,000, or 69%, to $2,952,000 in fiscal year 2008 from
$1,745,000 in fiscal year 2007.  The increase in clearing fees is
attributable to the increase in commission revenue and net dealer inventory
gains in fiscal year 2008 compared to fiscal year 2007, partially offset by the
amortization of credits received from one of the Company’s clearing firms, and
the merger with vFinance.  The greater increase in clearing fees as
compared to the increase in commission revenue is attributable to lower average
commission revenue per ticket in fiscal year 2008.
 
 Communication
expenses decreased $87,000, or 5%, to $1,632,000 from $1,719,000 in fiscal year
2008 compared to fiscal year 2007.  The decrease is primarily due to
the Company’s ability to acquire certain of these services at a lower price,
partially offset by increases associated with the merger with
vFinance.  Occupancy costs increased $848,000, or 28%, to $3,844,000
from $2,996,000 in fiscal year 2008 compared to fiscal year 2007.  The
increase in occupancy expense is due to annual rent increases contained in the
Company’s office leases, higher operating expenses, a new office lease and
leases assumed in connection in the merger with
vFinance.  Professional fees increased $720,000, or 32%, to $2,986,000
from $2,266,000 in fiscal year 2008 compared to fiscal year 2007.  The
increase in professional fees is primarily a result of legal fees and costs
incurred to defend and settle certain arbitrations and those incurred in
connection with the merger with vFinance.
 
 Interest
expense increased $149,000, or 28%, to $680,000 from $531,000 in fiscal year
2008 compared to fiscal year 2007.  The increase in interest expense
is attributable to new convertible notes issued in fiscal year 2008 partially
offset by the acceleration of amortization on the Company’s convertible notes
that were converted to common stock in fiscal year 2007.  Included in
interest expense is the amortization of deferred financing costs of $274,000 and
$291,000 for fiscal years 2008 and 2007, respectively.  Taxes,
licenses and registration decreased $133,000, or 20%, to $533,000 from $666,000
in fiscal year 2008 compared fiscal year 2007.  The decrease in taxes,
licenses and registration fees is due to lower registration fees paid on behalf
of brokers in fiscal year 2008 compared to fiscal year 2007, partially offset by
the acquisition of similar costs in connection with the merger with
vFinance.  Other administrative expenses increased $1,136,000, or 63%,
to $2,925,000 from $1,789,000 in fiscal year 2008 compared to fiscal year
2007.  The increase in other expenses is an increase in marketing and
other promotional expenses in fiscal year 2008, recruiting costs associated with
new registered representatives and the merger with vFinance.
 
 The
Company recorded an impairment charge related to the intangible asset acquired
in the merger with vFinance, Inc. of $12,999,000 based on a calculation that
determined that the adjusted carrying basis of its intangible assets was
$2,950,000 at September 30, 2008.  The Company had not reported any
impairment charge for the fiscal year ended September 30, 2007.
 
 The
Company reported a net loss of $21,017,000 in fiscal year 2008 compared to net
income of $1,372,000 in fiscal year 2007.  The net loss attributable
to common stockholders in fiscal year 2008 was $21,355,000, or $2.02 per common
share, as compared net income attributable to common of $963,000, or diluted
earnings of $.13 per common share in fiscal year 2007.  The net income
attributable to common stockholders for fiscal years 2008 and 2007 reflects
$338,000 and $409,000, respectively, of cumulative Preferred Stock dividends on
the Company’s Preferred Stock.
 
 -33-
 Liquidity
and Capital Resources
 
 Our
Broker Dealer Subsidiaries are subject to the SEC's Uniform Net Capital Rule
15c3-1, which is designed to measure the general financial integrity and
liquidity of a broker-dealer and requires the maintenance of minimum net
capital.  Net capital is defined as the net worth of a broker-dealer
subject to certain adjustments.  In computing net capital, various
adjustments are made to net worth that exclude assets not readily convertible
into cash. Additionally, the regulations require that certain assets, such as a
broker-dealer's position in securities, be valued in a conservative manner so as
to avoid over-inflation of the broker-dealer's net capital.  National
Securities has elected to use the alternative standard method permitted by the
rule. This requires that National Securities maintain minimum net capital equal
to the greater of $250,000 or a specified amount per security based on the bid
price of each security for which National Securities is a market
maker.  At September 30, 2008, National Securities’ net capital
exceeded the requirement by $443,000.  Due to its market maker status,
vFinance Investments is required to maintain a minimum net capital of $1,000,000
and EquityStation is required to maintain $100,000, and at September 30, 2008 the firms had
excess net capital of $524,000 and $263,000 respectively.
 
 Advances,
dividend payments and other equity withdrawals from the Company’s subsidiary are
restricted by the regulations of the SEC and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.  During the fiscal
year ended September 30, 2007 the Company did not have any equity
withdrawals.
 
 The
Company extends unsecured credit in the normal course of business to its
brokers.  The determination of the appropriate amount of the reserve
for uncollectible accounts is based upon a review of the amount of credit
extended, the length of time each receivable has been outstanding, and the
specific individual brokers from whom the receivables are due.
 
 The
objective of liquidity management is to ensure that the Company has ready access
to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
 
 In August
2005, upon the maturity of previously issued notes, the Company and two note
holders entered into new note agreements providing for $1.0 million of notes
with a maturity date of July 31, 2007, together with warrants having an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
of common stock at a price of $1.25 per share.  The notes had an
interest rate of 9%.  These notes were repaid in full in January 2006,
and the warrants to purchase 200,000 shares of common stock were exercised in
July 2007.
 
 National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company to borrow
securities that can be used by the Company for collateral
agreements.  In February 2008, upon the maturity of the previously
issued note, National Securities and the holder entered into a new $500,000
secured demand note collateral agreement with a maturity date of March 1,
2009.  The holder also entered into a warrant agreement to purchase
150,000 shares of common stock at a price of $1.25 per share, with an expiration
date of July 31, 2009.
 
 In
January 2006, the Company completed a private placement of its securities to a
limited number of accredited investors in a transaction exempt from registration
under Section 4(2) of the Securities Act.  The investors made a $2.0
million investment in the Company by purchasing an aggregate of the following:
(i) $1.0 million for 10,000 shares of the Company’s newly created Series B
Preferred Stock, which had a 10% dividend rate and was convertible into Common
Stock at a price of $.75 per share, and (ii) 11% convertible promissory notes in
the principal amount of $1.0 million, which were convertible into Common Stock
at a price of $1.00 per share, with warrants to purchase an aggregate of 300,000
shares of Common Stock at an exercise price of $1.00 per share.  The
convertible promissory notes were to mature in January 2011.  The fair
value of the warrants was calculated using the Black-Scholes Option Valuation
Model.  The Company recorded a debt discount of approximately $187,000
that was charged to interest expense over the life of the debt.
 
 -34-
 The
investment included $1.7 million by St. Cloud Capital Partners, L.P. (“St.
Cloud”), and an aggregate of $300,000 by two unrelated
investors.  Marshall S. Geller, the Co-Founder and Senior Managing
Member of SCGP, LLC, the General Partner of St. Cloud, became a member of the
Board of Directors of the Company simultaneous with the closing of the
transaction.  The Company incurred legal fees and other costs related
to this capital transaction, in the amount of $56,000.  The Company
capitalized one-half of the fees to deferred financing costs that were amortized
to interest expense over the life of the convertible promissory notes and
one-half of the fees were charged to paid-in capital.
 
 In June
2007, the Company exercised the conversion option contained in its 11%
convertible promissory notes.  The Company issued 1,024,413 shares of
its common stock in full payment of the $1,000,000 convertible promissory notes,
plus accrued interest.  The remaining unamortized debt discount of
approximately $150,000 was expensed as “Interest” in the quarter ended June 30,
2007.  In July 2007, the Company exercised the conversion option
contained in its Series B Preferred Stock, and issued 1,333,333 shares of its
common stock for the retirement of the Series B preferred
stock.  Accordingly, the Company is no longer obligated to pay
dividends on the Series B preferred stock.
 
 In
February 2007, the Company completed a financing transaction under which certain
investors purchased 10% promissory notes in the principal amount of $1.0
million, with warrants to purchase an aggregate of 250,000 shares of common
stock at an exercise price of $1.40 per share.  The promissory notes
mature in February 2009, and have a stated interest rate of 10% per
annum.  The fair value of the warrants was calculated using the
Black-Scholes Option Valuation Model.  The Company recorded a debt
discount of approximately $195,000 that is being charged to interest expense
over the life of the debt.
 
 The
Company and the investors entered into a registration rights agreement, wherein
the investors received unlimited piggyback registration rights and one demand
registration right for the shares of common stock issuable upon exercise of the
warrants.  The Company has agreed to file the registration statement
within 90 days of such demand.  The Company has agreed to use
commercially reasonable efforts to have the registration statement declared
effective.  There are no penalties for failure to have the
registration statement declared effective.  In October, 2008, the
Company filed a registration statement that includes the securities covered by
the warrants, but it has not yet been declared effective.
 
 The
investment included $500,000 by Christopher C. Dewey and $250,000 by St.
Cloud.  Mr. Dewey, and Mr. Geller, the Senior Managing Partner of St.
Cloud, are each members of the Company’s board of directors.  The
Company incurred legal fees and other costs related to this capital transaction
in the amount of $22,000 that were capitalized and will be amortized to interest
expense over the life of the promissory notes.
 
 On March
31, 2008, the Company completed a financing transaction under which an investor
made an investment in the Company by purchasing a convertible promissory note in
the principal amount of $3.0 million, with a warrant to purchase 375,000 shares
of common stock at an exercise price of $2.50 per share.  The
promissory note matures in March 2012, is convertible into common stock at a
price of $2.00 per share and has a stated interest rate of 10% per
annum.  Under accounting guidance provided by EITF No 98-5 and EITF
No. 00-27 the relative fair value of the warrant was calculated using the
Black-Scholes Option Valuation Model.  The Company also recorded an
additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $791,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 On June
30, 2008, the Company completed a financing transaction under which the same
investor made an additional investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0 million, with a
warrant to purchase 468,750 shares of common stock at an exercise price of $2.00
per share.  The promissory note matures in June 2012, is convertible
into common stock at a price of $1.60 per share and has a stated interest rate
of 10% per annum.  Under accounting guidance provided by EITF No 98-5
and EITF No. 00-27 the relative fair value of the warrant was calculated using
the Black-Scholes Option Valuation Model.  The Company also recorded
an additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $789,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 -35-
 The
Company and the investor entered into registration rights agreements, 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 merger with vFinance, and to cause
the registration statement to be declared effective within one hundred eighty
(180) days of the effective date of such merger.  Should the Company
fail to either file the registration statement or have it declared effective
within such time limits then as liquidated damages the interest rate of the note
shall increase 1% per annum for each month the applicable failure is not cured,
up to a maximum of 15%.  The investments were made by an affiliate of
St. Cloud, whose managing partner is Marshall S. Geller, a member of the
Company's board of directors.  Robert W. Lautz, Jr., a Managing
Director of St. Cloud, became a member of the board of directors of the Company
concurrent with the closing of the June 2008 financing
transaction.  The Company incurred legal fees and other costs related
to these capital transactions of approximately $101,000 and $75,000,
respectively that were capitalized and will be amortized to interest expense
over the life of the promissory notes.  In October, 2008, the Company
filed a registration statement that includes the securities covered by the
convertible notes and warrants, but is has not yet been declared
effective.
 
 In April
2005, National Securities entered into a clearing agreement with NFS that became
effective in June 2005.  In the first quarter of fiscal year 2007, NFS
paid National Securities a $750,000 general business credit that is being
amortized over an eight year period ending November 2014, corresponding with the
expiration date of the clearing agreement.  In the second quarter of
fiscal year 2007, NFS provided National Securities a $250,000 clearing fee
waiver that is being amortized over a two year period ending December 2008,
corresponding with the time period that certain performance standards were to be
achieved.  The clearing agreement includes a termination fee if
National Securities terminates the agreement without cause. The Broker Dealer
Subsidiaries currently have clearing agreements with NFS, Penson, Legent and
Fortis.  The Company believes that the overall effect of its clearing
relationships has been beneficial to the Company’s cost structure, liquidity and
capital resources.
 
 As of
September 30, 2008, advances to registered representatives increased $453,000 to
$4,463,000 from $4,010,000 as of September 30, 2007.  This increase is
attributable to advances made to registered representatives who became
affiliated with National Securities during fiscal year 2008 and advances to
registered representatives already affiliated with National Securities who
agreed to renew their affiliation, offset in part by the amortization of
advances in fiscal year 2008 and prior years.
 
 In fiscal
years 2008 and 2007, the Company received proceeds of approximately $17,000 and
$1,324,000, respectively, from the exercise of outstanding employee stock
options and warrants.
 
 The
Company has historically satisfied its capital needs with cash generated from
operations or from financing activities.  The Company believes that it
will have sufficient funds to maintain its current level of business activities
during fiscal year 2009.  If market conditions should weaken, the
Company would need to consider curtailing certain of its business activities,
reducing its fixed overhead costs and/or seek additional sources of
financing.
 
 The
following table shows the contractual obligations of the Company as of September
30, 2008:
 
 
 -36-
 
  Notes
                  
                  
                  SecuredFiscal
      Year Ending
                  
                  Payable
                  
                  
                  Demand
      Note
                  
                  
                  Leases
                  
                  
                  Total2009
                  
                  $
                  1,000,000
                  
                  
                  $
                  500,000
                  
                  
                  $
                  3,375,000
                  
                  
                  $
                  4,875,0002010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,131,000
                  
                  
                  
                  3,131,0002011
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,019,000
                  
                  
                  
                  3,019,0002012
                  
                  
                  6,000,000
                  
                  
                  
                  -
                  
                  
                  
                  2,777,000
                  
                  
                  
                  8,777,000Thereafter
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,275,000
                  
                  
                  
                  2,275,000Less:
      Deferred debt discount
                  
                  
                  (1,472,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,472,000
                  )$
                  5,528,000
                  
                  
                  $
                  500,000
                  
                  
                  $
                  14,577,000
                  
                  
                  $
                  20,605,000
 Inflation
 
 The
Company believes that the effect of inflation on its assets, consisting of cash,
securities, office equipment, leasehold improvements and computers has not been
significant.
 
 Recently
Issued Accounting
Standards
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired.
SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
No. 141(R) is effective for fiscal years beginning after December 15,
2008. The Company does not expect the provisions of SFAS 141(R) to have a
material impact on the Company's consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities--an amendment of FASB Statement No. 133" ("FAS 161"). FAS
161 changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in FAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company
does not expect the provisions of FASB 161 to have a material impact on the
Company's consolidated financial statements.
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS 157).
This standard clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company does not expect the implementation of SFAS 157 will have a material
impact on its results of operations or financial condition.  The FASB
approved the issuance of FASB Staff Position of 157-2, which defers the
effective date of SFAS 157 until Fiscal Years beginning after November 15, 2008
for non-financial assets and non-financial liabilities.
 
 The
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 159, Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). This standard addresses earnings volatility
caused by existing accounting standards that require related financial assets
and liabilities to be measured using different measurement attributes (such as
historical cost and fair value). SFAS 159 is intended to improve financial
reporting by giving all entities the option to recognize most financial assets
and liabilities and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected should be
reported in earnings. SFAS 159 is effective for the first quarter of our fiscal
2009 beginning October 1, 2008. We do not expect SFAS 159 to have a material
effect on our financial condition or results of operations.
 
 -37-
 ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The
Company's primary market risk arises from the fact that it engages in
proprietary trading and makes 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 market values of the Company's securities owned and
securities sold, but not yet purchased as of September 30, 2008:
 
 Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 See Part
IV, Item 15(a)(1) for a list of financial statements filed as part of this
Report.
  Securities
      sold, butSecurities
      owned
                
                
                not
      yet purchasedCorporate
      stocks
                
                $
                454,000
                
                
                $
                9,000Corporate
      bonds
                
                
                6,000
                
                
                
                10,000Municipal
      bonds
                
                
                516,000
                
                
                
                44,000$
                976,000
                
                
                $
                63,000
 
 -38-
 Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 There
were no disagreements with accountants on accounting and financial disclosure
for the fiscal year ended September 30, 2008.
 
 Item
9A. CONTROLS AND PROCEDURES
 
 Evaluation of disclosure
controls and procedures.  Based on the evaluation of the
Company’s disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b)
or 15d-15(b), the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities,
particularly during the period in which this yearly report on Form 10-K was
being prepared.
  The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a - 15(f) of the
Securities Exchange Act of 1934.
  The
Company's management conducted an evaluation of the effectiveness of its
internal control over financial reporting, as of September 30, 2008, based on
the framework and criteria established in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of controls,
evaluation of the design effectiveness of controls, testing of the operating
effectiveness of controls and a conclusion on this evaluation. Based on this
evaluation, management concluded that the Company's internal control over
financial reporting was effective as of September 30, 2008.
  Management
believes that a controls system, no matter how well designed and operated, can
not provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
 
 This
management report on internal control over financial reporting shall not be
deemed to be filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended or otherwise subject to the liabilities of that
Section.
 
 This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Commission that permit us to
provide only management’s report in this Annual report.
 
 Changes in internal
controls.  There were no significant changes in the Company’s
internal controls over financial reporting identified with the evaluation
thereof during the fiscal year ended September 30, 2008 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 controls and procedures requiring corrective actions.
 
 Item
9B. OTHER INFORMATION
 
 There is
no other information to be disclosed by the Company during the fourth quarter of
fiscal year 2008 that has not been reported on a current report on Form
8-K.
 
 -39-
 
 PART
III
 
 Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
 The other
information required by this Item will be included in the Company’s 2009 Proxy
Statement andis
incorporated herein by reference.
 
 Item
11. EXECUTIVE COMPENSATION
 
 The
information required by this Item will be included in the Company’s 2009 Proxy
Statement and is incorporated herein by reference.
 
 Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
 The
information required by this Item will be included in the Company’s 2009 Proxy
Statement and is incorporated herein by reference.
 
 Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 The
information required by this Item will be included in the Company’s 2009 Proxy
Statement and is incorporated herein by reference.
 
 Item 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
 
 The
information required by this Item will be included in the Company’s 2009 Proxy
Statement and is incorporated herein by reference.
 
 Item
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 (a)           The
following financial statements are included in Part II, Item
8:
 
 1.         Financial
Statements
 Independent Auditors'
Reports
 Consolidated Financial
Statements
 Statements
      of Financial Condition, September 30, 2008 and September 30,
      2007
 Statements
      of Operations for the Years ended September 30, 2008 and September 30,
      2007
 Statement
      of Changes in Stockholders' Equity for the Years ended September 30, 2008
      and September 30, 2007
 Statements
      of Cash Flows for the Years ended September 30, 2008 and September 30,
      2007Notes
      to Consolidated Financial
Statements
 
 2.         Financial Statement
Schedules
 
 Schedules
not listed above have been omitted because they are not applicable or have been
included in footnotes to the consolidated financial
statements.
 
 (b)           See
Exhibit Index.
 
 -40-
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities and 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
 (Registrant)
  Date:
      December 29, 2008
                By:
                /s/Mark GoldwasserMark
      GoldwasserChairman
      and Chief Executive OfficerDate:
      December 29, 2008
                By:
                /s/Alan B. LevinAlan
      B. LevinChief
      Financial Officer
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Date:
      December 29, 2008
                By:
                /s/Mark GoldwasserMark
      Goldwasser,Chairman
      and Chief Executive OfficerDate:
      December 29, 2008
                By:
                /s/Leonard J. SokolowLeonard
      J. SokolowVice
      Chairman and PresidentDate:
      December 29, 2008
                By:
                /s/Christopher C. DeweyChristopher
      C. DeweyVice
      ChairmanDate:
      December 29, 2008
                By:
                /s/Marshall S. GellerMarshall
      S. Geller, DirectorDate:
      December 29, 2008
                By:
                /s/Robert W. Lautz, Jr.Robert
      W. Lautz, Jr., DirectorDate:
      December 29, 2008
                By:
                /s/Charles R. ModicaCharles
      R. Modica, DirectorDate:
      December 29, 2008
                By:
                /s/Jorge A. OrtegaJorge
      A. Ortega, Director
 -41-
 EXHIBIT
INDEX
  2.1
                Agreement
      and Plan of Merger, dated as of November 7, 2007 by and among National,
      vFinance, Inc. and vFin Acquisition Corporation, previously filed as
      Exhibit 2.1 to the Company’s Current Report on Form 8-K dated November 8
      2007 and hereby incorporated by reference.2.2
                Amendment
      No. 1 to the Agreement and Plan of Merger, dated April 17, 2008 by and
      among National, vFinance, Inc. and vFin Acquisition Corporation,
      previously filed as Exhibit 2.2 to the Company’s Registration Statement on
      Form S-4 in April 2008 and hereby incorporated by
    reference.3.1
                The
      Company's Certificate of Incorporation, as amended, previously filed as
      Exhibit 3.5. to Form 10-Q in May 2004 and hereby incorporated by
      reference.3.2
                The
      Company's Bylaws, as amended, previously filed as Exhibit 3.3 to Form 10-Q
      in February 2002, and hereby incorporated by reference.3.3
                Certificate
      of Designations, Preferences, and Relative Optional or Other Special
      Rights of Preferred Stock and Qualifications, Limitations and Restrictions
      Thereof of Series A Convertible Preferred Stock, as amended, previously
      filed as Exhibit 3.6 to Form 10-Q in May 2004 and hereby incorporated by
      reference.3.4
                Certificate
      of Designation of Series B Preferred Stock, filed with the Secretary of
      State of the State of Delaware on January 11, 2006, previously filed as
      Exhibit 3.5 to Form 8-K in January 2006 and hereby incorporated by
      reference.3.5
                Certificate
      of Amendment to the Certificate of Incorporation, filed with the Secretary
      of State of the State of Delaware on March 15, 2006 filed as Exhibit 3.6
      to Form 10-Q in May 2006 and hereby incorporated by
    reference.3.6
                Certificate
      of Amendment to the Certificate of Designation of Series A Preferred
      Stock, filed with the Secretary of State of the State of Delaware on March
      15, 2006 filed as Exhibit 3.7 to Form 10-Q in May 2006 and hereby
      incorporated by reference.3.7
                Certificate
      of Amendment to the Certificate of Incorporation, previously filed as
      Exhibit 3.8 to Amendment No. 1 to the Company’s Registration Statement on
      Form S-4, dated May 6, 2008 and hereby incorporated by
      reference.4.1
                Form
      of Warrant, previously filed as Exhibit 4.4 to Form 8-K in February 2007
      and hereby incorporated by reference.4.2
                Form
      of 10% Promissory Note, previously filed as Exhibit 4.5 to Form 8-K in
      February 2007 and hereby incorporated by reference.4.3
                Form
      of Warrant, previously filed as Exhibit 4.6 to Form 8-K in April 2008 and
      hereby incorporated by reference.4.4
                Form
      of 10% Senior Subordinated Convertible Promissory Note, previously filed
      as Exhibit 4.7 to Form 8-K in April 2008 and hereby incorporated by
      reference.4.5
                Warrant,
      dated as of June 30, 2008, previously filed as Exhibit 4.8 to Form 8-K in
      July 2008 and hereby incorporated by reference.4.6
                10%
      Senior Subordinated Convertible Promissory Note dated June 30, 2008,
      previously filed as Exhibit 4.9 to Form 8-K in July 2008 and hereby
      incorporated by reference.10.1
                Office
      lease, Chicago, Illinois, previously filed as Exhibit 10.27 to Form 10-K
      in December 1996 and hereby incorporated by reference.10.2
                Amended
      office lease, Chicago, Illinois, previously filed as Exhibit 10.29 to Form
      10-K in December 1996 and hereby incorporated by
  reference.10.3
                Office
      lease, Seattle, Washington previously filed as Exhibit 10.20 to Form 10-K
      in December 1999 and hereby incorporated by reference.10.4
      *
                2001
      Stock Option Plan, previously included in the Proxy Statement-Schedule 14A
      filed in January 2001 and hereby incorporated by
  reference.
  -42-
 10.5
                Audit
      committee charter, previously filed as Exhibit 10.22 to Form 10-Q in
      August 2000 and hereby incorporated by reference.10.6
                Registration
      Rights Agreement dated as of January 11, 2006 by and among Olympic Cascade
      Financial Corporation and the investors set forth therein filed as Exhibit
      10.49 to Form 8-K in January 2006 and hereby incorporated by
      reference.10.7
                Securities
      Purchase Agreement, dated as of February 22, 2007 by and among National
      Holdings Corporation and the investors set forth therein filed as Exhibit
      10.52 to Form 8-K in February 2007 and hereby incorporated by
      reference.10.8
                Registration
      Rights Agreement, dated as of February 22, 2007 by and among National
      Holdings Corporation and the investors set forth therein filed as Exhibit
      10.53 to Form 8-K in February 2007 and hereby incorporated by
      reference.10.9*
                2006
      Stock Option Plan, previously included in the Proxy Statement-Schedule 14A
      filed in January 2006 and hereby incorporated by
      reference.10.10*
                2008
      Stock Option Plan, previously included in the Proxy Statement-Schedule 14A
      filed in January 2008 and hereby incorporated by
      reference.10.11
                Securities
      Purchase Agreement, dated as of March 31, 2008 by and among National
      Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
      filed as Exhibit 10.31 to Form 8-K in April 2008 and hereby incorporated
      by reference.10.12
                Registration
      Rights Agreement, dated as of March 31, 2008 by and among National
      Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
      filed as Exhibit 10.32 to Form 8-K in April 2008 and hereby incorporated
      by reference.10.13
                Agreement,
      dated April 16, 2008, by and between the Company and St. Cloud Capital
      Partners II, L.P, previously filed as Exhibit 10.33 to Amendment No. 1 to
      the Company’s Registration Statement on Form S-4, filed May 9, 2008 and
      hereby incorporated by reference.10.14
                Securities
      Purchase Agreement, dated as of June 30, 2008 by and between National
      Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
      filed as Exhibit 10.34 to Form 8-K in July 2008 and hereby incorporated by
      reference.10.15
                Registration
      Rights Agreement, dated as of June 30, 2008 by and between National
      Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
      filed as Exhibit 10.35 to Form -K in July 2008 and hereby incorporated by
      reference.10.16*
                Employment
      Agreement, dated as of July 1, 2008, by and between the Company and Mark
      Goldwasser, previously filed as Exhibit 10.36 to Form 8-K in July 2008 and
      hereby incorporated by reference.10.17*
                Employment
      Agreement, dated as of July 1, 2008, by and between the Company and
      Leonard J. Sokolow, previously filed as Exhibit 10.37 to Form 8-K in July
      2008 and hereby incorporated by reference.10.18*
                Employment
      Agreement, dated as of July 1, 2008, by and between the Company and Alan
      B. Levin previously filed as Exhibit 10.38 to Form 8-K in July 2008 and
      hereby incorporated by reference.10.19*
                Option
      Agreement, dated as of July 1, 2008, by and between the Company and Mark
      Goldwasser, previously filed as Exhibit 10.39 to Form 8-K in July 2008 and
      hereby incorporated by reference.10.20*
                Option
      Agreement, dated as of July 1, 2008, by and between the Company and
      Leonard J. Sokolow previously filed as Exhibit 10.40 to Form 8-K in July
      2008 and hereby incorporated by reference.10.21
                Voting
      Agreement, dated as of July 1, 2008, by and among the Company, Mark
      Goldwasser, Leonard J. Sokolow and Christopher C. Dewey previously filed
      as Exhibit 10.41 to Form 8-K in July 2008 and hereby incorporated by
      reference.10.22
                Termination
      Agreement, dated as of July 1, 2008, by and between vFinance, Inc. and
      Leonard J. Sokolow previously filed as Exhibit 10.42 to Form 8-K in July
      2008 and hereby incorporated by
reference.
  -43-
 14.
                The
      Code of Ethics filed as Exhibit 14 to Form 10-K in December 2003 and
      hereby incorporated by reference.16.1
                Change
      in Certifying Accountant, previously filed in Form 8-K in September 2008
      and hereby incorporated by reference.21.
                Subsidiaries
      of Registrant.23.1
                Consent
      of Sherb & Co., LLP.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.
  *Compensatory
agreements
 
 -44-
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders
 National
Holdings Corporation
  We have
audited the accompanying consolidated statements of financial condition of
National Holdings Corporation and Subsidiaries (the "Company") as of September
30, 2008 and 2007, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the two years in the
period ended September 30, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Holdings Corporation and Subsidiaries as of September 30, 2008 and 2007, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended September 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.
   /s/ Sherb
& Co., LLP
 Certified
Public Accountants
  Boca
Raton, Florida
 December
24, 2008
 
 
 F-1
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITIONASSETS
  September
      30,
                
                
                September
      30,2008
                
                
                2007Cash
                
                $
                7,387,000
                
                
                $
                4,957,000Deposit
      with clearing organizations
                
                
                1,210,000
                
                
                
                402,000Receivables
      from broker dealers and clearing organizations
                
                
                3,691,000
                
                
                
                4,739,000Other
      receivables, net of allowance for uncollectible accounts
of$630,000  and
      $467,000 at September 30, 2008 and 2007, respectively
                
                
                580,000
                
                
                
                784,000Advances
      to registered representatives
                
                
                4,463,000
                
                
                
                4,010,000Securities
      ownedMarketable,
      at market value
                
                
                976,000
                
                
                
                1,191,000Non-marketable,
      at fair value
                
                
                48,000
                
                
                
                -Fixed
      assets, net
                
                
                1,243,000
                
                
                
                304,000Secured
      demand note
                
                
                500,000
                
                
                
                500,000Intangible
      assets, net
                
                
                2,950,000
                
                
                
                -Other
      assets
                
                
                1,429,000
                
                
                
                396,000Total
      Assets
                
                $
                24,477,000
                
                
                $
                17,283,000LIABILITIES
      AND STOCKHOLDERS' EQUITYPayable
      to broker delaers and clearing organizations
                
                $
                730,000
                
                
                $
                1,115,000Securities
      sold, but not yet purchased, at market
                
                
                63,000
                
                
                
                77,000Accounts
      payable, accrued expenses and other liabilities
                
                
                12,335,000
                
                
                
                7,907,000Convertible
      notes payable, net of debt discount of $1,431,000at
      September 30, 2008
                
                
                4,569,000
                
                
                
                -Notes
      payable, net of debt discounts of $41,000 and $138,000at
      September 30, 2008 and 2007, respectively
                
                
                959,000
                
                
                
                862,000Total
      Liabilities
                
                
                18,656,000
                
                
                
                9,961,000Subordinated
      borrowings
                
                
                500,000
                
                
                
                500,000Stockholders'
      EquityPreferred
      stock, $.01 par value, 200,000 shares authorized; 50,000
      sharesdesignated
      as Series A and 20,000 shares designated as Series BSeries
      A 9% cumulative convertible preferred stock, $.01 par value,
      50,000shares
      authorized; 37,550 shares issued and outstanding
    (liquidationpreference:
      $3,755,000) at September 30, 2008 and September 30, 2007Series
      B 10% cumulative convertible preferred stock, $.01 par value,
      20,000and
      10,000 shares issued and outstanding (liquidation
    preference:preference:
      $0) at September 30, 2008 and September 30, 2007,
    respectivelyCommon
      stock, $.02 par value, 50,000,000 shares authorized;16,421,538
      and 8,602,628 shares issued and outstanding,at
      September 30, 2008 and 2007, respectively
                
                
                328,000
                
                
                
                172,000Additional
      paid-in capital
                
                
                39,279,000
                
                
                
                19,919,000Accumulated
      deficit
                
                
                (34,286,000
                )
                
                
                (13,269,000
                )Total  Stockholders'
      Equity
                
                
                5,321,000
                
                
                
                6,822,000Total
      Liabilities and Stockholders' Equity
                
                $
                24,477,000
                
                
                $
                17,283,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-2
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS
  Years
      EndedSeptember
      30, 2008
                  
                  
                  September
      30, 2007REVENUESCommissions
                  
                  $
                  50,128,000
                  
                  
                  $
                  39,237,000Net
      dealer inventory gains
                  
                  
                  16,810,000
                  
                  
                  
                  15,729,000Investment
      banking
                  
                  
                  1,906,000
                  
                  
                  
                  9,134,000Total
      commission and fee revenues
                  
                  
                  68,844,000
                  
                  
                  
                  64,100,000Interest
      and dividends
                  
                  
                  3,862,000
                  
                  
                  
                  2,824,000Transfer
      fees and clearing services
                  
                  
                  5,529,000
                  
                  
                  
                  4,075,000Other
                  
                  
                  3,908,000
                  
                  
                  
                  1,820,00082,143,000
                  
                  
                  
                  72,819,000EXPENSESCommissions
      and fees
                  
                  
                  64,910,000
                  
                  
                  
                  52,271,000Employee
      compensation and related expenses
                  
                  
                  9,699,000
                  
                  
                  
                  7,464,000Clearing
      fees
                  
                  
                  2,952,000
                  
                  
                  
                  1,745,000Communications
                  
                  
                  1,632,000
                  
                  
                  
                  1,719,000Occupancy
      and equipment costs
                  
                  
                  3,844,000
                  
                  
                  
                  2,996,000Professional
      fees
                  
                  
                  2,986,000
                  
                  
                  
                  2,266,000Interest
                  
                  
                  680,000
                  
                  
                  
                  531,000Taxes,
      licenses, registration
                  
                  
                  533,000
                  
                  
                  
                  666,000Other
      administrative expenses
                  
                  
                  2,925,000
                  
                  
                  
                  1,789,000Intangible
      impairment
                  
                  
                  12,999,000
                  
                  
                  
                  -103,160,000
                  
                  
                  
                  71,447,000Net
      income (loss)
                  
                  
                  (21,017,000
                  )
                  
                  
                  1,372,000Preferred
      stock dividends
                  
                  
                  (338,000
                  )
                  
                  
                  (409,000
                  )Net
      income (loss) attributable to common stockholders
                  
                  $
                  (21,355,000
                  )
                  
                  $
                  963,000INCOME
      (LOSS) PER COMMON SHAREBasic:Net
      income (loss) attributable to common stockholders
                  
                  $
                  (2.02
                  )
                  
                  $
                  0.16Diluted:Net
      income (loss) attributable to common stockholders
                  
                  $
                  (2.02
                  )
                  
                  $
                  0.13Weighted
      average number of shares outstanding:Basic
                  
                  
                  10,579,778
                  
                  
                  
                  6,042,646Diluted
                  
                  
                  10,579,778
                  
                  
                  
                  9,669,531
 The
accompanying notes are an integral part of these consolidated financial
statements.
 F-3
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITYYEARS
      ENDED SEPTEMBER 30, 2008 and SEPTEMBER 30,
2007
  AdditionalPreferred
      Stock
                  
                  
                  Common
      Stock
                  
                  
                  Paid-In
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  TotalBALANCE,
      September 30, 2006
                  
                  
                  45,316
                  
                  
                  $
                  -
                  
                  
                  
                  5,223,968
                  
                  
                  $
                  104,000
                  
                  
                  $
                  16,956,000
                  
                  
                  $
                  (14,217,000
                  )
                  
                  $
                  2,843,000Issuance
      of series A preferred stock dividends
                  
                  
                  2,537
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  317,000
                  
                  
                  
                  (317,000
                  )
                  
                  
                  -Payment
      of series B preferred stock dividends
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (107,000
                  )
                  
                  
                  (107,000
                  )Exercise
      of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  976,674
                  
                  
                  
                  19,000
                  
                  
                  
                  1,291,000
                  
                  
                  
                  -
                  
                  
                  
                  1,310,000Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,000
                  
                  
                  
                  -
                  
                  
                  
                  14,000
                  
                  
                  
                  -
                  
                  
                  
                  14,000Conversion
      of series A preferred stock
                  
                  
                  (303
                  )
                  
                  
                  -
                  
                  
                  
                  24,240
                  
                  
                  
                  1,000
                  
                  
                  
                  (1,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Conversion
      of series B preferred stock
                  
                  
                  (10,000
                  )
                  
                  
                  -
                  
                  
                  
                  1,333,333
                  
                  
                  
                  27,000
                  
                  
                  
                  (27,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Conversion
      of notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,024,413
                  
                  
                  
                  21,000
                  
                  
                  
                  1,003,000
                  
                  
                  
                  -
                  
                  
                  
                  1,024,000Warrants
      issued in connection with debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  194,000
                  
                  
                  
                  -
                  
                  
                  
                  194,000Amortization
      of deferred compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  172,000
                  
                  
                  
                  -
                  
                  
                  
                  172,000Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,372,000
                  
                  
                  
                  1,372,000BALANCE,
      September 30, 2007
                  
                  
                  37,550
                  
                  
                  
                  -
                  
                  
                  
                  8,602,628
                  
                  
                  
                  172,000
                  
                  
                  
                  19,919,000
                  
                  
                  
                  (13,269,000
                  )
                  
                  
                  6,822,000Common
      stock issued in connection with merger
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,788,910
                  
                  
                  
                  155,000
                  
                  
                  
                  16,547,000
                  
                  
                  
                  -
                  
                  
                  
                  16,702,000Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,000
                  
                  
                  
                  1,000
                  
                  
                  
                  16,000
                  
                  
                  
                  -
                  
                  
                  
                  17,000Warrants
      issued in connection with debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,579,000
                  
                  
                  
                  -
                  
                  
                  
                  1,579,000Amortization
      of deferred compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,218,000
                  
                  
                  
                  -
                  
                  
                  
                  1,218,000Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21,017,000
                  )
                  
                  
                  (21,017,000
                  )BALANCE,
      September 30, 2008
                  
                  
                  37,550
                  
                  
                  $
                  -
                  
                  
                  
                  16,421,538
                  
                  
                  $
                  328,000
                  
                  
                  $
                  39,279,000
                  
                  
                  $
                  (34,286,000
                  )
                  
                  $
                  5,321,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-4
 NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS
  Years
      endedSeptember
      30, 2008
                  
                  
                  September
      30, 2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                  
                  $
                  (21,017,000
                  )
                  
                  $
                  1,372,000Adjustments
      to reconcile net income (loss) to netcash
      provided by (used in) operating activitiesImpairment
      of intangible asset
                  
                  
                  12,999,000
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  1,140,000
                  
                  
                  
                  148,000Amortization
      of note discount
                  
                  
                  245,000
                  
                  
                  
                  292,000Compensatory
      element of common stock option issuances
                  
                  
                  1,218,000
                  
                  
                  
                  172,000Provision
      for doubtful accounts
                  
                  
                  163,000
                  
                  
                  
                  -Changes
      in assets and liabilitiesDeposits
      with clearing organizations
                  
                  
                  (2,000
                  )
                  
                  
                  (102,000
                  )Receivables
      from broker-dealers, clearing organizations and others
                  
                  
                  1,770,000
                  
                  
                  
                  (4,049,000
                  )Securities
      owned: marketable, at market value
                  
                  
                  299,000
                  
                  
                  
                  (716,000
                  )Securities
      owned: non-marketable, at fair value
                  
                  
                  (2,000
                  )
                  
                  
                  402,000Other
      assets
                  
                  
                  (392,000
                  )
                  
                  
                  (104,000
                  )Payables
                  
                  
                  (2,461,000
                  )
                  
                  
                  4,987,000Securities
      sold, but not yet purchased, at market
                  
                  
                  (15,000
                  )
                  
                  
                  (85,000
                  )Net
      cash (used in) provided by operating activities
                  
                  
                  (6,055,000
                  )
                  
                  
                  2,317,000CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      received in merger
                  
                  
                  3,620,000
                  
                  
                  
                  -Purchase
      of fixed assets
                  
                  
                  (471,000
                  )
                  
                  
                  (147,000
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  3,149,000
                  
                  
                  
                  (147,000
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds from issuance of convertible notes payable
                  
                  
                  6,000,000
                  
                  
                  
                  -Net
      proceeds from issuance of notes payable and warrants
                  
                  
                  -
                  
                  
                  
                  1,000,000Cash
      payment of deferred financing costs
                  
                  
                  (176,000
                  )
                  
                  
                  (22,000
                  )Payment
      of notes payable
                  
                  
                  -
                  
                  
                  
                  (850,000
                  )Dividends
      paid
                  
                  
                  -
                  
                  
                  
                  (107,000
                  )Capitalized
      merger costs
                  
                  
                  (505,000
                  )
                  
                  
                  -Exercise
      of stock options
                  
                  
                  17,000
                  
                  
                  
                  14,000Exercise
      of warrants
                  
                  
                  -
                  
                  
                  
                  1,311,000Net
      cash provided by financing activities
                  
                  
                  5,336,000
                  
                  
                  
                  1,346,000NET
      INCREASE IN CASH
                  
                  
                  2,430,000
                  
                  
                  
                  3,516,000CASH
      BALANCEBeginning
      of the year
                  
                  
                  4,957,000
                  
                  
                  
                  1,441,000End
      of the year
                  
                  $
                  7,387,000
                  
                  
                  $
                  4,957,000SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the year for:Interest
                  
                  $
                  528,000
                  
                  
                  $
                  555,000Series
      B preferred stock dividends
                  
                  $
                  -
                  
                  
                  $
                  107,000SUPPLEMENTAL
      DISCLOSURES OF NONCASH INVESTING ANDFINANCING
      ACTIVITIESWarrants
      issued in connection with debt
                  
                  $
                  1,579,000
                  
                  
                  $
                  194,000Series
      A preferred stock dividends
                  
                  $
                  -
                  
                  
                  $
                  327,000Common
      stock issued to holders of convertible notes
                  
                  $
                  -
                  
                  
                  $
                  1,024,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-5
 NATIONAL HOLDINGS
CORPORATION
 AND
SUBSIDIARIES
 
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
 
 SEPTEMBER 30, 2008 and
SEPTEMBER 30, 2007
 
 1.
                ORGANIZATION
  National
Holdings Corporation (“National” orthe “Company”), a
Delaware corporation organized in 1996,is a financial services
organization, operating primarily through its wholly owned subsidiaries,
National Securities Corporation (“National Securities”), vFinance Investments,
Inc. (“vFinance Investments”) and EquityStation, Inc. (“EquityStation”)
(collectively, the “Broker Dealer Subsidiaries”).  The Broker Dealer
Subsidiaries conduct a national securities brokerage business through its main
offices in New York, New York, Boca Raton, Florida, and Seattle,
Washington.  On March 15, 2006, the Company changed its name from
“Olympic Cascade Financial Corporation” to “National Holdings
Corporation.”  On July 1, 2008, National consummated a merger with
vFinance, Inc. (“vFinance”).
  Through
its Broker Dealer Subsidiaries, the Company offers (1) full service retail
brokerage to approximately 45,000 high net worth and institutional clients, (2)
provides investment banking, merger, acquisition and advisory services to micro,
small and mid-cap high growth companies, and (3) engages in trading securities,
including making markets in over 3,500 micro and small cap stocks and provides
liquidity in the United States Treasury marketplace.  The Broker
Dealer Subsidiaries are introducing brokers and clear all transactions through
clearing organizations on a fully disclosed basis.  They are
registered with the Securities and Exchange Commission ("SEC"), are members of
the Financial Industry Regulatory Authority ("FINRA") (formerly the National
Association of Securities Dealers) and Securities Investor Protection
Corporation ("SIPC").  vFinance Investments is also a member of the
National Futures Association ("NFA").
 
 In July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc., a Washington corporation ("NAM").  NAM is a
federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed.  In March 2008, all of the issued and outstanding stock of
NAM was transferred from National Securities to National.
 
 National
formed a new wholly owned subsidiary, National Insurance Corporation, a
Washington corporation (“National Insurance”) in the third quarter of fiscal
year 2006.  National Insurance provides fixed insurance products to
its clients, including life insurance, disability insurance, long term care
insurance and fixed annuities.  National Insurance finalized certain
requisite state registrations during the second quarter of fiscal year 2007 and
commenced business operations that have been de minimus.
 
 vFinance
Lending Services, Inc. (“vFinance Lending”), originally formed as a wholly owned
subsidiary of vFinance, was established in May 2002.  It is a mortgage
lender focused primarily on the commercial sector, providing bridge loans and
commercial mortgages through its nationwide network of lenders. Its operations
to date have been de minimus.
 
 F-6
  2.
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
 
 a.
                Principles of
      Consolidation - The consolidated financial statements include the
      accounts of National and its wholly owned subsidiaries.  All
      significant inter-company accounts and transactions have been eliminated
      in consolidation.  The acquired operations of vFinance have been
      included from the date of the merger (“July1, 2008”) though September 30,
      2008.
  b.
                Estimates-The preparation of
      financial statements in conformity with accounting principles generally
      accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities at the date
      of the financial statements, and the reported amounts of revenues and
      expenses during the reporting period.  Actual results could
      differ from those estimates.
 
 c.
                Revenue
      Recognition - The Company generally acts as an agent in executing
      customer orders to buy or sell listed and over-the-counter securities in
      which it may or may not make a market, and charges commissions based on
      the services the Company provides to its customers.  In
      executing customer orders to buy or sell a security in which the Company
      makes a market, the Company may sell to, or purchase from, customers at a
      price that is substantially equal to the current inter-dealer market price
      plus or minus a mark-up or mark-down.  The Company may also act
      as agent and execute a customer's purchase or sale order with another
      broker-dealer market-maker at the best inter-dealer market price available
      and charge a commission.  Mark-ups, mark-downs and commissions
      are generally priced competitively based on the services it provides to
      its customers.  In each instance the commission charges,
      mark-ups or mark-downs, are in compliance with guidelines established by
      FINRA.
 
 Customer
security transactions and the related commission income and expense are recorded
on a trade date basis.  Customers who are financing their transaction
on margin are charged interest.  The Company’s margin requirements are
in accordance with the terms and conditions mandated by its clearing firms,
National Financial Services LLC (“NFS”), Penson Financial Services, Inc.
(“Penson”) and Legent Clearing LLC (“Legent”).  The interest is billed
on the average daily balance of the margin account.
 
 Investment
banking revenues include gains, losses, and fees, net of syndicate expenses,
arising from securities offerings in which the Company acts as an underwriter or
agent.  Investment banking revenues also include fees earned from
providing financial advisory services. Investment banking management fees
are recorded on the offering date, sales concessions on the settlement date, and
underwriting fees at the time the underwriting is completed and the income is
reasonably determinable.
 
 Net
trading profits result from mark-ups and mark-downs in securities transactions
entered into for the account of the Company.  Some of these
transactions may involve the Company taking a position in securities that may
expose the company to losses.  Net trading profits are recorded on a
trade date basis.
 
 F-7
 Clearing
and other brokerage income are fees charged to the broker on customer’s security
transactions, and are recognized as of the trade date.
 
 Other
revenue consists primarily of investment advisory fees are account management
fees for high net worth clients.  These fees are determined based on a
percentage of the customers assets under management, are billed quarterly and
recognized when collected.
 
 d.
                Cash and Cash
      Equivalents - The Company considers all highly liquid temporary
      cash investments with an original maturity of three months or less when
      purchased, to be cash equivalents.
 
 e.
                Fixed Assets -
      Fixed assets are recorded at cost.  Depreciation is calculated
      using the straight-line method based on the estimated useful lives of the
      related assets, which range from three to five years.  Leasehold
      improvements are amortized using the straight-line method over the shorter
      of the estimated useful lives of the assets or the terms of the
      leases.  Maintenance and repairs are charged to expense as
      incurred; costs of major additions and betterments that extend the useful
      life of the asset are capitalized.  When assets are retired or
      otherwise disposed of, the costs and related accumulated depreciation or
      amortization are removed from the accounts and any gain or loss on
      disposal is recognized.
 
 f.
                Income Taxes -
      The Company recognizes deferred tax assets and liabilities based on the
      difference between the financial statements carrying amounts and the tax
      basis of assets and liabilities, using the effective tax rates in the
      years in which the differences are expected to reverse.  A
      valuation allowance related to deferred tax assets is also recorded when
      it is more likely than not that some or all of the deferred tax asset may
      not be realized.
 
 g.
                Fair Value of
      Financial Instruments- The carrying
      amounts reported in the balance sheet for cash, receivables, accounts
      payable, accrued expenses and other liabilities approximates fair value
      based on the short-term maturity of these
  instruments.
 
 h.
                  Impairment of
      Long-Lived Assets - The Company reviews long-lived assets for
      impairment at least once a year or earlier if circumstances and situations
      change such that there is an indication that the carrying amounts may not
      be recovered, as prescribed by SFAS No. 144. In such circumstances, the
      Company will estimate the future cash flows expected to result from the
      use of the asset and its eventual disposition. Future cash flows are the
      future cash inflows expected to be generated by an asset less the future
      outflows expected to be necessary to obtain those inflows. If the sum of
      the expected future cash flows (undiscounted and without interest charges)
      is less than the carrying amount of the asset, the Company will recognize
      an impairment loss to adjust to the fair value of the
    asset.
 
 i.
                Common Stock Purchase
      Warrants-The Company
      accounts for the issuance of common stock purchase warrants issued in
      connection with capital financing transactions in accordance with the
      provisions of Emerging Issues Task Force Issue No. 00-19 "Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock" (“EITF 00-19”).  Based on the provisions of
      EITF 00-19, the Company classifies as equity any contracts that (i)
      require physical settlement or net-share settlement or (ii) gives the
      Company a choice of net-cash settlement or settlement in its own shares
      (physical settlement or net-share settlement).  The Company
      classifies as assets or liabilities any contracts that (i) require
      net-cash settlement (including a requirement to net-cash settle the
      contract if an event occurs and if that event is outside the control of
      the Company) or (ii) gives the counterparty a choice of net-cash
      settlement or settlement in shares (physical settlement or net-share
      settlement).
 
 F-8
 The
Company assessed the classification of its derivative financial instruments as
of September 30, 2008, which consist of common stock purchase warrants, and
determined that such derivatives meet the criteria for equity classification
under EITF 00-19.
 
 j.
                Convertible
      Instruments - The Company evaluates and accounts for conversion
      options embedded in its convertible instruments in accordance with
      SFAS No. 133 “Accounting for Derivative Instruments and Hedging
      Activities” (“SFAS 133”) and EITF
00-19.
 
 SFAS 133
generally provides three criteria that, if met, require companies to bifurcate
conversion options from their host instruments and account for them as free
standing derivative financial instruments in accordance with EITF 00-19. These
three criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value
under otherwise applicable generally accepted accounting principles with changes
in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be
considered a derivative instrument subject to the requirements of
SFAS 133.  SFAS 133 and EITF 00-19 also provide an exception
to this rule when the host instrument is deemed to be conventional (as that term
is described in the implementation guidance to SFAS 133 and further
clarified in EITF 05-2 “The Meaning of “Conventional Convertible Debt
Instrument” in EITF 00-19).
 
 The
Company accounts for convertible instruments (when it has determined that the
embedded conversion options should not be bifurcated from their host
instruments) in accordance with the provisions of EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible notes
for the intrinsic value of conversion options embedded in debt instruments based
upon the differences between the fair value of the underlying common stock at
the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized over
the term of the related debt to their earliest date of redemption. The Company
also records when necessary deemed dividends for the intrinsic value of
conversion options embedded in preferred shares based upon the differences
between the fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in the
note.
 
 The
Company evaluated the conversion option embedded in the convertible preferred
stock and determined, in accordance with the provisions of these statements,
that such conversion option does not meet the criteria requiring bifurcation of
these instruments. The characteristics of the common stock that is issuable upon
a holder’s exercise of the conversion option embedded in the convertible
preferred stock are deemed to be clearly and closely related to the
characteristics of the preferred shares (as that term is clarified in
paragraph 61.l. of the implementation guidance included in Appendix A
of SFAS 133).  Additionally, the Company’s conversion options, if
free standing, would not be considered derivatives subject to the accounting
guidelines prescribed under SFAS 133.
 
 F-9
 k.
                Net Income (Loss) per
      Common Share - Basic net income (loss) per share is computed on the
      basis of the weighted average number of common shares
      outstanding.  Diluted net income (loss) per share is computed on
      the basis of the weighted average number of common shares outstanding plus
      the potential dilution that could occur if securities or other contracts
      to issue common shares were exercised or
  converted.
  Years
      EndedSeptember
      30,
                  
                  
                  September
      30,2008
                  
                  
                  2007Numerator:Net
      income (loss)
                  
                  $
                  (21,017,000
                  )
                  
                  $
                  1,372,000Preferred
      stock dividends
                  
                  
                  (338,000
                  )
                  
                  
                  (409,000
                  )Numerator
      for basic earnings per share--net income (loss)attributable
      to common stockholders - as reported
                  
                  
                  (21,355,000
                  )
                  
                  
                  963,000Effect
      of dilutive securities:Series
      A preferred stock
                  
                  
                  -
                  
                  
                  
                  327,000Numerator
      for diluted earnings per share--net income (loss)attributable
      to common stockholders - as adjusted
                  
                  $
                  (21,355,000
                  )
                  
                  $
                  1,290,000Denominator:Denominator
      for basic earnings per share--weightedaverage
      shares
                  
                  
                  10,579,778
                  
                  
                  
                  6,042,646Effect
      of dilutive securities:Assumed
      conversion of Series A preferred stock
                  
                  
                  -
                  
                  
                  
                  3,004,000Stock
      options
                  
                  
                  -
                  
                  
                  
                  366,712Warrants
                  
                  
                  -
                  
                  
                  
                  256,173Dilutive
      potential common shares
                  
                  
                  -
                  
                  
                  
                  3,626,885Denominator
      for diluted earnings per share--adjustedweighted-average
      shares and assumed conversions
                  
                  
                  10,579,778
                  
                  
                  
                  9,669,531Net
      income (loss) available to common stockholdersBasic:
                  
                  $
                  (2.02
                  )
                  
                  $
                  0.16Diluted:
                  
                  $
                  (2.02
                  )
                  
                  $
                  0.13
  For the
fiscal year ended September 30, 2008, 6,379,000 shares attributable to the
outstanding Series A Preferred Stock and convertible notes were excluded from
the calculation of diluted net income per share because their inclusion would
have been anti-dilutive.
 
 F-10
 l.
                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 fiscal years 2008 and 2007, the Company
      granted 2,255,000 and 1,120,000 stock options, respectively, with a fair
      value of approximately $2,059,000 and $1,052,000,
      respectively.  A charge of $826,000 and $172,000 was recorded in
      fiscal years 2008 and 2007, respectively, relating to the amortization of
      the fair value associated with these
grants.
 
 As a
result of the merger with vFinance, the Company issued 2,880,640 stock options
in exchange for the outstanding vFinance stock options, and recorded a charge of
$171,000 in fiscal year 2008 relating to the amortization of the fair value
associated with these options.
 
 In fiscal
year 2007, the Company granted 50,000 shares of restricted stock with a fair
value of $111,000. The fair value of the grant will be charged to the statement
of operations over the four-year vesting period.  During the fiscal
years ended September 30, 2008 and 2007 the Company recognized a charge of
$28,000 and $5,000, respectively, for the amortization of this
grant.
 
 The
Black-Scholes option valuation model was used to estimate the fair value of the
options granted during the fiscal years ended September 30, 2008 and
2007.  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 the Company's
opinion, this valuation model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.  The
principal assumptions used in applying the Black-Scholes model along with the
results from the model were as follows:
 
 Years
      EndedSeptember
      30,
                  September
      30,2008
                  2007Assumptions:Risk-free
      interest rate
                  
                  1.47%
      - 2.19%
                  4.40%Expected
      life, in years
                  
                  3.0
                  3.0Expected
      volatility
                  
                  78%
      - 82%
                  75%
      - 86%
 
 
 F-11
 As of
September 30, 2008, there was $2,339,000of total unrecognized
deferred compensation costs related to share-based compensation
arrangements.  The Company has experienced a historic forfeiture rate
of approximately 38% on previously granted stock options and expects that future
forfeitures will be consistent with this experience.
 
 A summary
of the status of the Company’s non-vested shares as of September 30, 2008, and
changes during the fiscal year then ended is presented below:
  WeightedAverageGrant
      DateNonvested
      Shares
                  
                  Shares
                  
                  
                  Fair
      ValueNonvested
      at September 30, 2007
                  
                  
                  900,000
                  
                  
                  $
                  0.95Issued
      in Merger with vFinance
                  
                  
                  1,660,024
                  
                  
                  
                  0.90Granted
                  
                  
                  1,755,000
                  
                  
                  
                  0.92Vested
                  
                  
                  (386,250
                  )
                  
                  
                  0.92Expired
                  
                  
                  (100,000
                  )
                  
                  
                  0.84Nonvested
      at September 30, 2008
                  
                  
                  3,828,774
                  
                  
                  $
                  0.92
  m.
                  Concentrations of
      Credit Risk - The Company is engaged in trading and providing a
      broad range of securities brokerage and investment services to a diverse
      group of retail and institutional clientele, as well as corporate finance
      and investment banking services to corporations and
      businesses.  Counterparties to the Company’s business activities
      include broker-dealers and clearing organizations, banks and other
      financial institutions.  The Company uses clearing brokers to
      process transactions and maintain customer accounts on a fee basis for the
      Company.  The Company uses three clearing brokers for
      substantially all of its business.  The Company permits the
      clearing firms to extend credit to its clientele secured by cash and
      securities in the client’s account.  The Company’s exposure to
      credit risk associated with the non-performance by its customers and
      counterparties in fulfilling their contractual obligations can be directly
      impacted by volatile or illiquid trading markets, which may impair the
      ability of customers and counterparties to satisfy their obligations to
      the Company.  The Company has agreed to indemnify the clearing
      brokers for losses they incur while extending credit to the Company’s
      clients.  It is the Company’s policy to review, as necessary,
      the credit standing of its customers and counterparty.  Amounts
      due from customers that are considered uncollectible by the clearing
      broker are charged back to the Company by the clearing broker when such
      amounts become determinable.  Upon notification of a charge
      back, such amounts, in total or in part, are then either (i) collected
      from the customers, (ii) charged to the broker initiating the transaction
      and included in other receivables in the accompanying consolidated
      statements of financial condition, and/or (iii) charged as an expense in
      the accompanying consolidated statements of financial condition, based on
      the particular facts and
circumstances.
  F-12
 The
Company maintains cash with major financial institutions.   All
interest bearing accounts are insured up to $250,000.  On October 14,
2008 the FDIC
announced its temporary Transaction Account Guarantee Program, which provides
full coverage for non-interest bearing transaction deposit accounts at
FDIC-insured institutions that agree to participate in the program. The
transaction account guarantee applies to all personal and business checking
deposit accounts that do not earn interest at participating institutions. This
unlimited insurance coverage is temporary and will remain in effect for
participating institutions until December 31, 2009.  As a result of
this coverage the Company believes it is not exposed to any significant credit
risks for cash.
 
 n.
                Other
      Receivables - The Company extends unsecured credit in the normal
      course of business to its registered representatives. The determination of
      the amount of uncollectible accounts is based on the amount of credit
      extended and the length of time each receivable has been outstanding, as
      it relates to each individual registered representative.  The
      allowance for doubtful accounts reflects the amount of loss that can be
      reasonably estimated by management, and is included in other expenses in
      the accompanying consolidated statements of
  operations.
 
 o.
                  Advances to Registered
      Representatives - Advances are given to certain registered
      representatives as an incentive for their affiliation with the Broker
      Dealer Subsidiaries.  The representative signs an independent
      contractor agreement with the Broker Dealer Subsidiaries for a specified
      term, typically a three-year period.  The advance is then
      amortized on a straight-line basis over the life of the brokers agreement
      with the Broker Dealer Subsidiaries, and is included in commissions
      expense in the accompanying consolidated statements of
      operations.  In the event a representative’s affiliation
      terminates prior to the fulfillment of their contract, the representative
      is required to repay the unamortized
balance.
 
 p.
                Securities
      Owned - Marketable securities which consist of publicly traded
      unrestricted common stock and bonds are valued at the closing price on the
      valuation date.  Non-marketable securities which consist partly
      of restricted common stock and of non-tradable warrants exercisable into
      freely trading common stock of public companies are carried at fair value
      as determined in good faith by
management.
 
 q.
                Other Assets -
      Other assets consist primarily of pre-paid expenses and lease
      deposits.
 
 r.
                Recently Issued
      Accounting Standards-
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations  (“SFAS No. 141(R)”). SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired.
SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
No. 141(R) is effective for fiscal years beginning after December 15,
2008. The Company does not expect the provisions of SFAS 141(R) to have a
material impact on the Company's consolidated financial statements.
 
 F-13
  In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities--an amendment of FASB Statement No. 133" ("FAS 161"). FAS
161 changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in FAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company
does not expect the provisions of FASB 161 to have a material impact on the
Company's consolidated financial statements.
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS 157).
This standard clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company does not expect the implementation of SFAS 157 will have a material
impact on its results of operations or financial condition.  The FASB
approved the issuance of FASB Staff Position of 157-2, which defers the
effective date of SFAS 157 until Fiscal Years beginning after November 15, 2008
for non-financial assets and non-financial liabilities.
 
 The
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 159, Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). This standard addresses earnings volatility
caused by existing accounting standards that require related financial assets
and liabilities to be measured using different measurement attributes (such as
historical cost and fair value). SFAS 159 is intended to improve financial
reporting by giving all entities the option to recognize most financial assets
and liabilities and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected should be
reported in earnings. SFAS 159 is effective for the first quarter of our fiscal
2009 beginning October 1, 2008. We do not expect SFAS 159 to have a material
effect on our financial condition or results of operations.
 
 
 F-14
  3.
                CLEARING
      AGREEMENTS
 
 In April
2005, National Securities entered into a clearing agreement with NFS that became
effective in June 2005.  In the first quarter of fiscal year 2007, NFS
paid National Securities a $750,000 general business credit that is being
amortized over an eight year period ending November 2014, corresponding with the
expiration date of the clearing agreement.  In the second quarter of
fiscal year 2007, NFS provided National Securities a $250,000 clearing fee
waiver that is being amortized over a two year period ending December 2008,
corresponding with the time period that certain performance standards were to be
achieved.  The clearing agreement includes a termination fee if
National Securities terminates the agreement without cause. The Broker Dealer
Subsidiaries currently have clearing agreements with NFS, Penson, Legent and
Fortis.  The Company believes that the overall effect of its clearing
relationships has been beneficial to the Company’s cost structure, liquidity and
capital resources.
 
 4.
                  BROKER-DEALERS AND
      CLEARING ORGANIZATIONS RECEIVABLES AND
  PAYABLES
 
 At
September 30, 2008 and 2007 the receivables of $3,691,000 and $4,739,000
respectively, from broker-dealers and clearing organizations represent net
amounts due for fees and commissions.  At September 30, 2008 and 2007,
the amounts payable to broker-dealers and clearing organizations of $730,000 and
$1,115,000 respectively, represent amounts payable for inventory purchases on
behalf of the Company and its customers.
 
 5.
                OTHER
      RECEIVABLES
 
 An
analysis of other receivables and the allowance for uncollectible accounts on
such receivables, for the fiscal years ended September 30, 2007 and 2008 is as
follows:
 
 Other
                  
                  
                  
                  
                  
                  NetReceivables
                  
                  
                  Allowance
                  
                  
                  ReceivablesBalance,
      September 30, 2006
                  
                  $
                  847,000
                  
                  
                  $
                  (467,000
                  )
                  
                  $
                  380,000Additions
                  
                  
                  513,000
                  
                  
                  
                  -
                  
                  
                  
                  513,000Collections
                  
                  
                  (109,000
                  )
                  
                  
                  -
                  
                  
                  
                  (109,000
                  )Provision
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance,
      September 30, 2007
                  
                  
                  1,251,000
                  
                  
                  
                  (467,000
                  )
                  
                  
                  784,000Additions
                  
                  
                  527,000
                  
                  
                  
                  -
                  
                  
                  
                  527,000Collections
                  
                  
                  (568,000
                  )
                  
                  
                  (163,000
                  )
                  
                  
                  (731,000
                  )Provision
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance,
      September 30, 2008
                  
                  $
                  1,210,000
                  
                  
                  $
                  (630,000
                  )
                  
                  $
                  580,000
 
 F-15
 
 6.
                  ADVANCES TO REGISTERED
      REPRESENTATIVES
 
 An
analysis of advances to registered representatives for the fiscal years ended
September 30, 2007 and 2008 is as follows:
  Balance,
      September 30, 2006
                  
                  $
                  1,556,000Advances
                  
                  
                  3,860,000Amortization
      of advances
                  
                  
                  (1,406,000
                  )Balance,
      September 30, 2007
                  
                  
                  4,010,000Advances
                  
                  
                  1,784,000Amortization
      of advances
                  
                  
                  (1,331,000
                  )Balance,
      September 30, 2008
                  
                  $
                  4,463,000
 The
unamortized advances outstanding at September 30, 2008 and 2007 attributable to
registered representatives who ended their affiliation with National Securities
prior to the fulfillment of their obligation were $84,000 and $134,000
respectively.
 
 7.
                  SECURITIES OWNED AND
      SECURITIES SOLD, BUT NOT YET PURCHASED, AT MARKET -
      MARKETABLE
 
 The
following table shows the market values of the Company's securities owned and
securities sold, but not yet purchased as of September 30, 2008 and 2007,
respectively:
  September 30, 2008
                  
                  
                  September 30, 2007Securities
                  
                  
                  
                  
                  
                  SecuritiesSecurities
                  
                  
                  sold,
      but not
                  
                  
                  Securities
                  
                  
                  sold,
      but notowned
                  
                  
                  yet
      purchased
                  
                  
                  owned
                  
                  
                  yet
      purchasedCorporate
      stocks
                  
                  $
                  454,000
                  
                  
                  $
                  9,000
                  
                  
                  $
                  972,000
                  
                  
                  $
                  -Corporate
      bonds
                  
                  
                  6,000
                  
                  
                  
                  10,000
                  
                  
                  
                  -
                  
                  
                  
                  -Municpal
      bonds
                  
                  
                  516,000
                  
                  
                  
                  44,000
                  
                  
                  
                  219,000
                  
                  
                  
                  77,000$
                  976,000
                  
                  
                  $
                  63,000
                  
                  
                  $
                  1,191,000
                  
                  
                  $
                  77,000
 Securities
sold, but not yet purchased commit the Company to deliver specified securities
at predetermined prices.  The transactions may result in market risk
since, to satisfy the obligation, the Company must acquire the securities at
market prices, which may exceed the values reflected in the consolidated
statements of financial condition.
 
 Securities
owned, non-marketable, which consist of restricted common stock that is not
readily traded and warrants to purchase common stock, totaled $48,000 and $0 as
of September 30, 2008 and 2007, respectively.
 
 F-16
  8.
                  FIXED
      ASSETS
  Fixed
assets as of September 30, 2008 and 2007, respectively, consist of the
following:
  September
      30, 2008
                  
                  
                  September
      30, 2007
                  
                  Estimated
      Useful LivesOffice
      machines
                  
                  $
                  1,027,000
                  
                  
                  $
                  138,000
                  
                  5
      yearsFurniture
      and fixtures
                  
                  
                  311,000
                  
                  
                  
                  186,000
                  
                  5
      yearsTelephone
      system
                  
                  
                  61,000
                  
                  
                  
                  34,000
                  
                  5
      yearsElectronic
      equipment
                  
                  
                  957,000
                  
                  
                  
                  699,000
                  
                  5
      yearsLeasehold
      improvements
                  
                  
                  544,000
                  
                  
                  
                  280,000
                  
                  Lesser
      of useful life or term of leaseCapital
      Leases (Primarily composed of Computer Equipment)
                  
                  
                  1,481,000
                  
                  
                  
                  -
                  
                  5
      years4,381,000
                  
                  
                  
                  1,337,000Less
      accumulated depreciation
                  
                  
                  (3,138,000
                  )
                  
                  
                  (1,033,000
                  )Fixed
      assets - net
                  
                  $
                  1,243,000
                  
                  
                  $
                  304,000
  Depreciation
and amortization expense for the years ended September 30, 2008 and 2007 was
$1,140,000 and $148,000 respectively.
 
 9.
                ACQUISITIONS
 
 Pursuant
to the Merger Agreement, upon the closing of the Merger which occurred at 12:01
a.m. July 1, 2008 (the "Effective Date"), each share of vFinance common stock
outstanding immediately prior to the closing of the Merger were automatically
converted into the right to receive 0.14 shares of our common stock, rounded up
to the nearest whole share.
 
 Each
option or warrant to purchase shares of vFinance common stock outstanding upon
the Effective Date were converted into options or warrants, as the case may be,
to acquire the number of shares of our common stock determined by multiplying
(i) the number of shares of vFinance common stock underlying each outstanding
stock option or warrant immediately prior to the effective time of the Merger by
(ii) 0.14, at a price per share of our common stock equal to (a) the exercise
price per share of each stock option or warrant otherwise purchasable pursuant
to the stock option or warrant divided by (b) 0.14.
 
 On the
Effective Date, our board of directors consisted of Mark Goldwasser (Chairman of
the Board), Leonard J. Sokolow (Vice Chairman of the Board), Christopher C.
Dewey (Vice Chairman of the Board), Marshall S. Geller, Robert W. Lautz, Jr.,
Charles R. Modica and Jorge A. Ortega.  Messrs. Geller, Lautz, Modica
and Ortega are independent directors.
 
 Pursuant
to the Merger Agreement, Mr. Goldwasser, our Chairman of the board of directors,
Mr. Dewey, a Vice Chairman of our board of directors, and Mr. Sokolow, the
Chairman and Chief Executive Officer of vFinance (and now a Vice Chairman of our
board of directors and our President), entered into an agreement (the "Director
Voting Agreement") on the Effective Date to vote their shares of our common
stock for the election of each other and up to three designees
of Mr. Goldwasser and up to three designees of Mr. Sokolow
until the earlier to occur of: (i) the Company’s merger, consolidation or
reorganization whereby the holders of our voting stock own less than 50% of the
voting power of the Company after such transaction, (ii) by mutual consent of
the parties thereto, (iii) the date that Messrs. Goldwasser, Sokolow and Dewey
own in the aggregate less than one percent of our outstanding voting securities,
(iv) upon the fifth anniversary of the Director Voting Agreement or (v) upon
listing of our common stock on AMEX, the NASDAQ Capital Market or the NASDAQ
Global Market.
 
 F-17
 On the
Effective Date, Mr. Sokolow's employment as Chairman and Chief Executive Officer
of vFinance and his employment agreement with vFinance dated November 16, 2004,
as amended, was terminated and vFinance’s principal office was relocated to New
York City, New York. Accordingly, pursuant to the terms of Mr. Sokolow's former
employment agreement with vFinance, Mr. Sokolow received a lump sum cash
payment of $1,150,000 as of the Effective Date. On the Effective Date, vFinance
entered into an employment termination agreement ("Termination Agreement") with
Mr. Sokolow.
 
 Notwithstanding
the fact that Mr. Sokolow’s stock options to purchase shares of vFinance common
stock that had not vested as of the Effective Date would have vested pursuant to
his former employment agreement with vFinance, Mr. Sokolow agreed to waive such
accelerated vesting. However, if: (i) Mr. Sokolow's employment is terminated by
us with cause or (ii) Mr. Sokolow voluntarily resigns his employment with us,
all stock options Mr. Sokolow received in exchange for his stock options
pursuant to the terms of the Merger Agreement will become 100% vested and will
remain exercisable by Mr. Sokolow or his beneficiaries for a period of nine
months from the date of such event; provided, however, such period of nine
months will not exceed the earlier of (a) the latest date upon which such
options could have expired by the original terms under the circumstances or (b)
the tenth anniversary of the original date of the grant of the
options.
 
 Pursuant
to the terms of the Termination Agreement, if any payments made to Mr. Sokolow,
including the acceleration of the vesting of his National stock options, will be
subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended, vFinance agreed to pay Mr. Sokolow an additional amount such that
the net amount retained by him, after deduction of any tax on such payment, will
equal the payments received by Mr. Sokolow under the Termination
Agreement.
 
 On the
Effective Date, Messrs. Goldwasser and Sokolow each entered into substantially
identical five-year employment agreements with us, pursuant to which Mr.
Goldwasser is employed by us as Chairman and Chief Executive Officer and Mr.
Sokolow is employed by us as Vice Chairman and President. Under the terms of the
employment agreements, Messrs. Goldwasser and Sokolow will each receive an
annual base salary of $450,000, which will increase 5% per year, and a
non-accountable automobile expense allowance of $1,000 per month. In addition,
each of them will be entitled to receive on a fiscal year basis a cash bonus
determined in the discretion of our Compensation Committee of not less than: (i)
$225,000, (ii) 5% of our fiscal year consolidated net income in excess of $4.5
million, up to 100% of the difference between their then current base salaries
and $225,000 and (iii) such additional bonuses as the board of directors may
determine based upon the Board's assessment of their performance in the
following areas: revenue growth, new business development, investor relations,
communications with the board of directors, and special projects as assigned by
the board of directors.
 
 F-18
 Each employment
agreement terminates upon the earliest to occur of: (i) the death of the
employee; (ii) a termination by National by reason of the disability of the
employee; (iii) a termination by National with or without cause; (iv) a
termination by the employee with or without good reason; (v) upon a "Change in
Control" (as defined in the employment agreements); or (vi) the non-renewal of
the agreement. Upon the termination due to the death or disability of the
employee, by National without cause, by the employee with good reason, (upon a
"Change of Control") or upon the expiration of the employment agreement if
National or the employee refuses to extend the term of the employment agreement,
the employee will be entitled to: (i) any accrued but unpaid salary or bonus or
unreimbursed expenses; (ii) any bonus payable for the portion of the fiscal year
during which the termination occurs; (iii) 100% of the employee's base salary
(150% in the event of termination by National without cause or by the employee
with good reason); (iv) the continuation of health benefits until the earlier of
(a) 18 months after termination and (b) the date the employee accepts other
employment; and (v) all unvested options granted pursuant to the employment
agreements will become immediately vested and be exercisable for a period of
nine months.
  Pursuant
to each employment agreement, on the Effective Date, each of Messrs. Goldwasser
and Sokolow were granted non-qualified stock options to purchase 1,000,000
shares of National's common stock at an exercise price of $1.64 per share, which
was equal to the average of the 10-day closing market price of National's common
stock prior to the Effective Date. The options vested 25% upon the date of grant
and become exercisable as to 25% of the shares underlying the options on the
second, third and fourth anniversaries of the date of grant. The options expire
seven years from the effective date of the Merger.
 
 In
accordance with the terms of the Merger Agreement, on the Effective Date, Alan
B. Levin, the Chief Financial Officer of vFinance, entered into a one-year
employment agreement with us, pursuant to which he is employed as the Chief
Financial Officer of the Company. Under the terms of the agreement, Mr. Levin
will receive an annual base salary of $180,000. In addition, he will be entitled
to receive an annual cash bonus determined in the discretion of the Compensation
Committee of the board of directors of National based upon its assessment
by the President of National of Mr. Levin's performance in the following areas:
revenue, net income and revenue growth, new business development, investor
relations, communications with the board of directors, and other factors
including, without limitation, special projects as assigned by the Chief
Executive Officer or the board of directors of National.
 
 The following table summarizes
the Company’s computation in determining the intangible asset acquired in the
merger:
  Purchase
      price
                  
                  $
                  17,598,000Fair
      value of liabilities assumed
                  
                  
                  6,506,00024,104,000Less
      fair value of assets aquired
                  
                  
                  7,316,000Intangible
      assets acquired
                  
                  $
                  16,788,000
  The Company attributed the entire
intangible asset to customer lists which will be amortized over a five year life
(See Note 10).
 
 
 F-19
  The
following table represents the operational performance as if the two entities
were merged as of October 1, 2007 and operating as one company for an entire
fiscal year:
  For
      the Fiscal Year Ended September 30, 2008
  (unaudited)ProformaNational
                  
                  
                  vFinance
                  
                  
                  Adjustments
                  
                  
                  TotalREVENUESCommissions
                  
                  $
                  44,471,000
                  
                  
                  $
                  26,109,000
                  
                  
                  $
                  -
                  
                  
                  $
                  70,580,000Net
      dealer inventory gains
                  
                  
                  13,259,000
                  
                  
                  
                  12,330,000
                  
                  
                  
                  -
                  
                  
                  
                  25,589,000Investment
      banking
                  
                  
                  1,718,000
                  
                  
                  
                  4,660,000
                  
                  
                  
                  -
                  
                  
                  
                  6,378,000Total
      commission and fee revenues
                  
                  
                  59,448,000
                  
                  
                  
                  43,099,000
                  
                  
                  
                  -
                  
                  
                  
                  102,547,000Interest
      and dividends
                  
                  
                  3,722,000
                  
                  
                  
                  568,000
                  
                  
                  
                  -
                  
                  
                  
                  4,290,000Transfer
      fees and clearing services
                  
                  
                  4,474,000
                  
                  
                  
                  4,727,000
                  
                  
                  
                  -
                  
                  
                  
                  9,201,000Other
                  
                  
                  3,738,000
                  
                  
                  
                  1,313,000
                  
                  
                  
                  -
                  
                  
                  
                  5,051,000TOTAL
      REVENUES
                  
                  
                  71,382,000
                  
                  
                  
                  49,707,000
                  
                  
                  
                  -
                  
                  
                  
                  121,089,000EXPENSESCommissions
      and fees
                  
                  
                  57,164,000
                  
                  
                  
                  35,542,000
                  
                  
                  
                  -
                  
                  
                  
                  92,706,000Employee
      compensation and related expenses
                  
                  
                  8,691,000
                  
                  
                  
                  6,351,000
                  
                  
                  
                  -
                  
                  
                  
                  15,042,000Clearing
      fees
                  
                  
                  2,297,000
                  
                  
                  
                  2,811,000
                  
                  
                  
                  -
                  
                  
                  
                  5,108,000Communications
                  
                  
                  1,176,000
                  
                  
                  
                  1,820,000
                  
                  
                  
                  -
                  
                  
                  
                  2,996,000Occupancy
      and equipment costs
                  
                  
                  3,294,000
                  
                  
                  
                  1,972,000
                  
                  
                  
                  -
                  
                  
                  
                  5,266,000Professional
      fees
                  
                  
                  2,533,000
                  
                  
                  
                  1,672,000
                  
                  
                  
                  -
                  
                  
                  
                  4,205,000Interest
                  
                  
                  662,000
                  
                  
                  
                  86,000
                  
                  
                  
                  -
                  
                  
                  
                  748,000Taxes,
      licenses, registration
                  
                  
                  436,000
                  
                  
                  
                  352,000
                  
                  
                  
                  -
                  
                  
                  
                  788,000Other
      administrative expenses
                  
                  
                  1,915,000
                  
                  
                  
                  4,564,000
                  
                  
                  
                  -
                  
                  
                  
                  6,479,00078,168,000
                  
                  
                  
                  55,170,000
                  
                  
                  
                  -
                  
                  
                  
                  133,338,000Net
      loss
                  
                  
                  (6,786,000
                  )
                  
                  
                  (5,463,000
                  )
                  
                  
                  -
                  
                  
                  
                  (12,249,000
                  )Preferred
      stock dividends
                  
                  
                  (338,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (338,000
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (7,124,000
                  )
                  
                  $
                  (5,463,000
                  )
                  
                  $
                  -
                  
                  
                  $
                  (12,587,000
                  )LOSS
      PER COMMON SHAREBasic:Net
      loss attributable to common stockholders
                  
                  $
                  (0.67
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1.19
                  )Diluted:Net
      loss attributable to common stockholders
                  
                  $
                  (0.67
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1.19
                  )Weighted
      average number of shares outstanding:Basic
                  
                  
                  10,579,778
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10,579,778Diluted
                  
                  
                  10,579,778
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10,579,778
 The
impairment of the intangible asset of $12,999,000 has been excluded from the
above Pro Forma information.  If it had been included our net loss
would have been $25,586,000 and our loss per basic and diluted would have been
($2.42).
 
 
 F-20
  The
following table shows the actual calculation of tangible assets acquired and the
total percentage of ownership in the vFinance Inc.
  June
      30, 2008Total
      tangible assets acquiredCash
                  
                  $
                  4,426,000Deposits
      with clearing organizations
                  
                  
                  991,000Other
      receviables, Net of allowance for non-collectable
                  
                  
                  135,000Advances
      to registered representatives
                  
                  
                  8,000Securities
      ownedMarketable,
      at market value
                  
                  
                  75,000Not
      readily marketable, at estimated market value
                  
                  
                  56,000Fixed
      assets, net of accumulated depreciation
                  
                  
                  768,000Other
      assets
                  
                  
                  857,000Total
      tangible assets
                  
                  $
                  7,316,000Total
      liabilities acquiredPayable
      to Broker-Dealers and Clearing Organizations
                  
                  $
                  239,000Securitie
      sold, but not yet purchased, at market
                  
                  
                  1,000Accounts
      payable, accrued expenses and other liabilities
                  
                  
                  5,785,000Capital
      lease obligations
                  
                  
                  481,000Total
      liabilities
                  
                  $
                  6,506,000Net
      tangible assets acquired
                  
                  $
                  810,000%
      Acquired
                  
                  
                  100
                  %
 
 F-21
  10.
                  INTANGIBLE
      ASSETS
 
 The
markets in which the Company operates have recently been adversely affected by
significant declines in the volume of securities transactions and in significant
fluctuations in market liquidity together with existing and anticipated
unfavorable financial and economic conditions.  Since late September
2008, the following events have occurred:
 
 ·
                Lehman
      Brothers filed for bankruptcy
protection;
 ·
                American
      International Group receives a loan of $85 billion from a the Federal
      Reserve;
 ·
                Washington
      Mutual’s banking assets were sold to JP
Morgan;
 ·
                The
      Emergency Economic Stabilization Act which created a $700 billion Troubled
      Assets Relief Program was signed into law
  (“TARP”);
 ·
                Central
      banks from large industrialized countries coordinate their efforts to aid
      the world economy;
 ·
                The
      TARP has been used for different purposes than originally intended to
      accommodate shifting currents in the US
economy
 ·
                The
      Federal Reserve Bank has set two new precedents by first, lowering the
      Federal Funds Rate to its lowest level ever of between 0% and .25% and
      second, modifying the structure of this instrument to one of a variable
      nature.
 ·
                The
      major US stock indexes have declined between 25.1% and 43.1% since July 1,
      2008.
 
 The
aforementioned economic events have caused a significant decline in the assets
under management of our customers, including the customers of
vFinance.  Additionally, the Company believes that such economic
events triggered a large number of those customers to reconsider several aspects
of their investment philosophy, strategy, and execution.  Accordingly,
we believe that this may result in lower revenues and net cash flows than we
initially anticipated at the time of the acquisition of
vFinance.  This leads the Company to believe that the carrying amount
of the intangible assets resulting from this acquisition may not be
recovered.
 
 During
December 2008, the Company estimates the future cash flows expected to result
from the use of the intangible assets resulting from merger with
vFinance.  The Company determined that such future cash flows did not
exceed the carrying value of the intangible asset as of September 30,
2008.  The Company believes that the intangible assets, which consist
substantially of customer relationships, will be held and used.
 
 To
determine the fair value of the intangible assets, the Company used the guidance
provided by SFAS 157 Fair Value Measurements.   SFAS 157 provides
a fair value hierarchy which gives priority to quoted prices (unadjusted) in
active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3).  Level 2 inputs are inputs
other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly.  There is no active
market for assets identical to the Company’s acquired customer relationships nor
has the Company been able to identify, as defined.  Additionally, the
Company was unable to identify the following Level 2 inputs:  1)
quoted prices for similar assets in active markets, 2) quoted prices for similar
or identical assets in markets that are not active, or 3) inputs other than
quoted prices that are observable for the asset.  Accordingly, the
Company used mostly unobservable inputs, consisting of estimated future net cash
flows generated specifically from the acquired customer
relationships.  However, the Company did use certain Level 1 and 2
inputs to substantiate certain assumptions that helped determine the discount
rate it used in deriving the fair value of the intangible assets.
 
 F-22
 Based on
this method, the Company determined that the adjusted carrying basis of its
intangible assets resulting from its merger with vFinance amounts to $2,950,000
at September 30, 2008.  The difference between the adjusted carrying
basis and its unamortized carrying basis amounts to $12,999,000 and has been
recorded as an operating expense of the Company in the accompanying financial
statements.  The remaining intangible asset will be amortized over the
balance of the assets original life for 4.75 years.
  The
following table demonstrates the amortization management expects to be taken in
future years:
  Fiscal
      Year Ending2009
                  
                  $
                  621,0002010
                  
                  
                  621,0002011
                  
                  
                  621,0002012
                  
                  
                  621,0002013
                  
                  
                  466,000$
                  2,950,000
  11.
                OTHER
      ASSETS
 
 Other
assets as of September 30, 2008 and 2007 respectively, consist of the
following:
  September
      30,
                    2008
                  
                  
                  September
      30,
                    2007Pre-paid
      expenses
                  
                  $
                  728,000
                  
                  
                  $
                  292,000Deposits
                  
                  
                  352,000
                  
                  
                  
                  38,000Investments
      in unaffiliated entity
                  
                  
                  162,000
                  
                  
                  
                  -Deferred
      financing costs
                  
                  
                  163,000
                  
                  
                  
                  16,000Other
                  
                  
                  24,000
                  
                  
                  
                  50,000Total
                  
                  $
                  1,429,000
                  
                  
                  $
                  396,000
 
 
 F-23
  12.
                ACCOUNTS PAYABLE,
      ACCRUED EXPENSES AND OTHER
LIABILITIES
 
 Accounts
payable, accrued expenses and other liabilities as of September 30, 2008 and
2007 respectively, consist of the following:
  September
      30,
                    2008
                  
                  
                  September
      30,
                    2007Commissions
      payable
                  
                  $
                  6,537,000
                  
                  
                  $
                  5,128,000Deferred
      clearing fee credits
                  
                  
                  578,000
                  
                  
                  
                  828,000Telecommunications
      vendors payable
                  
                  
                  209,000
                  
                  
                  
                  366,000Legal
      payable
                  
                  
                  646,000
                  
                  
                  
                  84,000Deferred
      rent payable
                  
                  
                  313,000
                  
                  
                  
                  133,000Accrued
      compensation
                  
                  
                  679,000
                  
                  
                  
                  -Commission
      payable - Triparty clearing
                  
                  
                  359,000
                  
                  
                  
                  -Capital
      lease liability
                  
                  
                  613,000
                  
                  
                  
                  -Other
      vendors
                  
                  
                  2,401,000
                  
                  
                  
                  1,368,000Total
                  
                  $
                  12,335,000
                  
                  
                  $
                  7,907,000
  13.
                CONVERTIBLE NOTES
      PAYABLE
 
 In
January 2006, the Company completed a financing transaction that included 11%
convertible promissory notes in the principal amount of $1,000,000 that were
convertible into common stock at a price of $1.00 per share.  Under a
conversion option contained in the convertible promissory notes the Company was
entitled to convert the notes into common stock at any time if the following
occur:
 
 ·
                The
      closing price of the common stock has equaled or exceeded $2.00 per share
      for 10 consecutive trading days and the trading volume exceeds 10,000
      during that 10 day period or
 ·
                The
      closing price of the common stock has equaled or exceeded $3.00 per share
      for 10 consecutive trading days regardless of the trading volume,
      and
 ·
                The
      shares of common stock into which the notes are convertible are then
      covered by an effective registration
statement.
 
 The
convertible promissory notes were to mature in January 2011.  The
Company granted 300,000 warrants to acquire shares of common stock to the note
holders, and the fair value of the warrants was calculated using the
Black-Scholes Option Valuation Model.  The Company recorded a debt
discount of approximately $187,000 that was charged to interest expense over the
life of the debt.  Such amortization has been included in “Interest”
in the accompanying consolidated financial statements.  In June 2007,
the Company exercised its conversion option contained in its 11% convertible
promissory notes, and issued 1,024,413 shares of its common stock in full
payment of the $1,000,000 convertible promissory notes, plus accrued
interest.  The unamortized debt discount at September 30, 2006 of
approximately $159,000 was expensed in fiscal year 2007 as “Interest” in the
accompanying consolidated financial statements.
 
 F-24
  On March
31, 2008, the Company completed a financing transaction under which an investor
made an investment in the Company by purchasing a convertible promissory note in
the principal amount of $3.0 million, with a warrant to purchase 375,000 shares
of common stock at an exercise price of $2.50 per share.  The
promissory note matures in March 2012, is convertible into common stock at a
price of $2.00 per share and has a stated interest rate of 10% per
annum.  Under accounting guidance provided by EITF No 98-5 and EITF
No. 00-27 the relative fair value of the warrant was calculated using the
Black-Scholes Option Valuation Model.  The Company also recorded an
additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $791,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 On June
30, 2008, the Company completed a financing transaction under which the same
investor made an additional investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0 million, with a
warrant to purchase 468,750 shares of common stock at an exercise price of $2.00
per share.  The promissory note matures in June 2012, is convertible
into common stock at a price of $1.60 per share and has a stated interest rate
of 10% per annum.  Under accounting guidance provided by EITF No 98-5
and EITF No. 00-27 the relative fair value of the warrant was calculated using
the Black-Scholes Option Valuation Model.  The Company also recorded
an additional debt discount for the beneficial conversion feature of the
instrument.  These amounts, totaling approximately $789,000, have been
recorded as a debt discount that will be charged to interest expense over the
life of the promissory note.
 
 The
following table summarizes convertible notes payable at September 30,
2008.
  September
      30,200810%
      convertible notes payable
                  
                  $
                  6,000,000Less:
      Deferred debt discount
                  
                  
                  (1,431,000
                  )$
                  4,569,000
  The
Company incurred interest expense related to its convertible notes of $391,000
and $262,000 for the fiscal years ended September 30, 2008 and 2007,
respectively.
 
 14.
                NOTES
      PAYABLE
 
 In
February 2004, the Company consummated a private offering of its securities to a
limited number of accredited investors wherein the Company issued an aggregate
of $850,000 of three-year, 10% senior subordinated promissory notes to four
unaffiliated parties.  The note holders received three-year warrants
to purchase an aggregate of 170,000 shares of the Company’s common stock at an
exercise price of $1.50 per share, with a fair value of approximately
$143,000.  The Company amortized the total debt discount of $183,000
over the three-year term of these promissory notes.  Such amortization
has been included in “Interest” in the accompanying consolidated financial
statements. These notes were repaid in full during the fiscal year ended
September 30, 2007.
 
 F-25
  In
February 2007, the Company completed a financing transaction under which certain
investors purchased 10% promissory notes in the principal amount of $1.0
million, with warrants to purchase an aggregate of 250,000 shares of common
stock at an exercise price of $1.40 per share.  The promissory notes
mature in February 2009, and have a stated interest rate of 10% per
annum.  The fair value of the warrants was calculated using the
Black-Scholes Option Valuation Model.  The Company recorded a debt
discount of approximately $195,000 that is being charged to interest expense
over the life of the debt.  Such amortization has been included in
“Interest” in the accompanying consolidated financial statements.
 
 The
following table summarizes notes payable at September 30, 2008 and 2007,
respectively:
  September
      30,
                  
                  
                  September
      30,2008
                  
                  
                  200710%
      promissory notes payable
                  
                  $
                  1,000,000
                  
                  
                  $
                  1,000,000Less:
      Deferred debt discount
                  
                  
                  (41,000
                  )
                  
                  
                  (138,000
                  )$
                  959,000
                  
                  
                  $
                  862,000
  The notes
outstanding on September 30, 2008 mature in fiscal year 2009.  The
Company incurred interest expense related to its notes of $208,000 and $173,000
for the fiscal years ended September 30, 2008 and 2007,
respectively.
 
 15.
                SECURED DEMAND NOTE /
      SUBORDINATED BORROWINGS
 
 Subordinated
borrowings represent a secured demand note that was entered into by National
Securities, a registered broker-dealer.  The secured demand note
was entered into in accordance with the form prescribed by the FINRA, and it is
accounted for in accordance with broker-dealer accounting SEC rule
15c3-1d.  Accordingly, our balance sheet includes both an asset
(“Secured demand note”) and the corresponding liability (“Subordinated
borrowings”) in an identical amount.  The secured demand note is
available to compute net capital under SEC rule 15c3-1.  The
borrowings are subordinated to the claims of present and future creditors of the
Company and cannot be repaid where such repayment will cause the Company to fail
to meet its minimum net capital requirements in accordance with SEC rule
15c3-1.
 
 National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company, to borrow
securities that can be used by the Company for collateral
agreements.  These securities have been pledged through an unrelated
broker-dealer, and have a borrowing value totaling $500,000.  This
note bears interest at 5% per annum with interest paid monthly.  In
February 2008, upon the maturity of the previously issued note, National
Securities and the holder entered into a new $500,000 secured demand note
collateral agreement with a maturity date of March 1, 2009.  Certain
of the securities, totaling $168,000, have been pledged as collateral for
security deposits for office leases under two letters of credit.  No
amounts have been drawn on either of these letters of credit.  The
holder also entered into a warrant agreement to purchase 150,000 shares of
common stock at a price of $1.25 per share, with an expiration date of July 31,
2009.
 
 F-26
 16.
                INCOME
      TAXES
 
 The
income tax provision (benefit) consists of:
  Years
      EndedSeptember
      30,
                    2008
                  
                  
                  September
      30,
                    2007Federal
      income tax provision (benefit)
                  
                  $
                  -
                  
                  
                  $
                  -State
      income tax provision (benefit)
                  
                  
                  -
                  
                  
                  
                  -Change
      in valuation allowance
                  
                  
                  -
                  
                  
                  
                  -$
                  -
                  
                  
                  $
                  -
 The
primary difference between income tax expense at the federal statutory rate and
actual tax expense is due to the utilization of net operating loss carryovers.
The Company did not record a provision for income taxes due to the utilization
of net operating losses.
 
 The
income tax provision (benefit) related to income (loss) from continuing
operations before income taxes and extraordinary items vary from the federal
statutory rate as follows:
  Years
      EndedSeptember
      30,
                    2008
                  
                  
                  September
      30,
                    2007Statutory
      federal rate
                  
                  
                  35.0
                  %
                  
                  
                  35.0
                  %State
      income taxes net of federal income tax benefit
                  
                  
                  5.2
                  
                  
                  
                  5.2Losses
      for which no bnefit is provided-Amortization and impairment of
      intangible
                  
                  
                  (26.5
                  )
                  
                  
                  -Change
      in valuation allowance
                  
                  
                  (13.7
                  )
                  
                  
                  (40.2
                  )0.0
                  %
                  
                  
                  0.0
                  %
  Significant
components of the Company’s deferred tax assets that are included in other
assets in the accompanying financial statements are as follows:
  September
      30,
                    2008
                  
                  
                  September
      30,
                    2007Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  13,000,000
                  
                  
                  $
                  3,781,000Reserves
      for uncollectible receivables
                  
                  
                  187,000
                  
                  
                  
                  150,000Accrued
      but unpaid bonuses
                  
                  
                  189,000
                  
                  
                  
                  -Other
      temporary differences
                  
                  
                  61,000
                  
                  
                  
                  129,000Total
      deferred tax assets
                  
                  
                  13,437,000
                  
                  
                  
                  4,060,000Deferred
      tax liability:Other
      temporary differences
                  
                  
                  -
                  
                  
                  
                  (2,000
                  )Deferred
      tax asset
                  
                  
                  13,437,000
                  
                  
                  
                  4,058,000Valuation
      allowance
                  
                  
                  (13,437,000
                  )
                  
                  
                  (4,058,000
                  )Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -
   F-27
 At
September 30, 2008, the Company had available net operating loss carryovers of
approximately $32.5 million that may be applied against future taxable income
and expires at various dates through 2028, subject to certain limitations. The
Company has a deferred tax asset arising substantially from the benefits of such
net operating loss deduction and has recorded a valuation allowance for the full
amount of this deferred tax asset since it is more likely than not that some or
all of the deferred tax asset may not be realized.  The valuation
allowance for the deferred tax asset increased $9.4 million and decreased
$431,000 during the fiscal years ended September 30, 2008 and 2007
respectively.  The net change in the valuation allowance is due
principally to the net operating loss carryovers, reserve for uncollectible
accounts and other temporary differences.
 
 The
Company acquired vFinance, Inc. and subsidiaries during fiscal year ended
September 30, 2008 and increased its consolidated tax net operating loss
carryforwards by approximately $14.6 million from vFinance pre-acquisition net
operating losses.  However, pursuant to IRC Section 382, the amount of
taxable income that can be offset by these pre-acquisition net operating losses
of both the Company and vFinance, Inc is limited due to the ownership change
that occurred during the year.  The deferred tax asset derived from
these tax loss carryforwards have been included in consolidated deferred tax
assets- net operating loss carryforwards, and a full valuation allowance has
been established since it is not more likely than not that such benefits will be
recovered.
 
 17.
                COMMITMENTS
 
 Leases - As of
September 30, 2008, the Company leases office space and equipment in various
states expiring at various dates through August 2014, and is committed under
operating leases for future minimum lease payments as
follows:
  Fiscal
      Year Ending2009
                  
                  $
                  3,375,0002010
                  
                  
                  3,131,0002011
                  
                  
                  3,019,0002012
                  
                  
                  2,777,000Thereafter
                  
                  
                  2,275,000$
                  14,577,000
  The
totals amount of rent payable under the leases is recognized on a straight line
basis over the term of the leases.  As of September 30, 2008 and
September 30, 2007, the Company has recognized deferred rent payable of $313,000
and $133,000, respectively (See Note 12). Rental expense under all operating
leases for the years ended September 30, 2008 and September 30, 2007 was $
2,356,000 and $1,781,000 respectively.
 
 
 F-28
  18.
                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 alleged
fraud and inequitable conduct relating to his attempts to sell his
investment in the Company in calendar year 2001, and was seeking
approximately $5,750,000 in damages.  On August 27, 2008, we received
notification from FINRA that Rothstein’s claim had been dismissed.
 
 In
November 2007, Nupetco Associates, LLC filed a customer arbitration action
(FINRA Case No. 07-03152) with FINRA, naming vFinance Investments as a
co-respondent.  Nupetco alleged violations of various state and
federal securities laws and sought compensatory damages of $508,787 against
vFinance Investments in addition to costs, attorneys’ fees and punitive
damages.  In response, vFinance Investments filed an answer and
affirmative defenses and requested  discovery from
the  arbitration  claimant.  vFinance Investments,
in cooperation with its insurance carrier has since agreed to settle this
case.  The settlement documents are being finalized and the Company
estimates its liability associated with this case at approximately
$27,000.
 
 In July
2005, the Securities and Exchange Commission contacted vFinance regarding an
investigation into Lexington Resources, Inc.  On May 4, 2006 the
Commission issued an Order Directing Investigation advising vFinance that the
Division of Enforcement staff were investigating possible violations of Sections
5(a) and 5(c)of the Securities Act of 1933, Rule 10(b)5 of the Exchange Act,
Section 17b of the Securities Act, Section 17(a) of the Exchange Act, Section
15(c)(l)(a) of the Exchange Act, Section 13(d) of the Exchange Act, and Section
16(a) of the Exchange Act from the period of November 2003 through May 4,
2006.  From July 2005 through and including March 2007, multiple
document and information requests and responses to those requests were exchanged
between the SEC staff and vFinance.  In total more than 5,000 pages of
documents were produced to the SEC staff in both electronic and hard copy
form.  On January 3, 2008, the SEC issued and Order Instituting
Administrative Proceedings against vFinance Investments, Inc., Richard
Campanella and a former registered representative.  The Order alleges
that vFinance violated the federal securities laws by failing to preserve and
produce customer correspondence of one of its registered
representative.  The SEC also alleges that the registered
representative repeatedly failed to produce records and deliberately deleted
data from his hard drive relating to a matter under investigation by the
SEC.  The SEC separately alleges that Campanella failed to respond
promptly to the SEC's document requests, as required under Section 17(a) of the
Exchange Act, and failed to address the registered representative’s
non-compliance with the firm document retention policies.  The alleged
violations were isolated occurrences related to this registered representative
and were limited to the Flemington, New Jersey branch office.  The
registered representative terminated his employment with vFinance on August 4,
2006, and has not been associated with vFinance since that date.  On
November 7, 2008, a ruling in this matter was issued which found that
vFinance willfully violated Section 17(a) of the Exchange Act and Rules
17a-4(b)(4) and 17a-4(j) thereunder, and that Campanella aided and abetted and
caused vFinance's violations.  As a consequence, a Cease and Desist
Order was issued against vFinance with a civil monetary penalty
against vFinance in the amount of $100,000.00.  On November 17, 2008
vFinance filed a Motion to Correct Manifest Errors of Fact in the Initial
Decision in an effort to correct possible errors in the ruling’s findings
of fact.  The Judge denied the motion.   The Company
may choose to file a Petition for Review of the decision by the
Commission.
 
 F-29
  On March
4, 2008, vFinance received a customer arbitration action (FINRA Case No.
08-00472) from Claimants, Donald and Patricia Halfmann. As indicated under
FINRA's Code of Arbitration Procedure, vFinance filed a responsive
pleading.  The  Halfmanns'  Statement  of
Claim  alleges  that Jeff Lafferty, a former broker working
for vFinance Investments,  opened accounts for the Halfmanns and
misappropriated approximately $110,000 of the Halfmanns' funds via
check  alteration  and  forgery  while
he was  employed  by  vFinance as the
Halfmanns'  financial advisor. The Halfmanns also contend vFinance is
liable for an additional $150,000 for investments made by the Halfmanns directly
with Jeff Lafferty after their account transferred out of vFinance and after
Lafferty's resignation from vFinance, with a form U-5 filed with NASD by
vFinance on August 27, 2004. Finally, the Halfmanns' Statement of Claim requests
punitive damages, costs and attorney's fees incurred for this
action.  The Company is currently engaged in the discovery process
with a final hearing scheduled in February 2009. While vFinance intends to
vigorously defend against the allegations made in the Halfmanns' Statement of
Claim, a prediction of the likely outcome cannot be made at this
time.
 
 The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, seeking in the aggregate damages of
approximately $3,400,000.  The Company believes such claims are
substantially without merit, and estimates that its liability, primarily for
attorney representation, will approximate $295,000 (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 September 30, 2008 and 2007, is $587,000 and $62,000 (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 other FINRA related expenses of $1,820,000 and $1,444,000 for the
fiscal years ended September 30, 2008 and 2007, respectively.
 
 19.
                STOCKHOLDERS'
      EQUITY
  Shares Authorized –
The Company’s authorized number of shares of common stock is 50,000,000, and its
authorized number of shares of preferred stock is 200,000.  The number
of authorized shares of preferred stock designated as Series A is
50,000.
 
 Common Stock – During
the fiscal year ended September 30, 2008, upon the vote of its shareholders, the
Company increased the authorized number of shares of its common stock to
50,000,000 shares from 30,000,000 shares.
 
 During
the fiscal year ended September 30, 2007, the Company granted 50,000 shares of
restricted stock with a fair value of $111,000.  The fair value of the
grant will be charged to the statement of operations over the four-year vesting
period. During the fiscal years ended September 30, 2008 and 2007 the Company
recognized a charge of $28,000 and $5,000, respectively, for the amortization of
this grant.
 
 Series A Convertible
Preferred Stock – Each Series A convertible preferred stock is
convertible into 80 shares of common stock ($1.25 per share of common). The
holders are entitled to receive dividends on a quarterly basis at a rate of 9%
per annum, per share.  Such dividends are cumulative and accumulate
whether or not declared by the Company’s Board of Directors, but are payable
only when and if declared by the Company’s Board of Directors.
 
 F-30
 During
the fiscal years ended September 30, 2007, 2006 and 2005, the Company’s Board of
Directors declared in-kind dividends in the aggregate of 2,537, 1,996 and 2,143
shares of Series A preferred stock, in payment of approximately $317,000,
$300,000 and $322,000, respectively, for dividends accumulated through March 31
of each year.  No dividends have been declared subsequent to March
2007.  In March 2006, the Company’s shareholders approved an amendment
to decrease the conversion price of the Series A preferred stock to $1.25 per
share from $1.50 per share.  As of September 30, 2008 and 2007, the
amount of accumulated dividends for the Company’s 37,550 issued and outstanding
shares of Series A preferred stock was approximately $506,000 and $169,000,
respectively.
 
 During
the fiscal year ended September 30, 2007 a holder of the Series A convertible
preferred stock converted 303 shares of preferred stock into 24,240 shares of
common stock.
 
 Series B Convertible
Preferred Stock – In January 2006, the Company completed a financing
transaction under which investors made a $2.0 million investment in the Company
by purchasing an aggregate of the following:
 
 ·
                $1.0
      million for 10,000 shares of the Company’s Series B Convertible Preferred
      Stock and,
 ·
                11%
      convertible promissory notes in the principal amount of $1.0 million,
      which were convertible into Common Stock at a price of $1.00 per share
      with warrants to purchase an aggregate of 300,000 shares of Common Stock
      at an exercise price of $1.00 per share (See Note
  11).
 
 The
holders of the Series B Preferred Stock were entitled to dividends of 10% per
annum, and each share of preferred stock was convertible into 133 shares of
common stock ($.75 per share of common). Dividends were cumulative and were
payable only when declared by the Company’s Board of Directors.  Upon
the issuance of the Series B Preferred Stock, the Company did not incur an
additional charge for any beneficial conversion features as the conversion price
of the preferred stock exceeded the market price of the common stock underlying
the conversion feature.  During the year ended September 30, 2007 and
2006, the Company declared and paid cash dividends on its Series B convertible
preferred stock of $82,000 and $46,000, respectively.
 
 Under a
conversion option contained in its Series B preferred stock the Company was
entitled to convert the preferred stock into common stock at a conversion price
of $0.70 per share at any time if the following occur:
 
 ·
                The
      closing price of the common stock has equaled or exceeded $1.80 per share
      for 30 consecutive trading days and the trading volume exceeds 10,000
      during that 30 day period or
 ·
                The
      closing price of the common stock has equaled or exceeded $3.00 per share
      for 30 consecutive trading days regardless of the trading volume,
      and
 ·
                The
      shares of common stock into which the Series B Convertible Preferred Stock
      are convertible are then covered by an effective registration
      statement.
 
 F-31
 In the
fourth quarter of fiscal year 2007, the Company exercised its conversion option
and issued 1,333,333 shares of common stock for the retirement of the Series B
convertible preferred stock.  Accordingly, the Company is no longer
obligated to pay dividends on the Series B convertible preferred
stock.
 
 Stock Options – The
Company’s stock option plans provide for the granting of stock options to
certain key employees, directors and investment executives. Generally, options
outstanding under the Company’s stock option plan are granted at prices equal to
or above the market value of the stock on the date of grant, vest either
immediately or ratably over up to five years, and expire five years subsequent
to award.
 
 In the
fiscal year ended September 30, 2006, the Company issued options to purchase
170,000 shares of its common stock.  The options vest over periods
from six months to two years, have a 5-year life and are exercisable at prices
from $1.00 to $1.35 per share.  The fair value of the options
was  $20,000 and $30,000 and was charged to operations in the fiscal
years ended September 2007 and 2008, respectively.
 
 In the
fiscal year ended September 30, 2007, the Company issued options to purchase
1,120,000 shares of its common stock.  The options vest over periods
from six months to four years, have a 5-year life and are exercisable at prices
from $1.30 to $2.50 per share.  The fair value of the options was
$1,012,000, and $137,000 and $339,000 was charged to operations in the fiscal
years ended September 2007 and 2008, respectively.
 
 In the
fiscal year ended September 30, 2008, the Company issued options to purchase
255,000 shares of its common stock.  The options vest over periods
from six months to four years, have a 5-year life and are exercisable at prices
from $1.15 to $2.10 per share.  The fair value of the options was
$260,000, and $130,000 was charged to operations in the fiscal year ended
September 2008.  On July 1, 2008, pursuant to the merger with
vFinance, the Company issued options to purchase 2,000,000 shares of its common
stock.  The options vest over a 3-year period, have a 7-year life and
are exercisable at a price of $1.64 per share.  The fair value of the
options was $1,800,000, and $563,000 was charged to operations in the fiscal
year ended September 2008.
 
 Additionally,
on July 1, 2008, pursuant to the merger with vFinance, the Company issued
options to purchase approximately 2,880,640 shares of its common stock in
exchange for the outstanding options of vFinance.  The options vest
over periods from 3 months to 29 months from the Merger date and have a weighted
average life of 1.4 years. The options are exercisable at prices from $1.10 to
$2.57 per share.  The fair value of the options was approximately
$1,700,000 and $171,000 was charged to operations in the fiscal year ended
September 2008.
 
 In March
2008, the Company’s shareholders approved the 2008 stock option plan that
reserved 5,000,000 shares of common stock for issuance of options granted under
such plan.
 
 
 F-32
  A summary
of the status of the Company’s stock options outstanding at September 30, 2008
is in the tables presented below.
  Options
      Outstanding
                  
                  
                  Options
      ExercisableRange
      of Exercise Prices
                  
                  Number
      Outstanding
                  
                  
                  Weighted
      Average Remaining Contractual Life (Years)
                  
                  
                  Weighted
      Average Exercise Prices
                  
                  
                  Number
      Exercisable
                  
                  
                  Weighted
      Average Exercise Prices$1.00-$1.50
                  
                  
                  2,984,390
                  
                  
                  
                  2.44
                  
                  
                  
                  $1.33
                  
                  
                  
                  1,941,035
                  
                  
                  
                  $1.30$1.55-$1.93
                  
                  
                  3,193,375
                  
                  
                  
                  5.51
                  
                  
                  
                  $1.66
                  
                  
                  
                  804,156
                  
                  
                  
                  $1.63$2.00-$2.57
                  
                  
                  709,875
                  
                  
                  
                  3.60
                  
                  
                  
                  $2.28
                  
                  
                  
                  313,675
                  
                  
                  
                  $2.296,887,640
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,058,866
  Weighted
                  
                  
                  AggregateAverage
      Price
                  
                  
                  IntrinsicOutstanding
                  
                  
                  Per
      Share
                  
                  
                  ValueBalance,
      September 30, 2006
                  
                  
                  932,000
                  
                  
                  
                  $1.30
                  
                  
                  $
                  56,000Granted
                  
                  
                  1,120,000
                  
                  
                  
                  $1.88Exercised
                  
                  
                  (20,000
                  )
                  
                  
                  $0.72Forfeitures
                  
                  
                  (25,000
                  )
                  
                  
                  $2.00Balance,
      September 30, 2007
                  
                  
                  2,007,000
                  
                  
                  
                  $1.62
                  
                  
                  $
                  2,359,000Granted
                  
                  
                  2,255,000
                  
                  
                  
                  $1.67Issued
      in Merger
                  
                  
                  2,880,640
                  
                  
                  
                  $1.46Exercised
                  
                  
                  (30,000
                  )
                  
                  
                  $0.57Forfeitures
                  
                  
                  (225,000
                  )
                  
                  
                  $1.53Balance,
      September 30, 2008
                  
                  
                  6,887,640
                  
                  
                  
                  $1.58
                  
                  
                  $
                  -
  As of
September 30, 2008, the aggregate intrinsic value of the Company’s outstanding
and exercisable options was $0.
 
 Warrants –In February
2007, as further discussed in Note 14, the Company completed a financing
transaction that included five-year warrants to purchase 250,000 shares of the
Company’s common stock at $1.40 per share.
 
 In March
2008, as further discussed in Note 13, the Company completed a financing
transaction that included five-year warrants to purchase 375,000 shares of the
Company’s common stock at $2.50 per share.  In June 2008, as further
discussed in Note 13, the Company completed a financing transaction that
included five-year warrants to purchase 468,750 shares of the Company’s common
stock at $2.00 per share.
 
 Additionally,
on July 1, 2008, pursuant to the merger with vFinance, the Company issued
warrants to purchase approximately 436,000 shares of its common stock in
exchange for the outstanding warrants of vFinance.  The warrants are
fully vested, have an average life of 1.3 years, and are exercisable at prices
from $0.79 to $16.07 per share.
 
 F-33
 During
the year ended September 30, 2007 the warrant holders exercised 976,674 of their
warrants and provided cash proceeds to the Company of $1,310,000.  No
warrants were exercised during the year ended September 30, 2008.
 
 The
following tables summarize information about warrants outstanding at September
30, 2008.
  Warrants
  Shares
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  ExercisableOutstanding
      at September 30, 2006
                  
                  
                  2,565,357
                  
                  
                  
                  $1.28
                  
                  
                  
                  2,565,357Granted
                  
                  
                  250,000
                  
                  
                  
                  $1.40Exercised
                  
                  
                  (976,674
                  )
                  
                  
                  $1.34Expired
                  
                  
                  (1,088,683
                  )
                  
                  
                  $1.30Outstanding
      at September 30, 2007
                  
                  
                  750,000
                  
                  
                  
                  $1.20
                  
                  
                  
                  750,000Granted
                  
                  
                  843,750
                  
                  
                  
                  $2.22Issued
      in Merger
                  
                  
                  435,624
                  
                  
                  
                  $1.35Expired
                  
                  
                  (50,000
                  )
                  
                  
                  $1.25Outstanding
      at September 30, 2008
                  
                  
                  1,979,374
                  
                  
                  
                  $1.67
                  
                  
                  
                  1,979,374
  Warrants Outstanding and
      ExercisableExercise
      Prices
                  
                  Number
      Outstanding
                  
                  
                  Weighted
      Average Remaining Contractual Life
                  
                  
                  Weighted
      Average Exercise Prices$0.79
                  
                  
                  364,224
                  
                  
                  
                  1.09
                  
                  
                  
                  $0.79$1.00
                  
                  
                  300,000
                  
                  
                  
                  2.28
                  
                  
                  
                  $1.00$1.25
                  
                  
                  150,000
                  
                  
                  
                  0.83
                  
                  
                  
                  $1.25$1.40
                  
                  
                  250,000
                  
                  
                  
                  3.40
                  
                  
                  
                  $1.40$2.00
                  
                  
                  468,750
                  
                  
                  
                  4.75
                  
                  
                  
                  $2.00$2.14
                  
                  
                  14,000
                  
                  
                  
                  1.39
                  
                  
                  
                  $2.14$2.50
                  
                  
                  375,000
                  
                  
                  
                  4.50
                  
                  
                  
                  $2.50$4.46
                  
                  
                  56,000
                  
                  
                  
                  2.86
                  
                  
                  
                  $4.46$16.07
                  
                  
                  1,400
                  
                  
                  
                  0.09
                  
                  
                  
                  $16.071,979,374
  As of
September 30, 2008, the aggregate intrinsic value of the Company’s outstanding
and exercisable warrants was $78,000.
  F-34
 20.
                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 September 30, 2008, the
Company had net capital of approximately $693,000 which exceeded its requirement
by approximately $443,000
 
 In
addition to the net capital requirements, each of vFinance Investments Inc and
EquityStation are required to maintain a ratio of aggregate indebtedness to net
capital, as defined, of not more than 15 to 1 (and the rule of the “applicable”
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to 1). At
September 30, 2008, vFinance Investments had net capital of approximately
$1,337,000 which was approximately $337,000 in excess of its required net
capital of $1,000,000 and its percentage of aggregate indebtedness to net
capital was 485.0%.  At September 30, 2008, EquityStation had net
capital of approximately $363,000 which was approximately $263,000 in excess of
its required net capital of $100,000 and its percentage of aggregate
indebtedness to net capital was 160.5%.  Each of the Broker Dealer
subsidiaries qualifies under the exemptive provisions of Rule 15c3-3 under
Section (k)(2)(ii) of the Rule, as none of them carry the accounts of their
customers on their books nor perform custodial functions related to customer
securities.
 
 Advances,
dividend payments and other equity withdrawals from its broker dealer
subsidiaries are restricted by the regulations of the SEC, and other regulatory
agencies.  These regulatory restrictions may limit the amounts that a
subsidiary may dividend or advance to the Company.
 
 21.
                EMPLOYEE
      BENEFITS
 
 National
Securities has a defined 401(k) profit sharing plan (the “Plan”) that covers
substantially all of its employees.  Under the terms of the Plan,
employees can elect to defer up to 25% of eligible compensation, subject to
certain limitations, by making voluntary contributions to the
Plan.  The Company’s annual contributions are made at the discretion
of the Board of Directors.  During the fiscal years ended September
30, 2008 and 2007, the Company made no contributions to the Plan.
 
 vFinance
Inc. participates in a defined contribution savings plan maintained by an
affiliate, vFinance Holdings, Inc., in which substantially all employees are
eligible to participate. The plan allows for matching of up to 25% of an
employee’s annual contribution however, there were no Company matches for the
last three years.
 
 
 F-35
  22.
                UNAUDITED QUARTERLY
      DATA
 
 Selected
Quarterly Financial Data (Dollars in thousands, except per share
data)
  December31,
      2006
                  
                  
                  March31,
      2007
                  
                  
                  June30,
      2007
                  
                  
                  September30,
      2007Revenues
                  
                  $
                  14,286
                  
                  
                  $
                  17,615
                  
                  
                  $
                  20,229
                  
                  
                  $
                  20,689Net
      income (loss)
                  
                  $
                  (85
                  )
                  
                  $
                  576
                  
                  
                  $
                  1,561
                  
                  
                  $
                  (680
                  )Preferred
      stock dividends
                  
                  
                  (105
                  )
                  
                  
                  (103
                  )
                  
                  
                  (109
                  )
                  
                  
                  (92
                  )Net
      income (loss) attributable  to common
    stockholders
                  
                  $
                  (190
                  )
                  
                  $
                  473
                  
                  
                  $
                  1,452
                  
                  
                  $
                  (772
                  )Income
      (loss) per common share - Basic
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.09
                  
                  
                  $
                  0.26
                  
                  
                  $
                  (0.10
                  )Income
      (loss) per common share - Diluted
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.05
                  
                  
                  $
                  0.14
                  
                  
                  $
                  (0.10
                  )
  December31,
      2007
                  
                  
                  March31,
      2008
                  
                  
                  June30,
      2008
                  
                  
                  September30,
      2008Revenues
                  
                  $
                  20,365
                  
                  
                  $
                  16,284
                  
                  
                  $
                  18,679
                  
                  
                  $
                  26,815Net
      loss
                  
                  $
                  (1,167
                  )
                  
                  $
                  (1,364
                  )
                  
                  $
                  (909
                  )
                  
                  $
                  (17,577
                  )Preferred
      stock dividends
                  
                  
                  (85
                  )
                  
                  
                  (83
                  )
                  
                  
                  (84
                  )
                  
                  
                  (86
                  )Net
      loss attributable  to common stockholders
                  
                  $
                  (1,252
                  )
                  
                  $
                  (1,447
                  )
                  
                  $
                  (993
                  )
                  
                  $
                  (17,663
                  )Loss
      per common share - Basic
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (1.08
                  )Loss
      per common share - Diluted
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (1.08
                  )
   Income
      (loss) per share for each quarter was computed independently using the
      weighted-average number of shares outstanding during the
      quarter.  However, income (loss) per share for the year was
      computed using the weighted-average number of shares outstanding during
      the year.  As a result, the sum of the income (loss) per share
      for the four quarters may not equal the full year income (loss) per
      share.
  
 F-36
  23.
                  FINANCIAL INFORMATION
      - NATIONAL HOLDINGS
CORPORATION
 
 National
      was organized in 1996 and began operations on February 6,
      1997.  The following National (parent company only) financial
      information should be read in conjunction with the other notes to the
      consolidated financial statements.
 
 STATEMENTS
      OF FINANCIAL CONDITIONASSETSSeptember
      30,
                  
                  
                  September
      30,2008
                  
                  
                  2007Cash
                  
                  $
                  289,000
                  
                  
                  $
                  189,000Investment
      in subsidiaries
                  
                  
                  8,167,000
                  
                  
                  
                  7,527,000Intangible
      asset
                  
                  
                  2,950,000
                  
                  
                  
                  92,000Other
      assets
                  
                  
                  304,000
                  
                  
                  
                  -$
                  11,710,000
                  
                  
                  $
                  7,808,000LIABILITIES
      AND STOCKHOLDERS' EQUITYAccounts
      payable, accrued expensesand
      other liabilities
                  
                  $
                  861,000
                  
                  
                  $
                  124,000Convertible
      notes payable
                  
                  
                  4,569,000
                  
                  
                  
                  862,000Notes
      payable
                  
                  
                  959,000
                  
                  
                  
                  -6,389,000
                  
                  
                  
                  986,000Stockholders'
      equity
                  
                  
                  5,321,000
                  
                  
                  
                  6,822,000$
                  11,710,000
                  
                  
                  $
                  7,808,000
 STATEMENTS
      OF OPERATIONSYears
      endedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007Operating
      expenses
                
                $
                (2,784,000
                )
                
                $
                (1,056,000
                )Other
      income (expense)Gain
      on investment
                
                
                -
                
                
                
                38,000Intangible
      impairment
                
                
                (12,999,000
                )Gain
      on investment in subsidiaries
                
                
                (5,234,000
                )
                
                
                2,390,000Net
      income (loss) before income tax
                
                $
                (21,017,000
                )
                
                $
                1,372,000






F-37