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, 2009
 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. YESo
   NOx
 
 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   NOx
 
 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.  YESx
  NOo
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   
Yes    No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer 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 Filero
   Accelerated Filero
  Non-Accelerated Filero
  Smaller Reporting Companyx
 
 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.
YESo
   NOx
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).  YESo   NOx
  As of
March 31, 2009, 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 $8,939,048 (calculated by excluding shares
owned beneficially by directors, officers and 10% shareholders).  As
of December 29, 2009 there were 17,151,704 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 17, 2010 (the “Company’s 2010 Proxy
Statement”) are incorporated by reference into Part III hereof.
  1
 
  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;●
                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.
 
 2
 
 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 their 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 4,000 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 to date have been de minimis.
 
 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 minimis.
 
 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, which was effective 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 the exercise price
per share of each stock option or warrant otherwise purchasable pursuant to the
stock option or warrant divided by  0.14.
 
 3
 
 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.
 
 Clearing
Relationships
 
 The
Broker Dealer Subsidiaries have clearing arrangements with National Financial
Services LLC (“NFS”), Penson Financial Services, Inc. (“Penson”), Legent
Clearing LLC (“Legent”), Fortis Securities, LLC (“Fortis”) and Rosenthal Collins
Group, LLC. (“Rosenthal”).  We believe that the overall effect of our
clearing relationships has been beneficial to our cost structure, liquidity and
capital resources.
 
 Financial
Information about Industry Segments
 
 The
Company realized approximately 85% of its total revenues in fiscal year 2009
from brokerage services, principal and agency transactions, and investment
banking.  During fiscal year 2009, brokerage services that consist of
retail brokerage commissions represent 62% of total revenues, principal and
agency transactions that consist of net dealer inventory gains represent 21% 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 FINRA,
the Municipal Securities Rulemaking Board ("MSRB") and the SIPC, and vFinance
Investments is also a member of the 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
2009, stocks and options represented approximately 85% of our business, bonds
represent approximately 9% of our business, and mutual funds and annuities and
insurance 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.
 
 4
 
 We
generally act as an agent in executing customer orders to buy or sell listed and
over-the-counter securities in which we do not make a market, and charge
commissions based on the services we provide 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.
 
 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 our 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, 2009, we had a total of 922 associates of which 164 were employees
and were 758 independent contractors.  Of these totals 693 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 are resulting in a number of acquisition opportunities
being introduced to us.  We are focused on maximizing the
profitability of our existing operations while we continue 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, 2009, wemade markets in over
4,000 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.
 
 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.
 
 5
 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 are generated from capital
raising transactions of equity and debt securities and fees for strategic
advisory services, and 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, 2009, we employed or had contractual relationships with
approximately 10 individuals providing institutional services, approximately 6
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, 2009, 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 100 countries with an
estimated 20,000 unique visitors monthly. The website provides sales leads to
our  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.
 
 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 subsidiaries’ brokerage
activities.  They provide these services to our subsidiaries’
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.
 
 6
 
 Competition
 
 The
Company is engaged in a highly competitive business.  With respect to
one or more aspects of our business, our 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.”
 
 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.  They are 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.  The alternative method precludes National Securities
from having to calculate a ratio of aggregate indebtedness to net
capital.  At September 30, 2009, National Securities had net capital
of approximately $489,000 which was approximately $239,000 in excess of its
required net capital of $250,000.
 
 Due to
its market maker status, vFinance Investments is required to maintain a minimum
net capital of $1,000,000 and EquityStation is required to maintain
$100,000.In addition
to the net capital requirements, each of vFinance Investments and EquityStation
are required to maintain a ratio of aggregate indebtedness to net capital, as
defined, of not more than 15 to 1 (and the rule of the “applicable” exchange
also provides that equity capital may not be withdrawn or cash dividends paid if
the resulting net capital ratio would exceed 10 to 1). At September 30, 2009,
vFinance Investments had net capital of approximately $1,295,000, which was
approximately $295,000 in excess of its required net capital of $1,000,000, and
its percentage of aggregate indebtedness to net capital was
614.0%.  At September 30, 2009, EquityStation had net capital of
approximately $186,000, which was approximately $86,000 in excess of its
required net capital of $100,000, and its percentage of aggregate indebtedness
to net capital was 297.0%.  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.
 
 7
 
 The
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the FINRA
Conduct Rules require our broker dealer subsidiaries 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.
 
 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 our broker dealer subsidiaries are currently
registered as broker-dealers in the jurisdictions described in this Annual
Report on Form 10-K, all of our 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, 2009, we employed the following personnel:
 Salaried
                  
                  
                  IndependentPosition
                  
                  Employees
                  
                  
                  Contractors
                  
                  
                  TotalOfficers
                  
                  
                  16
                  
                  
                  
                  0
                  
                  
                  
                  16Administration
                  
                  
                  84
                  
                  
                  
                  174
                  
                  
                  
                  258Brokers
                  
                  
                  28
                  
                  
                  
                  578
                  
                  
                  
                  606Traders
                  
                  
                  25
                  
                  
                  
                  1
                  
                  
                  
                  26Investment
      Bankers
                  
                  
                  11
                  
                  
                  
                  3
                  
                  
                  
                  14Lenders
                  
                  
                  0
                  
                  
                  
                  2
                  
                  
                  
                  2Totals
                  
                  
                  164
                  
                  
                  
                  758
                  
                  
                  
                  922
 
 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.
 
 8
 
 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.
 
 9
 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.
 
 National
reported losses of approximately $6 million and $21.0 million in fiscal years
2009 and 2008, respectively.  National’s losses were primarily
attributable to the volatile market conditions in fiscal year 2008 and the
generally slow recovery in customer activity volume due to significant investor
losses in 2008.  In addition, the Company took an impairment of $12.9
million on its intangible asset it acquired in the merger with vFinance in
fiscal year ended 2008.  The market slowdowns and reduced trading
activity and volatility, and the cessation of National’s market making
activities prior to the Merger, in addition to vFinance’s substantial losses due
to ongoing operating expenses and a lack of revenues sufficient to offset those
operating expenses contributed as well.  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 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 we 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 we are 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, 2009, we had total indebtedness of $7,350,000, of which $850,000
is subordinated debt and $500,000 is a nonconvertible note maturing in May
2010.  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.
 
 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.
 
 10
 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 our 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 $6,000,000 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.
 
 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
its market maker status, vFinance Investments is required to maintain a
specified amount of capital for each security that it makes 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 their 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.
 
 11
 
 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.
 
 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.
 
 Financial
markets are susceptible to severe events evidenced by rapid depreciation in
asset values accompanied by a reduction in asset liquidity, such as the asset
price deterioration in the subprime residential mortgage
market.
 
 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.
 
 We are a holding company and depend
on payments from our subsidiaries.
 
 We depend
on dividends, distributions and other payments from our subsidiaries to fund our
obligations. Regulatory and other legal restrictions may limit our ability to
transfer funds freely, either to or from our subsidiaries. In particular, our
broker-dealer subsidiaries are subject to laws and regulations that authorize
regulatory bodies to block or reduce the flow of funds to the parent holding
company, or that prohibit such transfers altogether in certain circumstances.
These laws and regulations may hinder our ability to access funds that we may
need to make payments on our obligations. In addition, because our interests in
the firm’s subsidiaries consist of equity interests, our rights may be
subordinated to the claims of the creditors of these
subsidiaries.
 
 12
 
 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.
 
 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.
 
 13
 
 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.
 
 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.
 
 14
 
 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.
 
 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, 2009, the average daily trading volume was
approximately 27,155 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 $0.72 to a low of $0.50.  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 42,957
shares of Series A preferred stock outstanding, which are convertible, in total,
into 3,436,560 shares of common stock.
 
 Warrants
and Options-We
currently have outstanding warrants to purchase 2,090,473 shares of common stock
at exercise prices ranging from $0.75 to $4.46 per share and options to purchase
5,912,165 shares of common stock at exercise prices ranging from $0.64 to $2.57
per 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.
 
 15
 
 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.
 
 We
have restricted shares outstanding that may depress the price of our common
stock.
 
 As of
September 30, 2009, of the 17,151,704 outstanding shares of our common stock,
approximately 2,900,000 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, 2009, our executive officers, directors and/or entities that these
individuals are affiliated with, owned approximately 24% 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 46% 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.
 
 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.
 
 16
 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 42,957 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, 2009, 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.
 
 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 we will pay any dividends to holders of our common stock in the
foreseeable future. Other than dividends paid on our Series A preferred stock,
we expect to retain all future earnings, if any, for investment in our
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.
 
 17
 
 Item
2. PROPERTIES
 
 The
Company owns no real property.  Its corporate headquarters are in
space leased by National Securities in New York, New York.  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.  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.
 The
Company leases office space in the following locations.  The following
chart provides information related to these lease obligations:
  Address
                  
                  Approximate
                    Square
                    Footage
                  
                  
                  Approximate
                    Annual
      Lease
                    Rental
                  
                  Lease
                    Termination
                    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
                  
                  9/30/2012131
      Gaither Drive, Mount Laurel, NJ
                  
                  
                  1,400
                  
                  
                  
                  19,600
                  
                  9/30/20101200
      N. Federal Highway, Boca Raton FL
                  
                  
                  17,089
                  
                  
                  
                  542,100
                  
                  8/21/2014330
      Madison Ave New York City, NY
                  
                  
                  6,484
                  
                  
                  
                  310,050
                  
                  4/29/20113010
      North Military Trail Boca Raton, FL
                  
                  
                  2,634
                  
                  
                  
                  79,128
                  
                  2/28/2011
 
 18
 
 Item
3. LEGAL PROCEEDINGS
  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
sought review of the Judge's decision and, following briefing, will present oral
argument in early 2010.
 
 On March
4, 2008, vFinance received a customer arbitration (FINRA Case No.08-00472) from
Donald and Patricia Halfmann, alleging that Jeff Lafferty, a former registered
representative of vFinance, misappropriated approximately $110,000 of the
Halfmanns' funds via check alteration, and that vFinance ought to be liable for
an additional $150,000 for other dishonest and fraudulent acts committed after
he left vFinance.  On August 6, 2009 the arbitrators’ ruled that
vFinance Investments must pay for losses, interest, attorney’s costs and
punitive damages totaling approximately $805,000. The firm made a claim against
its fidelity bond carrier, and received approximately $59,000 for the
claim.  The firm and has determined that there was no basis to seek to
have the entire arbitration award, or any part of that award, vacated.  In
December, vFinance finished paying the entire award to the Halfmann's in
accordance with the terms agreed upon between the parties.
 
 In
November 2009, James and Cheryl Merrill, on behalf of themselves and on behalf
of all other similarly situated investors, filed a class action in the Unites
States District Court, Central District of California, Southern Division,
against National  and National Securities  in connection
with the purchase and sale of promissory notes issued on or after September 18,
2006 by one or more of Medical Capital Holdings, Inc.’s special purpose
corporations, including Medical Provider Financial Corporation III, Medical
Provider Financial Corporation IV (“Medical Capital IV”), Medical Provider
Funding Corporation V (“Medical Capital V”) and Medical Provider Funding
Corporation VI V (“Medical Capital VI”) .  The class action has not
yet been certified or decertified.  The class members assert claims
against NSC for violations of Section 12(a)(1) of the Securities Act of 1933
(the “Securities Act”), 15 U.S.C. § 77l, and for violations of 12(a)(2) of the
Securities Act, 15 U.S.C. § 77l.  The class members further assert
claims against NHC under Section 15 of the Securities Act, 15 U.S.C. §
770.  The class members seek compensatory damages, rescission or a
recessionary measure of damages, pre-judgment and post-judgment interest, costs
and expenses, including attorneys’ fees, all in undisclosed
amounts.
 
 In
December 2009, Amos Norman (“Norman”), individually and as trustee of a trust,
commenced an arbitration against National Securities and Brian Folland
(“Folland”), a securities broker registered with NSC, before FINRA Dispute
Resolution in connection with investments totaling $815,000. Claimant alleges
that he invested a total of $590,000 in Medical Capital IV, Medical Capital V
and Medical Capital VI, among other investments, although Norman concedes that
$60,000 of the amount invested in Medical Capital IV was made prior to Folland’s
registration with National Securities, and further, that National Securities
should not be liable for such investment.  Claimant also alleges that
he invested $100,000 in an entity created by Provident Royalties (discussed
further below).  Claimant asserts claims against National Securities
for violation of federal securities laws, violation of California securities
laws, violation of California’s elder abuse laws, violation of California’s
unfair, unlawful and fraudulent business practices acts, breach of contract,
common law fraud, breach of fiduciary duty, negligence and gross
negligence.
 
 In total,
Claimant seeks compensatory damages of $630,000 from National Securities
($530,000 for the Medical Capital investments and $100,000 for the Provident
Royalties investment), as well as benefit of the bargain damages, lost
opportunity costs, model portfolio damages, prejudgment interest, costs,
reasonable attorneys’ fees and punitive damages, all in undisclosed
amounts.
 
 19
 In
October 2009, NSC received demands from counsel representing two other customers
who allegedly invested an aggregate of $200,000 in Medical Capital V and Medical
Capital VI.  Those matters have not proceeded to litigation and the
Company has not yet conducted discovery into the allegations or potential
defenses, although it appears that those customers may also be contemplated
members of the above-discussed class action.  The Company estimates,
to the extent that it can, that based on prior experience, its liability from
these demands, should they proceed to litigation, may be substantially less than
the amount of all damages and other relief sought.  These demands
arise in the normal course of business.
 
 The
Company has not yet conducted discovery into the allegations or potential
defenses in connection with any of these actions or claims and it appears that
Norman and the other claimants set forth above may be contemplated member of the
above-discussed class action with respect to his investments in Medical Capital
IV, Medical Capital V and Medical Capital VI, and with respect to Norman, the
below-discussed class action involving Provident Royalties.  The
Company intends to defend itself vigorously in this action and believes that the
eventual outcome of this matter will not have a materially adverse effect on the
Company.  However, the ultimate outcome of this matter cannot be
determined at this time.
 
 In
December 2009, plaintiffs Robert Adams, Joseph Billitteri, Karen L. Bopp, IRA,
Bussell Living Trust DTD 12/05/96, John Gilgallon, Scott Jessen, Sharon Kreindel
Revocable Trust DTD 02/09/2005, Mary Merline, James Merrill, Don Ribacchi and
Lewis Wilson, each on his, her or its own behalf and on behalf of all similarly
situated investors, filed a Consolidated Amended Class Action Complaint in the
United States District Court, Northern District of Texas, Dallas Division,
against a number of broker-dealers, including NSC, and against a number such
broker-dealers’ parent companies, including NHC, in connection with a series of
offerings for oil and gas investments.  Each member of the class
asserts claims against NSC for breach of fiduciary duty and for violations of §
33(A)(2) of the Texas Securities Act.  Each member seeks to hold NHC
liable for NSC’s conduct as a control person under § 33(F)(1) of the Texas
Securities Act.  The class members seek compensatory damages,
rescission or a recessionary measure of damages, pre-judgment interest, costs
and expenses, including attorneys’ fees, all in undisclosed
amounts.
 
 In
December 2009, claimants Lorna Chen, Terry Darden, John Davis, Barbara Farace,
David Kravetz, Janice Miyashiro and Vip Miyashiro commenced an arbitration
against NSC before FINRA Dispute Resolution.  Claimants assert claims
against NSC for negligence, negligent misrepresentation and omission, breach of
fiduciary duty, breach of contract, violation of New Jersey’s Uniform Securities
Law, violation of the Texas Securities Act, violation of California Corporate
Securities Laws, violation of the Securities Act of Washington
 
 In total,
Claimants seeks compensatory damages of $525,000 from NSC in connection with the
Provident Royalties investments, and Mr. Davis seeks compensatory damages of
$207,000 from NSC in connection with his Medical Capital
investments.  Claimants further seek rescission, prejudgment interest,
punitive damages, costs pursuant to New Jersey’s Uniform Securities Law, and
costs and attorneys’ fees pursuant to the Texas Securities Act and the
Securities Act of Washington, all in undisclosed amounts.
 
 The
Company has not yet conducted discovery into the allegations or potential
defenses related to the Provident claims and it appears that each of the
claimants in the FINRA Dispute Resolution may be a contemplated member of the
above-discussed class action involving Provident Royalties, and that Mr. Davis
may also be a contemplated member of the above-discussed class action with
respect to his investments in Medical Capital IV, Medical Capital V and Medical
Capital VI.  The Company intends to defend itself vigorously in this
action and believes that the eventual outcome of this matter will not have a
materially adverse effect on the Company.  However, the ultimate
outcome of this matter cannot be determined at this time.
  In early
2009, Vincent Falco commenced a FINRA arbitration against National Securities
and two of its employees.   Claimant alleges that National
Securities and the registered representatives purchased unsuitable securities,
failed to follow instructions regarding the use of margin, made
misrepresentations of material fact and/or omitted material facts in connection
with the purchase of securities, managed the account negligently, breached their
contract with Mr. Falco, breached fiduciaries duties owed to him, and violated
FINRA Conduct Rules.  Claimant further alleges that National
Securities negligently supervised Mr. Alves and is vicariously liable for his
conduct in tort, under a theory of respondeat superior.  Finally,
Claimant alleges violations of unidentified laws of the State of
Florida.  Claimant seeks compensatory damages from all respondents in
the amount of $3,000,000, punitive damages of $9,000,000, plus disgorgement of
fees, attorneys’ fees, forum fees, costs and interest, all in undisclosed
amounts.
 
 National
Securities timely filed a response to this claim and has begun but not yet
completed discovery into the allegations and potential defenses.  The
Company intends to defend itself vigorously in this action, which is set for
hearing in Florida on February 15-19, 2010.  The Company believes that
the eventual outcome of this matter will not have a materially adverse effect on
the Company.  However, the ultimate outcome of this matter cannot be
determined at this time.
 
 20
 
  The
Company’s subsidiaries are defendants in various arbitrations and administrative
proceedings, lawsuits and claims together alleging damages in excess of
$12,091,000.   The Company estimates, to the extent that it can,
that based on discussions with legal counsel and prior experience, its aggregate
liability from these pending actions may be less than $602,000 (exclusive of
fees, costs and unspecified punitive damages related to certain claims and
inclusive of expected insurance coverage).  These matters arise in the
normal course of business. The Company intends to vigorously defend itself
in these actions, and based on discussions with counsel believes that the
eventual outcome of these matters will not have a material adverse effect on the
Company.  However, the ultimate outcome of these matters cannot be
determined at this time.  The amounts related to such matters that are
reasonably estimable and which have been accrued at September 30, 2009 and 2008,
is $203,000 and $587,000 (inclusive of legal fees and estimated claims),
respectively, and have been included in "Accounts Payable, Accrued Expenses and
Other Liabilities" in the accompanying consolidated statements of financial
condition. The Company has included in "Professional fees" litigation and
FINRA related expenses of $829,000 and $1,820,000 for the fiscal year 2009 and
2008, 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, 2009.
 
 21
 
 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, 2007 to September 30, 2009.
  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
 Period
                    
                    High
                    
                    
                    LowOctober
      1, 2008/December 31, 2009
                    
                    $
                    0.90
                    
                    
                    $
                    0.30January
      1, 2009/March 31, 2009
                    
                    $
                    0.84
                    
                    
                    $
                    0.43April
      1, 2009/June 30, 2009
                    
                    $
                    0.70
                    
                    
                    $
                    0.41July
      1, 2009/September 30, 2009
                    
                    $
                    0.75
                    
                    
                    $
                    0.40
  The
closing price of the common stock on December 28 , 2009, as quoted on the OTCBB,
was $0.65 per share.
 
 Shareholders
 
 As of
September 30, 2009, the Company had approximately 174 shareholders of record and
estimates its total number of beneficial shareholders at approximately
1,000.
 
 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, 2009, 2007, 2006 and 2005, the Company’s Board of Directors
declared in-kind dividends in the aggregate of 5,407, 2,537, 1,996 and 2,143
shares of Series A preferred stock, in payment of approximately $676,000,
$317,000, $300,000 and $322,000, respectively, for dividends accumulated through
March 31 of each year.  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,
2009 and 2008, the amount of accumulated dividends for the Company’s 42,957 and
37,550 issued and outstanding shares of Series A preferred stock was
approximately $194,000 and $507,000, respectively.
 
 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.
 
 22
 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
 
 Not
applicable.
 
 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.
 
 OVERVIEW
 
 We are
engaged in investment banking, equity research, institutional sales and trading,
independent brokerage and advisory services and asset management services
through our principal subsidiaries, National Securities Corporation (“National
Securities”), vFinance Investments, Inc. (“vFinance Investments”) and
EquityStation, Inc. (“EquityStation”, and collectively with National Securities
and vFinance Investments, the “Broker Dealer Subsidiaries”). We are committed to
establishing a significant presence in the financial services industry by
meeting the varying investment needs of our retail, corporate and institutional
clients.
  Each of
National Securities, vFinance Investments and EquityStation is subject to
regulation by, among others, the Securities and Exchange Commission (“SEC”), the
Financial Industry Regulatory Authority (“FINRA”), the Municipal Securities
Rulemaking Board (“MSRB”) and are members of the Securities Investor Protection
Corporation (“SIPC”).  vFinance Investments is also subject to
regulation by the National Futures Association (“NFA”).  In addition,
each of the Broker Dealer Subsidiaries is licensed to conduct its brokerage
activities in all 50 states, plus the District of Columbia and Puerto Rico, with
National Securities and vFinance Investments also being licensed in the U.S.
Virgin Islands.
  As of
September 30, 2009, we had approximately 922associated personnel
serving retail and institutional customers, trading and investment banking
clients. With the exception of our New York, New Jersey, Florida, Washington and
Illinois branches, our approximately 80 other registered offices are owned and
operated by independent owners who maintain all appropriate licenses and are
responsible for all office overhead and expenses. Because these independent
operators, many of whom are financial planners, are required to pay their own
expenses, we generally pay them a much greater percentage of the commissions and
fee income they generate, typically 70% - 90%.
  Our
registered representatives offer a broad range of investment products and
services. These products and services allow us to generate both commissions
(from transactions in securities and other investment products) and fee income
(for providing investment advisory services, namely managing a client’s
account). The investment products and services offered include but are not
limited to stocks, bonds, mutual funds, annuities, insurance, and managed money
accounts.
 
 Difficult
Market Conditions
 
 The U.S.
and global economies have deteriorated to the point of a recession, and although
we are seeing some signs of improvement, this recession could be long-term. We,
like other companies in the financial services sector, are exposed to volatility
and trends in the securities markets and the economy, generally. The market
downturn and poor economic conditions have reduced overall investment banking
and client activity levels. It is difficult to predict when conditions will
change. Given difficult market and economic conditions, we have focused on
reducing redundancies and unnecessary expense. At the same time, however, we
continue to seek to selectively upgrade our talent pool given the availability
of experienced professionals.
 
 23
 
 GrowthStrategy
 
 We
continue to evaluate opportunities to grow our businesses, including potential
acquisitions or mergers with other securities, investment banking and investment
advisory firms, and by adding to our base of independent representatives
organically.These
acquisitions may involve payments of material amounts of cash, the incurrence of
a significant amount of debt or the issuance of significant amounts of our
equity securities, which may be dilutive to our existing shareholders and/or may
increase our leverage. We cannot assure you that we will be able to consummate
any such potential acquisitions at all or on terms acceptable to us or, if we
do, that any acquired business will be profitable. There is also a risk that we
will not be able to successfully integrate acquired businesses into our existing
business and operations.
 
 Key
Indicators of Financial Performance for Management
 
 Management
periodically reviews and analyzes our financial performance across a number of
measurable factors considered to be particularly useful in understanding and
managing our business. Key metrics in this process include productivity and
practice diversification of representatives, top line commission and advisory
services revenues, gross margins, operating expenses, legal costs, taxes and
earnings per share.
 
 Acquisition
of vFinance, Inc.
  In July
2008, we acquired vFinance, Inc. through a merger with a newly formed
wholly-owned subsidiary.  The assets and liabilities acquired as well
as the financial results of vFinance were included in our consolidated financial
statements after the close of business on July 1, 2008, the acquisition date.
The aggregate acquisition price was approximately $17.6 million, which consisted
of approximately 7,790,000 shares of Company common stock issued in exchange for
all of the issued and outstanding common stock of vFinance, and direct expenses
of $0.6 million in legal fees, valuation fees, severance costs and contract
cancellation costs. We accounted for the acquisition of vFinance in accordance
with professional standards for “Business Combinations.”
  Since
July 1, 2008, our management team has been focused on the task of eliminating
duplicative overhead and services, and eliminating unnecessary costs in an
effort to improve bottom line performance.  As of the date of this
report, the Company has made considerable progress on cost cutting measures, and
these savings are exceeding $6 million dollars on an annualized basis since the
merger.  We fully intend to continue our efforts to conserve capital
and keep costs low in an effort to improve the Company’s
profitability.
 
 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, Legent, Fortis and Rosenthal.  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.
 
 24
 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 Accounting Standard Codification 815-
Derivatives and Hedging (“ASC 815”).  Based on such provisions, 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, 2009, which consist of common stock purchase warrants, and
determined that such derivatives meet the criteria for equity classification
under ASC 815.
 
 Convertible
Instruments - The Company evaluates and accounts for conversion options embedded
in its convertible instruments in accordance with ASC 815.
 
 ASC 815
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 ASC 815. ASC
815 also provide an exception to this rule when the host instrument is deemed to
be conventional (as that term is described).
 
 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 ASC 470 20 “Debt with
Conversion Options” 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 ASC 815
 Additionally,
the Company’s conversion options, if free standing, would not be considered
derivatives subject to the accounting guidelines prescribed under ASC
815.
 
 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.
 
 Effective
October 1, 2005, the Company adopted ASC 718- Compensation-Stock
Compensation.  ASC 718 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
ASC 718, 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, 2009 and
2008.  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.
 
 25
 
 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 2009 Compared with Fiscal Year 2008
 
 The
Company’s fiscal year 2009 resulted in an increase in revenues, and a lesser
increase in expenses, compared with fiscal year 2008.  As a result,
the Company reported a net loss of $6,432,000 compared with a net loss of
$21,017,000 for the fiscal years 2009 and 2008, respectively.
 
 Fiscal
      Year
                
                
                Increase
      (Decrease)2009
                
                
                2008
                
                
                Amount
                
                
                PercentCommissions
                
                $
                72,684,000
                
                
                $
                50,128,000
                
                
                $
                22,556,000
                
                
                
                45%Net
      dealer inventory gains
                
                
                24,202,000
                
                
                
                16,810,000
                
                
                
                7,392,000
                
                
                
                44%Investment
      banking
                
                
                2,084,000
                
                
                
                1,906,000
                
                
                
                178,000
                
                
                
                9%Interest
      and dividends
                
                
                1,586,000
                
                
                
                3,862,000
                
                
                
                (2,276,000
                )
                
                
                (59%
                )Transfer
      fees and clearing services
                
                
                10,797,000
                
                
                
                5,529,000
                
                
                
                5,268,000
                
                
                
                95%Other
                
                
                5,237,000
                
                
                
                3,908,000
                
                
                
                1,329,000
                
                
                
                34%$
                116,590,000
                
                
                $
                82,143,000
                
                
                $
                34,447,000
                
                
                
                42%
 
 Total
revenues increased $34,447,000, or 42%, in fiscal year 2009 to $116,590,000 from
$82,143,000 in fiscal year 2008.  The increase in revenues is due
to:
 
 1) the
inclusion of a full year of revenues  from the vFinance
merger;
 2) higher
commission revenue resulting from higher volume of transactions made by our
customers;
 3) higher
net dealer inventory gains which consist of trading, market making and mark-ups
and mark-downs primarily resulting from   the merger with
vFinance, which was effective for three months in fiscal 2008 and a full year in
fiscal 2009;
 4) higher
transfer fees and clearing services, resulting from higher volume of
transactions made by our clients.
 
 Such
increases are offset by a decline in interest and dividends revenues due to
lower customer margin account balances, lower customer free cash balances, and
lower prevailing interest rates during fiscal 2009 when compared to the prior
year.
 
 Investment
banking revenues were at similar levels in fiscal 2009 and 2008.
 
 Fiscal
      Year
                
                
                Increase
      (Decrease)2009
                
                
                2008
                
                
                Amount
                
                
                PercentCommissions
                
                $
                89,431,000
                
                
                $
                64,910,000
                
                
                $
                24,521,000
                
                
                
                38%Employee
      compensation
                
                
                12,085,000
                
                
                
                9,699,000
                
                
                
                2,386,000
                
                
                
                25%Clearing
      fees
                
                
                3,180,000
                
                
                
                2,952,000
                
                
                
                228,000
                
                
                
                8%Communications
                
                
                4,242,000
                
                
                
                1,632,000
                
                
                
                2,610,000
                
                
                
                160%Occupancy
      and equipment costs
                
                
                5,015,000
                
                
                
                3,844,000
                
                
                
                1,171,000
                
                
                
                30%Professional
      fees
                
                
                3,599,000
                
                
                
                2,986,000
                
                
                
                613,000
                
                
                
                21%Interest
                
                
                1,242,000
                
                
                
                680,000
                
                
                
                562,000
                
                
                
                83%Taxes,
      licenses and registration
                
                
                1,371,000
                
                
                
                533,000
                
                
                
                838,000
                
                
                
                157%Other
      administrative expenses
                
                
                2,857,000
                
                
                
                2,925,000
                
                
                
                (68,000
                )
                
                
                (2%
                )Intangible
      impairment
                
                
                -
                
                
                
                12,999,000
                
                
                
                (12,999,000
                )
                
                
                (100%
                )$
                123,022,000
                
                
                $
                103,160,000
                
                
                $
                19,862,000
                
                
                
                19%
 
 In
comparison with the 42% increase in total revenues, total expenses increased
19%, or $19,862,000, to $123,022,000 for fiscal year 2009 compared to
$103,160,000 in fiscal year 2008.  The increase in total expenses is
primarily the result of greater commission expense commensurate with an increase
in commission revenues and net dealer inventory gain, and increases in employee
compensation and communications, and the merger with vFinance, partially offset
by an intangible impairment of $12,999,000 in fiscal year 2008.
 
 26
 Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $24,521,000, or 38%, to
$89,431,000 in fiscal year 2009 from $64,910,000 in fiscal year
2008.  The increase is primarily attributable to an increase in the
related commission revenues from the vFinance merger.  Commission
expense includes the amortization of advances to registered representatives of
$1,443,000 and $1,448,000 for fiscal years 2009 and 2008,
respectively.  These amounts fluctuate based upon the amounts of
advances outstanding and the time period for which the registered
representatives have agreed to be affiliated with our Broker Dealer
Subsidiaries.
 
 Employee
compensation expense increased $2,386,000, or 25%, to $12,085,000 in fiscal year
2009 from $9,699,000 in fiscal year 2008.  The increase is primarily
attributable to employee salaries associated with vFinance and an increase in
the amortization of the fair value associated with stock based
compensation.  The amortization of stock based compensation is
$878,000 and $564,000 for fiscal years 2009 and 2008,
respectively.  Overall, combined commission and employee compensation
expense, as a percentage of revenue decreased to 87% from 91% in fiscal years
2009 and 2008, respectively, as a result of cost cutting plans implemented due
to market and economic conditions.
 
 Clearing
fees increased $228,000, or 8%, to $3,180,000 in fiscal year 2009 from
$2,952,000 in fiscal year 2008.  The increase in clearing fees is
primarily attributable to costs from vFinance due to the merger.  The
greater increase in clearing fees as compared to the increase in commission
revenue is attributable to lower average commission revenue per ticket in fiscal
year 2009.
 
 Communication
expenses increased $2,610,000, or 160%, to $4,242,000 from $1,632,000 in fiscal
year 2009 compared to fiscal year 2008.  The increase is attributable
to costs from vFinance due to the merger.  Occupancy costs increased
$1,171,000, or 30%, to $5,015,000 from $3,844,000 in fiscal year 2009 compared
to fiscal year 2008.  The increase in occupancy expense is due to
annual rent increases contained in the Company’s office leases and the addition
of rented office space due to the vFinance merger.  Professional fees
increased $613,000, or 21%, to $3,599,000 from $2,986,000 in fiscal year 2009
compared to fiscal year 2008.  The increase in professional fees is
primarily a result of the filing of a registration statement, costs incurred to
defend and settle certain arbitrations and slightly higher legal costs
associated with the merger with vFinance.
 
 Interest
expense increased $562,000, or 83%, to $1,242,000 from $680,000 in fiscal year
2009 compared to fiscal year 2008.  The increase in interest expense
is attributable to higher weighted average debt outstanding during fiscal 2009
resulting from new convertible notes issued in March and June of fiscal year
2008.  Included in interest expense is the amortization of deferred
financing costs of $49,000 and $28,000 for fiscal years 2009 and 2008,
respectively.  Taxes, licenses and registration increased $838,000, or
157%, to $1,371,000 from $533,000 in fiscal year 2009 compared fiscal year
2008.  The increase in taxes, licenses and registration is due to
primarily attributable to costs from vFinance due to the
merger.  Other administrative expenses decreased $68,000, or 2%, to
$2,857,000 from $2,925,000 in fiscal year 2009 compared to fiscal year
2008.  The decrease is primarily attributable to cost savings from
vFinance due to the merger.
 
 In fiscal
year 2008, 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 did not
report any impairment charge for the fiscal year ended September 30,
2009.
 
 The
Company reported a net loss of $6,432,000 in fiscal year 2009 compared to a net
loss of $21,017,000 in fiscal year 2008.  The net loss attributable to
common stockholders in fiscal year 2009 was $6,794,000, or $0.41 per common
share, as compared to a net loss attributable to common of $21,355,000, or $2.02
per common share in fiscal year 2008.  The net loss attributable to
common stockholders for fiscal years 2009 and 2008 reflects $362,000 and
$338,000, respectively, of cumulative Preferred Stock dividends on the Company’s
Preferred Stock.
 
 27
 
 Liquidity
and Capital Resources
 
 For the
periods ended September 30, 2009 and 2008, 61% and 54% of our total assets
consisted of cash and cash equivalents, marketable securities owned and
receivables from clearing brokers and other broker dealers.  The level
of cash used in each asset class is subject to fluctuation based on market
volatility, revenue production and trading activity in the
marketplace.  Allocation of cash into marketable securities classes
are dependent upon overall market activity, but the majority of our securities
owned are in municipal securities and common stock.
 
 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, 2009, National Securities’ net capital
exceeded the requirement by $239,000.  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, 2009
the firms had excess net capital of $295,000 and $86,000
respectively.
 
 Advances,
dividend payments and other equity withdrawals from the Company’s 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. During 2009 and 2008, the
broker dealer subsidiaries were in compliance with the rules governing dividend
payments and other 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.
 
 Our
primary sources of liquidity include our cash flow from operations, the sale of
our securities and other financing activities. We believe that we have
sufficient funds from operations to fund our ongoing operating requirements
through at least 2010.
 
 Cash used
in operating activities for the fiscal year 2009 amounted to $377,000, which was
primarily due to our net loss of $6,432,000, reduced by non cash adjustments of
$1,336,000 in depreciation and amortization, $878,000 in stock compensation
expense and $435,000 in amortization of note discount.  A decrease in
receivables from our clearing firms of $612,000, a decrease in securities owned
at market value of $494,000, a decrease in other assets of $250,000, and an
increase in accounts payable and accrued expenses of $2,143,000 further
contributed to the reduction in cash used in operations.
 
 Cash used
in investing activities for fiscal year 2009 amounted to $635,000, which was due
to the need to purchase fixed assets under mostly capital leases due to the move
of our vFinance Boca Raton data center into a co-location facility in Miami,
Florida, the move of our Boca Raton office to a new location and the ongoing
upgrade of technology in our Downtown Manhattan office.
 
 Cash
provided by financing activities for fiscal year 2009 amounted to $118,000,
which was due to the proceeds from the Company securing a subordinated loan of
$350,000 and net proceeds from the issuance of securities in a private placement
(net of costs) of $268,000, offset by the repayment of notes payable of
$500,000.
 
 Cash used
in operating activities for the fiscal year 2008 amounted to $6,055,000, which
was primarily due to our net loss of $21,017,000, reduced by non cash
adjustments of $12,999,000 for the impairment of intangible assets, $1,140,000
in depreciation and amortization and $1,218,000 in stock compensation
expense.  A decrease in receivables from our clearing firms of
$1,933,000 offset by a decrease in accounts payable and accrued expenses of
$2,461,000 further contributed to this use of cash.
 
 Cash
provided by investing activities for fiscal year 2008 amounted to $3,149,000,
which was due to cash received from the merger with vFinance of $3,620,000,
offset by the purchase of fixed assets of $471,000.
 
 Cash
provided by financing activities for fiscal year 2008 amounted to $2,430,000,
which was due to the proceeds from the Company’s issuance of $6,000,000 worth of
convertible notes payable and the proceeds from the exercise of stock options of
$17,000, offset by the capitalized merger costs of $505,000 and the payment of
deferred financing costs of $176,000.
 
 28
 
 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.  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 fiscal year 2009, upon the
maturity of the aforementioned note, the lender opted to not renew the note and
as such, the note is presently in “Suspended Repayment” status, as defined in
the original note and in accordance with SEC rules.
 
 On March
31, 2008, the Company completed a financing transaction under which St. Cloud
Capital Partners II, L.P. (“St. Cloud”), an affiliated entity of Marshall S.
Geller, a director of the Company, 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.  In accordance with
professional standards 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.  In accordance with professional standards 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
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.   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.  The Company has filed a registration statement that includes a
portion of 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 being amortized over a two year period ended 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, Fortis
and Rosenthal.   The Company believes that the overall
effect of its clearing relationships has been beneficial to the Company’s cost
structure, liquidity and capital resources.
 
 In April
2009, the Company completed a financing transaction with an unaffiliated third
party under which the investor purchased a promissory note in the principal
amount of $500,000, which was subsequently converted into 666,666 shares of the
Company’s common stock.
 
 In June
2009, National Securities was approved by FINRA to receive a Subordinated loan
from Legent for $100,000.  This loan was granted subsequent to
National Securities signing a clearing agreement with Legent, to clear a portion
of the business.  This loan accrues interest at the rate of 4.5% but
both interest and principal are forgivable after one year as long as National
Securities remains in good standing with Legent.
 
 In
July 2009, National Securities was approved by FINRA to receive an additional
Subordinated loan from Legent for $250,000, also bearing interest at the rate of
4.5% payable monthly.  This loan was granted subsequent to National
Securities signing a clearing agreement with Legent, to clear a portion of the
business.  This loan is scheduled to begin principal repayment at a
minimum of $10,000 per month or $10 per transaction whichever is greater,
starting July 31, 2010.  Some or all of this repayment may be funded
by transactional credits depending on the amount of business conducted through
Legent on a monthly basis.
 
 As of
September 30, 2009, advances to registered representatives decreased $1,583,000
to $2,880,000 from $4,463,000 as of September 30, 2008.  This decrease
is attributable to the amortization of advances in fiscal year 2009 for loans
made during 2009 and prior years offset by new advances made to registered
representatives who became affiliated with National Securities during fiscal
year 2009.
 
 29
 
 In fiscal
years 2009 and 2008, the Company received proceeds of approximately $0 and
$17,000, 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 2010.  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, 2009:
 
 Notes
                
                
                Secured
      DemandFiscal
      Year Ending
                
                Payable
                
                
                and
      Subordinated Notes
                
                
                Leases
                
                
                Total2010
                
                $
                500,000
                
                
                $
                850,000
                
                
                $
                3,887,000
                
                
                $
                5,237,0002011
                
                
                -
                
                
                
                -
                
                
                
                3,712,000
                
                
                
                3,712,0002012
                
                
                6,000,000
                
                
                
                -
                
                
                
                3,126,000
                
                
                
                9,126,0002013
                
                
                -
                
                
                
                -
                
                
                
                2,319,000
                
                
                
                2,319,000Thereafter
                
                
                -
                
                
                
                -
                
                
                
                1,492,000
                
                
                
                1,492,000Less:
      Debt discount
                
                
                (1,036,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,036,000
                )$
                5,464,000
                
                
                $
                850,000
                
                
                $
                14,536,000
                
                
                $
                20,850,000
 
 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 May
2009, the FASB issued SFAS No. 165, “Subsequent Events”.  The new
standard is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before the
issuance of financial statements. Specifically, the standard sets forth: 1) the
period after the balance sheet date during which management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, 2) the circumstances that an entity should recognize
events or transactions that occur after the balance sheet date, and 3) the
disclosures that an entity should make about events or transactions that occur
after the balance sheet date.
 
 In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles- a replacement of FASB Statement No. 162”.  The new
standard sets forth that the FASB Accounting Standards
Codification(Codification) will become the source of authoritative U.S.
generally accepted accounting principles (GAAP) recognized by the FASB to be
applied to nongovernmental entities.  Rules and interpretive releases
of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also source for authoritative GAAP for SEC registrants. When
the statement is effective, the Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. As of September 30, 2009, the Company has adopted this
policy.
 
 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.
 
 30
 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 marketable and
non-marketable securities owned and securities sold, but not yet purchased as of
September 30, 2009:
 
 Securities
      sold, butSecurities
      owned
                
                
                not
      yet purchasedCorporate
      stocks –marketable
                
                $
                86,000
                
                
                $
                4,000Corporate
      bonds – marketable
                
                
                3,000
                
                
                
                -Municipal
      bonds - marketable
                
                
                542,000Restricted
      stock and warrants – non-marketable
                
                
                60,000
                
                
                
                -$
                691,000
                
                
                $
                4,000
 
 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.
 
 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, 2009.
 
 Item
9A. CONTROLS AND PROCEDURES
 
 Evaluation of disclosure
controls and procedures:  Disclosure controls and procedures
are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
recorded, processed, summarized and reported within the time period specified by
the Commission’s rules and forms.  Disclosure and control procedures
are also designed to ensure that such information is accumulated and
communicated to management, including the chief executive officer and principal
accounting officer, to allow timely decisions regarding required
disclosures.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act, is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding disclosure.
 
 Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange
Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the period covered
by this report, the Company’s disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this quarterly report on Form
10-Q was being prepared.
 
 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, 2009, 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, 2009.
 
 31
 
 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: We have continually had in place systems relating to internal
controls over financial reporting.  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, 2009 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 2009 that has not been reported on a current report on Form
8-K.
 
 32
 
 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 2010 Proxy
Statement and is incorporated herein by reference.
 
 Item
11. EXECUTIVE COMPENSATION
 
 The
information required by this Item will be included in the Company’s 2010 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 2010 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 2010 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 2010 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, 2009 and September 30,
2008Statements of
      Operations for the Years ended September 30, 2009 and September 30,
      2008Statement of
      Changes in Stockholders' Equity for the Years ended September 30, 2009 and
      September 30, 2008Statements of
      Cash Flows for the Years ended September 30, 2009 and September 30,
      2008Notes 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.
 
 33
 
 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, 2009
                By:
                /s/Mark
      GoldwasserMark
      GoldwasserChairman
      and Chief Executive OfficerDate:
      December 29, 2009
                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, 2009
                By:
                /s/Mark
      GoldwasserMark
      Goldwasser,Chairman
      and Chief Executive OfficerDate:
      December 29, 2009
                By:
                /s/Leonard
      J. SokolowLeonard
      J. SokolowVice
      Chairman and PresidentDate:
                By:Christopher
      C. DeweyVice
      ChairmanDate:
      December 29, 2009
                By:
                /s/Marshall
      S. GellerMarshall
      S. Geller, DirectorDate:
      December 29, 2009
                By:
                /s/Robert
      W. Lautz, Jr.Robert
      W. Lautz, Jr., DirectorDate:
      December 29, 2009
                By:
                /s/Charles
      R. ModicaCharles
      R. Modica, DirectorDate:
                By:Jorge
      A. Ortega, Director
 
 34
 
 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.4.7
                Warrant,
      dated as of September 9, 2009.4.8
                Warrant,
      dated as of September 9, 2009 to Christopher C. Dewey.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.105
                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.  35
 10.6
                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.10.7*
                2006
      Stock Option Plan, previously included in the Proxy Statement-Schedule 14A
      filed in January 2006 and hereby incorporated by
      reference.10.8*
                2008
      Stock Option Plan, previously included in the Proxy Statement-Schedule 14A
      filed in January 2008 and hereby incorporated by
      reference.10.9
                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.10.10
                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.10.11
                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.10.12
                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.10.13
                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.10.14*
                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.10.15*
                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.10.16*
                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.10.17*
                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.10.18*
                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.10.19
                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.10.20
                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.10.21
                Forbearance
      Agreement, dated as of February 24, 2009, by and between the Company and
      St. Cloud Capital Partners, L.P. previously filed as Exhibit 10.23 to Form
      8-K in March 2009 and hereby incorporated by reference.10.22
                Forbearance
      Agreement, dated as of February 25, 2009, by and between the Company and
      Bedford Oaks Partners, L.P. previously filed as Exhibit 10.24 to Form 8-K
      in March 2009 and hereby incorporated by reference.10.23
                Forbearance
      Agreement, dated as of February 25, 2009, by and between the Company and
      Christopher C. Dewey previously filed as Exhibit 10.25 to Form 8-K in
      March 2009 and hereby incorporated by reference.10.24
                Amendment
      No. 1 to Forbearance Agreement, dated as of April 6, 2009, by and between
      the Company and St. Cloud Capital Partners, L.P. previously filed as
      Exhibit 10.26 to Form 8-K in April 2009 and hereby incorporated by
      reference.10.25
                Forbearance
      Agreement, dated as of April 6, 2009, by and between the Company and St.
      Cloud Capital Partners II, L.P.previously filed as
      Exhibit 10.26 to Form 8-K in April 2009 and hereby incorporated by
      reference.10.26
                Amendment
      No. 1 to Forbearance Agreement, dated as of May 6, 2009, by
      and between the Company and Christopher C. Dewey previously filed as
      Exhibit 10.28 to Form 10-Q in May 2009 and hereby incorporated by
      reference.  36
 10.27
                Amendment
      No. 1 to Forbearance Agreement, dated as of May 6, 2009, by
      and between National Holdings Corporation and Bedford Oak Partners,
      L.P. previously filed as Exhibit 10.29 to Form 10-Q in May 2009 and hereby
      incorporated by reference.10.28
                Amendment
      No.2 to Forbearance Agreement, dated as of May 14, 2009, by
      and between National Holdings Corporation and Christopher C. Dewey
      previously filed as Exhibit 10.30 to Form 10-Q in May 2009 and hereby
      incorporated by reference.10.29
                Amendment
      No.2 to Forbearance Agreement, dated as of May 14, 2009, by
      and between National Holdings Corporation and Bedford Oak Partners,
      L.P. previously filed as Exhibit 10.31 to Form 10-Q in May 2009 and hereby
      incorporated by reference.10.30
                Amendment
      No.3 to Forbearance Agreement, dated as of May 29, 2009, by
      and between National Holdings Corporation and Christopher C. Dewey
      previously filed as Exhibit 10.34 to Form 10-Q in August 2009 and hereby
      incorporated by reference.10.31*
                Amendment
      No. 1 to Employment Agreement, dated as of November 23, 2009, by
      and between the Company and Mark Goldwasser.10.32*
                Letter
      Agreement, dated as of November 23, 2009, by and between the Company
      and Mark Goldwasser.10.33*
                Amendment
      No. 1 to Employment Agreement, dated as of November 23, 2009, by
      and between the Company and Leonard Sokolow.10.34*
                Letter
      Agreement, dated as of November 23, 2009, by and between the Company
      and Leonard Sokolow.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 previously filed as Exhibit 21 to Form 10-K in December 2008
      and hereby incorporated by reference.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
  37


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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended September 30, 2009, in conformity with accounting
principles generally accepted in the United States of America.
 
 
 /s/ Sherb
& Co., LLP
 Certified
Public Accountants
 
 Boca
Raton, Florida
 December
23, 2009
 
 
 F-1
  NATIONAL
      HOLDINGS CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITIONASSETS  September
      30,Current
      Assets
                  
                  2009
                  
                  
                  2008Cash
                  
                  $
                  6,493,000
                  
                  
                  $
                  7,387,000Deposit
      with clearing organizations
                  
                  
                  1,212,000
                  
                  
                  
                  1,210,000Receivables
      from broker dealers and clearing organizations
                  
                  
                  4,910,000
                  
                  
                  
                  3,691,000Other
      receivables, net of allowance for uncollectible accounts
of$402,000 and
      $630,000 at September 30, 2009 and 2008, respectively
                  
                  
                  332,000
                  
                  
                  
                  580,000Advances
      to registered representatives - Current portion
                  
                  
                  1,784,000
                  
                  
                  
                  3,033,000Securities
      owned: marketable – at market value
                  
                  
                  631,000
                  
                  
                  
                  976,000Securities
      owned:nonmarketable – at fair value
                  
                  
                  60,000
                  
                  
                  
                  48,000Total
      Current Assets
                  
                  
                  15,422,000
                  
                  
                  
                  16,925,000Advances
      to registered representatives - Long term portion
                  
                  
                  1,096,000
                  
                  
                  
                  1,430,000Fixed
      assets, net
                  
                  
                  1,163,000
                  
                  
                  
                  1,243,000Secured
      demand note
                  
                  
                  500,000
                  
                  
                  
                  500,000Intangible
      assets, net
                  
                  
                  2,329,000
                  
                  
                  
                  2,950,000Other
      assets
                  
                  
                  1,132,000
                  
                  
                  
                  1,429,000Total
      Assets
                  
                  $
                  21,642,000
                  
                  
                  $
                  24,477,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LaibilitiesPayable
      to broker dealers and clearing organizations
                  
                  $
                  299,000
                  
                  
                  $
                  730,000Securities
      sold, but not yet purchased, at market
                  
                  
                  4,000
                  
                  
                  
                  63,000Accounts
      payable, accrued expenses and other liabilities - Current
      portion
                  
                  
                  14,162,000
                  
                  
                  
                  11,724,000Notes
      payable, net of debt discounts of $0 and $41,000at
      September 30, 2009 and 2008, respectively
                  
                  
                  500,000
                  
                  
                  
                  959,000Total
      Current Liabilities
                  
                  
                  14,965,000
                  
                  
                  
                  13,476,000Accrued
      expenses and other liabilities - Long term portion
                  
                  
                  719,000
                  
                  
                  
                  611,000Convertible
      notes payable, net of debt discount of $1,036,000 and
      $1,431,000at
      September 30, 2009 and 2008, respectively
                  
                  
                  4,964,000
                  
                  
                  
                  4,569,000Total
      Liabilities
                  
                  
                  20,648,000
                  
                  
                  
                  18,656,000Subordinated
      borrowings
                  
                  
                  850,000
                  
                  
                  
                  500,000Stockholders'
      EquityPreferred
      stock, $.01 par value, 200,000 shares authorized; 50,000
      sharesdesignated
      as Series A and 20,000 shares designated as Series B
                  
                  
                  -
                  
                  
                  
                  -Series
      A 9% cumulative convertible preferred stock, $.01 par value,
      50,000shares
      authorized; 42,957 shares issued and outstanding (liquidation
      preference:$4,295,700)
      at September 30, 2009 and  37,550 shares issued and
      outstanding(liquidation
      preference: $3,755,000) at September 30, 2008
                  
                  
                  -
                  
                  
                  
                  -Series
      B 10% cumulative convertible preferred stock, $.01 par value, 20,000
      sharesauthorized;
      0 shares issued and outstanding (liquidation preference:
$0at
      September 30, 2009 and September 30, 2008, respectively
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $.02 par value, 50,000,000 shares authorized;17,151,704
      and 16,422,538 shares issued and outstanding,at
      September 30, 2009 and 2008, respectively
                  
                  
                  343,000
                  
                  
                  
                  328,000Additional
      paid-in capital
                  
                  
                  41,195,000
                  
                  
                  
                  39,279,000Accumulated
      deficit
                  
                  
                  (41,394,000
                  )
                  
                  
                  (34,286,000
                  )Total  Stockholders'
      Equity
                  
                  
                  144,000
                  
                  
                  
                  5,321,000Total
      Liabilities and Stockholders' Equity
                  
                  $
                  21,642,000
                  
                  
                  $
                  24,477,000
  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, 2009
                    
                    
                    September
      30, 2008REVENUESCommissions
                    
                    $
                    72,684,000
                    
                    
                    $
                    50,128,000Net
      dealer inventory gains
                    
                    
                    24,202,000
                    
                    
                    
                    16,810,000Investment
      banking
                    
                    
                    2,084,000
                    
                    
                    
                    1,906,000Total
      commission and fee revenues
                    
                    
                    98,970,000
                    
                    
                    
                    68,844,000Interest
      and dividends
                    
                    
                    1,586,000
                    
                    
                    
                    3,862,000Transfer
      fees and clearing services
                    
                    
                    10,797,000
                    
                    
                    
                    5,529,000Other
                    
                    
                    5,237,000
                    
                    
                    
                    3,908,000TOTAL
      REVENUES
                    
                    
                    116,590,000
                    
                    
                    
                    82,143,000EXPENSESCommissions
      and fees
                    
                    
                    89,431,000
                    
                    
                    
                    64,910,000Employee
      compensation and related expenses
                    
                    
                    12,085,000
                    
                    
                    
                    9,699,000Clearing
      fees
                    
                    
                    3,180,000
                    
                    
                    
                    2,952,000Communications
                    
                    
                    4,242,000
                    
                    
                    
                    1,632,000Occupancy
      and equipment costs
                    
                    
                    5,015,000
                    
                    
                    
                    3,844,000Professional
      fees
                    
                    
                    3,599,000
                    
                    
                    
                    2,986,000Interest
                    
                    
                    1,242,000
                    
                    
                    
                    680,000Taxes,
      licenses, registration
                    
                    
                    1,371,000
                    
                    
                    
                    533,000Other
      administrative expenses
                    
                    
                    2,857,000
                    
                    
                    
                    2,925,000Intangible
      impairment
                    
                    
                    -
                    
                    
                    
                    12,999,000TOTAL
      EXPENSES
                    
                    
                    123,022,000
                    
                    
                    
                    103,160,000Net
      loss
                    
                    
                    (6,432,000
                    )
                    
                    
                    (21,017,000
                    )Preferred
      stock dividends
                    
                    
                    (362,000
                    )
                    
                    
                    (338,000
                    )Net
      loss attributable to common stockholders
                    
                    $
                    (6,794,000
                    )
                    
                    $
                    (21,355,000
                    )LOSS
      PER COMMON SHARENet
      income (loss) attributable to common stockholdersBasic
      and diluted:
                    
                    $
                    (0.41
                    )
                    
                    $
                    (2.02
                    )Weighted
      average number of shares outstanding:Basic
      and diluted
                    
                    
                    16,760,243
                    
                    
                    
                    10,579,778
  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, 2009 and SEPTEMBER 30,
2008  TotalPreferred
      Stock
                  
                  
                  Common
      Stock
                  
                  
                  Additional
                  
                  
                  Accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  $
                  
                  
                  Shares
                  
                  
                  $
                  
                  
                  Paid-in
      Capital
                  
                  
                  Deficit
                  
                  
                  Equity
      (Deficit)BALANCE, 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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,789,910
                  
                  
                  
                  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
                  
                  
                  
                  -
                  
                  
                  
                  16,422,538
                  
                  
                  
                  328,000
                  
                  
                  
                  39,279,000
                  
                  
                  
                  (34,286,000
                  )
                  
                  
                  5,321,000Common
      stock issued in private placement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  666,666
                  
                  
                  
                  14,000
                  
                  
                  
                  254,000
                  
                  
                  
                  -
                  
                  
                  
                  268,000Issuance
      of stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  878,000
                  
                  
                  
                  -
                  
                  
                  
                  878,000Common
      stock issued in exchange for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  62,500
                  
                  
                  
                  1,000
                  
                  
                  
                  62,000
                  
                  
                  
                  -
                  
                  
                  
                  63,000Issuance
      of Series A preferred stock dividend
                  
                  
                  5,407
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  676,000
                  
                  
                  
                  (676,000
                  )Forbearance
      agreement warrant repricing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  46,000
                  
                  
                  
                  -
                  
                  
                  
                  46,000Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,432,000
                  )
                  
                  
                  (6,432,000
                  )BALANCE, September
      30, 2009
                  
                  
                  42,957
                  
                  
                  $
                  -
                  
                  
                  
                  17,151,704
                  
                  
                  $
                  343,000
                  
                  
                  $
                  41,195,000
                  
                  
                  $
                  (41,394,000
                  )
                  
                  $
                  144,000
  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, 2009
                  
                  
                  September
      30, 2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                  
                  $
                  (6,432,000
                  )
                  
                  $
                  (21,017,000
                  )Adjustments
      to reconcile net income (loss) to netcash
      used in operating activitiesImpairment
      of intangible asset
                  
                  
                  -
                  
                  
                  
                  12,999,000Depreciation
      and amortization
                  
                  
                  1,336,000
                  
                  
                  
                  1,140,000Amortization
      of deferred financing costs
                  
                  
                  49,000
                  
                  
                  
                  -Amortization
      of note discount
                  
                  
                  435,000
                  
                  
                  
                  245,000Compensatory
      element of common stock option issuances
                  
                  
                  878,000
                  
                  
                  
                  1,218,000Warrant
      issuance and repricing for forbearance of notes payable
                  
                  
                  46,000
                  
                  
                  
                  -Fair
      value of shares issued in exchange for services and deferred
      comp
                  
                  
                  63,000
                  
                  
                  
                  28,000Unrealized
      loss on securities
                  
                  
                  (150,000
                  )
                  
                  
                  -Changes
      in assets and liabilitiesDeposits
      with clearing organizations
                  
                  
                  (2,000
                  )
                  
                  
                  (2,000
                  )Receivables
      from broker-dealers, clearing organizations and others
                  
                  
                  612,000
                  
                  
                  
                  1,933,000Securities
      owned: marketable, at market value
                  
                  
                  494,000
                  
                  
                  
                  299,000Securities
      owned: non-marketable, at fair value
                  
                  
                  (11,000
                  )
                  
                  
                  (2,000
                  )Other
      assets
                  
                  
                  250,000
                  
                  
                  
                  (392,000
                  )Payables
                  
                  
                  2,115,000
                  
                  
                  
                  (2,489,000
                  )Securities
      sold, but not yet purchased, at market
                  
                  
                  (60,000
                  )
                  
                  
                  (15,000
                  )Net
      cash used in operating activities
                  
                  
                  (377,000
                  )
                  
                  
                  (6,055,000
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      received in merger
                  
                  
                  -
                  
                  
                  
                  3,620,000Purchase
      of fixed assets
                  
                  
                  (635,000
                  )
                  
                  
                  (471,000
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  (635,000
                  )
                  
                  
                  3,149,000CASH
      FLOWS FROM FINANCING ACTIVITIESRepayment
      of notes payable
                  
                  
                  (500,000
                  )
                  
                  
                  -Net
      proceeds from issuance of convertible notes payable
                  
                  
                  -
                  
                  
                  
                  6,000,000Net
      proceeds from subordinated borrowings
                  
                  
                  350,000
                  
                  
                  
                  -Net
      proceeds from private placement
                  
                  
                  268,000
                  
                  
                  
                  -Cash
      payment of deferred financing costs
                  
                  
                  -
                  
                  
                  
                  (176,000
                  )Capitalized
      merger costs
                  
                  
                  -
                  
                  
                  
                  (505,000
                  )Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  17,000Net
      cash provided by financing activities
                  
                  
                  118,000
                  
                  
                  
                  5,336,000NET
      INCREASE (DECREASE) IN CASH
                  
                  
                  (894,000
                  )
                  
                  
                  2,430,000CASH
      BALANCEBeginning
      of the year
                  
                  
                  7,387,000
                  
                  
                  
                  4,957,000End
      of the year
                  
                  $
                  6,493,000
                  
                  
                  $
                  7,387,000SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the year for:Interest
                  
                  $
                  574,000
                  
                  
                  $
                  528,000Income
      taxes
                  
                  $
                  80,000
                  
                  
                  
                  -SUPPLEMENTAL
      DISCLOSURES OF NONCASH INVESTING ANDFINANCING
      ACTIVITIESWarrants
      issued in connection with debt
                  
                  $
                  112,500
                  
                  
                  $
                  1,579,000Series
      A preferred stock dividends
                  
                  $
                  362,000
                  
                  
                  $
                  -
  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, 2009 and SEPTEMBER 30, 2008
 
 NOTE
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 their 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 63,000 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 4,000 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 to date have been de minimus.
 
 vFinance
Lending Services, Inc. (“vFinance Lending”), originally formed as a wholly owned
subsidiary of vFinance, was established in May 2002.  It is a mortgage
lender focused primarily on the commercial sector, providing bridge loans and
commercial mortgages through its nationwide network of lenders.  Its
operations to date have been de minimus.
 
 NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 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 (“July 1,
2008”) though September 30, 2009.
 
 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.
 
 Reclassifications
 
 Certain
items in the 2008 financial statements have been reclassified to conform to the
presentation in the 2009 financial statements.  Such reclassifications
did not have a material impact on the presentation of the overall financial
statements.
 
 F-6
  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”), Legent Clearing LLC (“Legent”), Fortis Securities, LLC (“Fortis”)
and Rosenthal Collins Group, LLC. (“Rosenthal”).  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.
 
 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.
 
 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.
 
 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.
 
 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.
 
 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.
 
 F-7
 
 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, in accordance with professional
standards. 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.
 
 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 professional
standards for "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".  In accordance with
professional standards, 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, 2009, which consist of common stock purchase warrants, and
determined that such derivatives are accounted for in accordance with
professional standards.
 
 Convertible
Instruments
 
 The
Company evaluates and accounts for conversion options embedded in its
convertible instruments in accordance with professional standards for
“Accounting for Derivative Instruments and Hedging Activities”.
 
 Professional
standards 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. 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.  Professional standards also provide an exception to this
rule when the host instrument is deemed to be conventional  as defined
under professional standards as “The Meaning of “Conventional Convertible Debt
Instrument”.
 
 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 professional standards when “Accounting for
Convertible Securities with Beneficial Conversion Features,” as those
professional standards pertain 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.  Additionally, the Company’s
conversion options, if free standing, would not be considered derivatives
subject to the accounting guidelines prescribed in accordance with professional
standards.
 
 F-8
  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
      30,2009
                  
                  
                  2008Numerator:Net
      loss
                  
                  $
                  (6,432,000
                  )
                  
                  $
                  (21,017,000
                  )Preferred
      stock dividends
                  
                  
                  (362,000
                  )
                  
                  
                  (338,000
                  )Numerator
      for basic earnings per share--net income (loss)attributable
      to common stockholders - as reported
                  
                  
                  (6,794,000
                  )
                  
                  
                  (21,355,000
                  )Effect
      of dilutive securities:Series
      A preferred stock
                  
                  
                  -
                  
                  
                  
                  -Numerator
      for diluted earnings per share--net income (loss)attributable
      to common stockholders - as adjusted
                  
                  $
                  (6,794,000
                  )
                  
                  $
                  (21,355,000
                  )Denominator:Denominator
      for basic earnings per share--weightedaverage
      shares
                  
                  
                  16,760,243
                  
                  
                  
                  10,579,778Effect
      of dilutive securities:Assumed
      conversion of Series A preferred stock
                  
                  
                  -
                  
                  
                  
                  -Stock
      options
                  
                  
                  -
                  
                  
                  
                  -Warrants
                  
                  
                  -
                  
                  
                  
                  -Dilutive
      potential common shares
                  
                  
                  -
                  
                  
                  
                  -Denominator
      for diluted earnings per share--adjustedweighted-average
      shares and assumed conversions
                  
                  
                  16,760,243
                  
                  
                  
                  10,579,778Net
      loss available to common stockholdersBasic
      and diluted
                  
                  $
                  (0.41
                  )
                  
                  $
                  (2.02
                  )
 
 For the
fiscal year ended September 30, 2009 and September 30, 2008, 6,811,650 and
6,379,000 shares, respectively, 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.
 
 Stock-Based
Compensation
 
 Effective
October 1, 2005, the Company adopted professional standards in accounting
for “Share Based Payments.”   Professional standards address all
forms of share based payment (“SBP”) awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights.  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 2009 and 2008, the Company granted 90,000 and 2,255,000
stock options, respectively, with a fair value of approximately $56,100 and
$2,059,000, respectively.  A charge of $878,000 and $826,000 was
recorded in fiscal years 2009 and 2008, respectively, relating to the
amortization of the fair value associated with these grants.
 
 F-9
  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
$429,000 and $171,000 in fiscal years 2009 and 2008, respectively, 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, 2009 and 2008 the Company recognized a charge of
$28,000, for both years 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, 2009 and
2008.  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
      30,2009
                  2008Assumptions:Risk-free
      interest rate
                  2.06%
      - 2.38%
                  1.47%
      - 2.19%Expected
      life, in years
                  5.0
                  3.0Expected
      volatility
                  30%
      - 87%
                  78%
      - 82%
 
 As of
September 30, 2009, there was $1,000,000of 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, 2009, and
changes during the fiscal year then ended is presented below:
 
 Nonvested
      Shares
                  
                  Shares
                  
                  
                  Weighted
      Average Grant Date Fair ValueNonvested
      at September 30, 2008
                  
                  
                  3,828,774
                  
                  
                  $
                  0.92Granted
                  
                  
                  50,000
                  
                  
                  $
                  0.64Vested
                  
                  
                  (1,146,856
                  )
                  
                  $
                  0.56Expired
                  
                  
                  (815,177
                  )
                  
                  $
                  0.90Nonvested
      at September 30, 2009
                  
                  
                  1,916,741
                  
                  
                  $
                  0.61
 
 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 primarily 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-10
 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 June 30, 2010.  As a result of this
coverage the Company believes it is not exposed to any significant credit risks
for cash.
 
 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.
 
 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 broker’s agreement
with the Broker Dealer Subsidiaries, and is included in commission 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.
 
 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.
 
 Other
Assets
 
 Other
assets consist primarily of pre-paid expenses and lease deposits.
 
 Legal and Other
Contingencies
 
 The
outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty. SFAS No. 5, Accounting for Contingencies, requires
that an estimated loss from a loss contingency such as a legal proceeding or
claim should be accrued by a charge to income if it is probable that an asset
has been impaired or a liability has been incurred and the amount of the loss
can be reasonably estimated. Disclosure of a contingency is required if there is
at least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially impact
our results of operations, financial position, or our cash flows.
 
 Recently Issued Accounting
Standards
 
 The new
professional standard issued in May 2009 accounting for “Subsequent Events” is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the issuance of
financial statements. Specifically, the standard sets forth: 1) the period after
the balance sheet date during which management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, 2) the circumstances that an entity should recognize
events or transactions that occur after the balance sheet date, and 3) the
disclosures that an entity should make about events or transactions that occur
after the balance sheet date.
 
 F-11
 The new
professional standard using Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles was issued in June 2009.  It sets forth that the Accounting Standards Codification(Codification) will become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the professionals to be
applied to nongovernmental entities.  Rules and interpretive releases
of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also source for authoritative GAAP for SEC registrants. When
the statement is effective, the Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative. As of September 30, 2009, the Company has adopted this
policy.
 
 NOTE 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 was amortized over a two year period ended 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, Fortis
and Rosenthal.  The Company believes that the overall effect of its
clearing relationships has been beneficial to the Company’s cost structure,
liquidity and capital resources.
 
 NOTE
4. BROKER-DEALERS AND CLEARING ORGANIZATIONS RECEIVABLES AND
PAYABLES
 
 At
September 30, 2009 and 2008, the receivables of $4,910,000 and $3,691,000
respectively, from broker-dealers and clearing organizations represent net
amounts due for fees and commissions.  At September 30, 2009 and 2008,
the amounts payable to broker-dealers and clearing organizations of $299,000 and
$730,000 respectively, represent amounts owed to clearing firms for fees on
unsettled transactions and payables to other broker dealers associated with
tri-party clearing agreements.
 
 NOTE
5. OTHER RECEIVABLES
 
 An
analysis of other receivables and the allowance for uncollectible accounts on
such receivables, for the fiscal years ended September 30, 2008 and 2009 is as
follows:
  Other
                    
                    
                    
                    
                    
                    NetReceivables
                    
                    
                    Allowance
                    
                    
                    ReceivablesBalance,
      September 30, 2007
                    
                    $
                    1,251,000
                    
                    
                    $
                    (467,000
                    )
                    
                    $
                    784,000Additions
                    
                    
                    527,000
                    
                    
                    
                    -
                    
                    
                    
                    -Collections
                    
                    
                    (568,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Provision
                    
                    
                    -
                    
                    
                    
                    (163,000
                    )
                    
                    
                    -Balance,
      September 30, 2008
                    
                    
                    1,210,000
                    
                    
                    
                    (630,000
                    )
                    
                    
                    580,000Additions
                    
                    
                    3,693,000
                    
                    
                    
                    -
                    
                    
                    
                    -Collections
                    
                    
                    (3,539,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Provision
                    
                    
                    (630,000
                    )
                    
                    
                    228,000
                    
                    
                    
                    -Balance,
      September 30, 2009
                    
                    $
                    734,000
                    
                    
                    $
                    (402,000
                    )
                    
                    $
                    332,000
 
 F-12
  NOTE
6. ADVANCES TO REGISTERED REPRESNTATIVES
 
 An
analysis of advances to registered representatives for the fiscal years ended
September 30, 2008 and 2009 is as follows:
 
 Balance,
      September 30, 2007
                  
                  $
                  4,010,000Advances
                  
                  
                  1,784,000Amortization
      or repayment of advances
                  
                  
                  (1,331,000
                  )Balance,
      September 30, 2008
                  
                  
                  4,463,000Advances
                  
                  
                  853,000Amortization
      or repayment of advances
                  
                  
                  (2,436,000
                  )Balance,
      September 30, 2009
                  
                  $
                  2,880,000
 
 The
unamortized advances outstanding at September 30, 2009 and 2008 attributable to
registered representatives who ended their affiliation with National Securities
prior to the fulfillment of their obligation were $0 and $84,000
respectively.
 
 NOTE
7. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED, AT MARKET –
MARKETABLE
 
 The
following table shows the quoted market values of securities owned by the
Company as of September 30, 2009 and 2008, respectively:
 
 Securities
      ownedSeptember
      30, 2009
                  
                  
                  September
      30, 2008Corporate
      stocks
                  
                  $
                  86,000
                  
                  
                  $
                  454,000Corporate
      bonds
                  
                  
                  3,000
                  
                  
                  
                  6,000Government
      obligations
                  
                  
                  542,000
                  
                  
                  
                  516,000Restricted
      securities – non marketable
                  
                  
                  60,000
                  
                  
                  
                  48,000$
                  691,000
                  
                  
                  $
                  1,024,000
 
 The
following table shows the quoted market values of securities sold, but not yet
purchased by the Company as of September 30, 2009 and 2008
respectively:
 
 Securities
      sold, but not yet purchasedSeptember
      30, 2009
                  
                  
                  September
      30, 2008Corporate
      stocks
                  
                  $
                  4,000
                  
                  
                  $
                  9,000Corporate
      bonds
                  
                  
                  -
                  
                  
                  
                  10,000Government
      obligations
                  
                  
                  -
                  
                  
                  
                  44,000$
                  4,000
                  
                  
                  $
                  63,000
 
 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 $60,000 and
$48,000 as of September 30, 2009 and 2008, respectively.
 
 F-13
  Fair
Value Measurements
 
 As of
September 30, 2009
 
 Securities
      owned at fair valueLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCorporate
      stocks
                  
                  $
                  86,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  86,000Corporate
      bonds
                  
                  
                  3,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,000Government
      obligations
                  
                  
                  542,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  542,000Restricted
      stock
                  
                  
                  -
                  
                  
                  
                  60,000
                  
                  
                  
                  -
                  
                  
                  
                  60,000$
                  631,000
                  
                  
                  $
                  60,000
                  
                  
                  $
                  -
                  
                  
                  $
                  691,000
 
 Securities
      sold, butnot
      yet purchased at fair value
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCorporate
      stocks
                  
                  $
                  4,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,000Corporate
      bonds
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Government
      obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  4,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,000
 
 As of
September 30, 2008
 
 Securities
      owned at fair valueLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCorporate
      stocks
                  
                  $
                  454,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  454,000Corporate
      bonds
                  
                  
                  6,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,000Government
      obligations
                  
                  
                  516,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  516,000Restricted
      stock
                  
                  
                  -
                  
                  
                  
                  48,000
                  
                  
                  
                  -
                  
                  
                  
                  48,000$
                  976,000
                  
                  
                  $
                  48,000
                  
                  
                  $
                  -
                  
                  
                  $
                  1,024,000
 
 Securities
      sold, butnot
      yet purchased at fair value
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCorporate
      stocks
                  
                  $
                  9,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  9,000Corporate
      bonds
                  
                  
                  10,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,000Government
      obligations
                  
                  
                  44,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  44,000$
                  63,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  63,000
 
 NOTE
8. FIXED ASSETS
 
 Fixed
assets as of September 30, 2009 and 2008, respectively, consist of the
following:
 
 September
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  Estimated
      Useful LivesEquipment
                  
                  $
                  2,294,000.
                  
                  
                  $
                  2,045,000
                  
                  5
      yearsFurniture
      and fixtures
                  
                  
                  341,000
                  
                  
                  
                  311,000
                  
                  5
      yearsLeasehold
      improvements
                  
                  
                  576,000
                  
                  
                  
                  544,000
                  
                  Lesser
      of useful life
                    or
      term of leaseCapital
      Leases (Primarily composed
                    of
      Computer Equipment)
                  
                  
                  1,940,000
                  
                  
                  
                  1,481,000
                  
                  5
      years5,151,000
                  
                  
                  
                  4,381,000Less
      accumulated depreciation
                  
                  
                  (3,988,000
                  )
                  
                  
                  (3,138,000
                  )Fixed
      assets - net
                  
                  $
                  1,163,000
                  
                  
                  $
                  1,243,000
 
 F-14
 Depreciation
and amortization expense for the years ended September 30, 2009 and 2008 was
$1,336,000 and $1,140,000 respectively.
 
 NOTE
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 the exercise price
per share of each stock option or warrant otherwise purchasable pursuant to the
stock option or warrant divided by 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.
 
 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 acquired
                  
                  
                  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-15
  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-16
  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
      receivables, 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
                  
                  $
                  239,000Securities
      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
                  %
  NOTE
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.
 
 F-17
 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 professional standards defining Fair Value
Measurements.   These professional standards provide 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.
  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.  Amortization of
the Company’s intangible asset for the fiscal years ending September 30, 2009
and 2008 was $621,000 and $839,000, respectively.
 The
following table demonstrates the amortization management expects to be taken in
future years:
 
 Fiscal Year Ending2010
                  
                  
                  621,0002011
                  
                  
                  621,0002012
                  
                  
                  621,0002013
                  
                  
                  466,000$
                  2,329,000
 
 
 F-18
  NOTE
11. OTHER ASSETS
 
 Other
assets as of September 30, 2009 and 2008 respectively, consist of the
following:
 
 September
      30,
                    2009
                  
                  
                  September
      30,
                    2008Pre-paid
      expenses
                  
                  $
                  659,000
                  
                  
                  $
                  728,000Deposits
                  
                  
                  184,000
                  
                  
                  
                  352,000Investments
      in unaffiliated entity
                  
                  
                  162,000
                  
                  
                  
                  162,000Deferred
      financing costs
                  
                  
                  114,000
                  
                  
                  
                  163,000Other
                  
                  
                  13,000
                  
                  
                  
                  24,000Total
                  
                  $
                  1,132,000
                  
                  
                  $
                  1,429,000
 
 NOTE
12. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
 
 Accounts
payable, accrued expenses and other liabilities, as a part of current
liabilities, as of September 30, 2009 and 2008 respectively, consist of the
following:
 
 September
      30,
                    2009
                  
                  
                  September
      30,
                    2008Commissions
      payable
                  
                  $
                  7,745,000
                  
                  
                  $
                  6,537,000Deferred
      clearing fee credits
                  
                  
                  94,000
                  
                  
                  
                  94,000Telecommunications
      vendors payable
                  
                  
                  82,000
                  
                  
                  
                  209,000Legal
      payable
                  
                  
                  663,000
                  
                  
                  
                  646,000Deferred
      rent payable
                  
                  
                  33,000
                  
                  
                  
                  33,000Accrued
      compensation
                  
                  
                  757,000
                  
                  
                  
                  567,000Capital
      lease liability
                  
                  
                  703,000
                  
                  
                  
                  613,000Other
      vendors
                  
                  
                  4,085,000
                  
                  
                  
                  3,025,000Total
                  
                  $
                  14,162,000
                  
                  
                  $
                  11,724,000
 
 NOTE
13. CONVERTIBLE NOTES PAYABLE
 
 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.  Using professional standards, 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 professional standards, 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.
 
 F-19
  The
following table summarizes convertible notes payable at September 30,
2009.
 
 September
      30,
                  
                  
                  September
      30,2009
                  
                  
                  200810%
      convertible notes payable
                  
                  $
                  6,000,000
                  
                  
                  $
                  6,000,000Less:
      Debt discount
                  
                  
                  (1,036,000
                  )
                  
                  
                  (1,431,000
                  )$
                  4,964,000
                  
                  
                  $
                  4,569,000
 
 The
Company incurred interest expense related to its convertible notes of $600,000
and $391,000 for the fiscal years ended September 30, 2009 and 2008,
respectively.
 
 NOTE
14. NOTES PAYABLE – RELATED PARTY
 
 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
matured in February 2009, and had a stated interest rate of 10% per
annum.  The Company obtained forbearance agreements from the lenders
and as a result, re-priced some of the warrants down to an exercise price of
$0.75 per share.  The Company recalculated the fair value of the
warrants and took an incremental charge of approximately $46,000 recorded as
interest expense, in accordance with professional
standards.  During  2009 the Company repaid $500,000 of the
notes payable and the other $500,000 has been extended to a new maturity of May
2010.  The Company has fully amortized the debt discount associated
with these notes and an expense of $41,000 was charged to interest expense in
2009.  Such amortization had been included in “Interest” in previous
years, in the accompanying consolidated financial statements.
 
 The
following table summarizes notes payable at September 30, 2009 and 2008,
respectively:
 
 September
      30,
                  
                  
                  September
      30,2009
                  
                  
                  200810%
      promissory notes payable
                  
                  $
                  500,000
                  
                  
                  $
                  1,000,000Less:
      Debt discount
                  
                  
                  -
                  
                  
                  
                  (41,000
                  )$
                  500,000
                  
                  
                  $
                  959,000
 
 The note
outstanding on September 30, 2009 matures in fiscal year 2010.  This
note has is made by Christopher Dewey, who serves as a member of our Board of
Directors.  The Company incurred interest expense related to its notes
of $73,000 and $208,000 for the fiscal years ended September 30, 2009 and 2008,
respectively.
 
 NOTE
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 fiscal
year 2009, upon the maturity of the aforementioned note, the lender opted to not
renew the note and as such, the note is presently in “Suspended Repayment”
status, as defined in the original note.    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, 2010.
 
 F-20
 In June
2009, National Securities was approved by the FINRA to receive a Subordinated
loan from Legent for $100,000.  This loan was granted subsequent to
National Securities signing a clearing agreement with Legent, to clear a portion
of the business.  This loan is forgivable after one year and National
Securities bringing over a certain number of assets to the Legent clearing
platform.
 
 In July
2009, National Securities was approved by the FINRA to receive an additional
Subordinated loan from Legent for $250,000, also bearing interest at the rate of
4.5% payable monthly.  This loan was granted subsequent to National
Securities signing a clearing agreement with Legent, to clear a portion of the
business.  This loan is scheduled to begin principal repayment at a
minimum of $10,000 per month or $10 per transaction whichever is greater,
starting July 31, 2010.  Some or all of this repayment may be funded
by transactional credits depending on the amount of business conducted through
Legent on a monthly basis.
 
 NOTE
16. INCOME TAXES
 
 The
income tax provision (benefit) consists of:
 
 Years
      EndedSeptember
      30,
                    2009
                  
                  
                  September
      30,
                    2008Federal
      income tax provision (benefit)
                  
                  $
                  -
                  
                  
                  $
                  -State
      income tax provision (benefit)
                  
                  
                  -
                  
                  
                  
                  -$
                  -
                  
                  
                  $
                  -
 
 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,
                    2009
                  
                  
                  September
      30,
                    2008Statutory
      federal rate
                  
                  
                  35.0
                  %
                  
                  
                  35.0
                  %State
      income taxes net of federal income tax benefit
                  
                  
                  5.2
                  
                  
                  
                  5.2Permanent
      differences for tax purposes
                  
                  
                  (10.4
                  )
                  
                  
                  (26.5
                  )Change
      in valuation allowance
                  
                  
                  (29.8
                  )
                  
                  
                  (13.7
                  )0.0
                  %
                  
                  
                  0.0
                  %
 
 
 F-21
  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,
                    2009
                  
                  
                  September
      30,
                    2008Deferred
      tax assets:Net
      operating loss carry-forwards
                  
                  $
                  12,585,000
                  
                  
                  $
                  13,000,000Reserves
      for uncollectible receivables
                  
                  
                  162,000
                  
                  
                  
                  187,000Accrued
      but unpaid bonuses
                  
                  
                  190,000
                  
                  
                  
                  189,000Other
      temporary differences
                  
                  
                  88,000
                  
                  
                  
                  61,000Total
      deferred tax assets
                  
                  
                  13,025,000
                  
                  
                  
                  13,437,000Valuation
      allowance
                  
                  
                  (13,025,000
                  )
                  
                  
                  (13,437,000
                  )Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -
  At
September 30, 2009, the Company had available net operating loss carryovers of
approximately $31.5 million that may be applied against future taxable income
and expires at various dates through 2029, 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 decreased by  $ 412,000 and
increased $9.4 million during the fiscal years ended September 30, 2009 and 2008
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.
 
 During
the fiscal year ended September 30, 2009, the Company adjusted its deferred tax
asset estimate relating to net operating loss carryovers from fiscal year ended
September 30, 2008 to reflect actual tax losses per the Company’s tax return as
filed.  This adjustment had the effect of reducing the deferred tax
assets from net operating loss carry-forwards by approximately $2,200,000 with a
corresponding reduction to the valuation allowance account.  This
adjustment has no impact on the Company’s assets, liabilities or net loss as of
September 30, 2009.
 
 The
Company acquired vFinance, Inc. and subsidiaries during fiscal year ended
September 30, 2008 and increased its consolidated tax net operating loss
carry-forwards by approximately $12 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 carry-forwards have been included in consolidated deferred tax
assets- net operating loss carry-forwards, and a full valuation allowance has
been established since it is not more likely than not that such benefits will be
recovered.
 
 F-22
  NOTE
17. COMMITMENTS AND CONTINGENCIES
 
 Leases
 
 As of
September 30, 2009, the Company leases office space and equipment in various
states expiring at various dates through August 2015, and is committed under
operating leases for future minimum lease payments as follows:
 
 Fiscal
      Year Ending
                  
                  Rental
      Expense
                  
                  
                  Less,
      Sublease Income
                  
                  
                  Net2010
                  
                  $
                  3,887,000
                  
                  
                  $
                  72,000
                  
                  
                  $
                  3,815,0002011
                  
                  
                  3,712,000
                  
                  
                  
                  72,000
                  
                  
                  
                  3,640,0002012
                  
                  
                  3,126,000
                  
                  
                  
                  72,000
                  
                  
                  
                  3,054,0002013
                  
                  
                  2,319,000
                  
                  
                  
                  72,000
                  
                  
                  
                  2,247,000Thereafter
                  
                  
                  1,492,000
                  
                  
                  
                  66,000
                  
                  
                  
                  1,426,000$
                  14,536,000
                  
                  
                  $
                  354,000
                  
                  
                  $
                  14,182,000
 
 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, 2009 and
September 30, 2008, the Company has recognized deferred rent payable of $221,000
and $313,000, respectively (See Note 12).  Rental expense under all
operating leases for the years ended September 30, 2009 and September 30, 2008
was $3,266,000 and $2,356,000 respectively. Sublease income under all operating
subleases for the years ended September 30, 2009 and 2008 was approximately
$72,000 and $65,000, respectively.
 
 Litigation and Regulatory
Matters
 
 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.  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
sought review of the Judge's decision and, following briefing, will present oral
argument in early 2010.
 
 On March
4, 2008, vFinance received a customer arbitration (FINRA Case No.08-00472) from
Donald and Patricia Halfmann, alleging that Jeff Lafferty, a former registered
representative of vFinance, misappropriated approximately $110,000 of the
Halfmanns' funds via check alteration, and that vFinance ought to be liable for
an additional $150,000 for other dishonest and fraudulent acts committed after
he left vFinance.  On August 6, 2009 the arbitrators’ ruled that
vFinance Investments must pay for losses, interest, attorney’s costs and
punitive damages totaling approximately $805,000. The firm made a claim against
its fidelity bond carrier, and received approximately $59,000 for the
claim.  The firm and has determined that there was no basis to seek to
have the entire arbitration award, or any part of that award, vacated.  In
December, vFinance finished paying the entire award to the Halfmann's in
accordance with the terms agreed upon between the parties.
 
 In
November 2009, James and Cheryl Merrill, on behalf of themselves and on behalf
of all other similarly situated investors, filed a class action in the Unites
States District Court, Central District of California, Southern Division,
against National  and National Securities  in connection
with the purchase and sale of promissory notes issued on or after September 18,
2006 by one or more of Medical Capital Holdings, Inc.’s special purpose
corporations, including Medical Provider Financial Corporation III, Medical
Provider Financial Corporation IV (“Medical Capital IV”), Medical Provider
Funding Corporation V (“Medical Capital V”) and Medical Provider Funding
Corporation VI V (“Medical Capital VI”) .  The class action has not
yet been certified or decertified.  The class members assert claims
against NSC for violations of Section 12(a)(1) of the Securities Act of 1933
(the “Securities Act”), 15 U.S.C. § 77l, and for violations of 12(a)(2) of the
Securities Act, 15 U.S.C. § 77l.  The class members further assert
claims against NHC under Section 15 of the Securities Act, 15 U.S.C. §
770.  The class members seek compensatory damages, rescission or a
recessionary measure of damages, pre-judgment and post-judgment interest, costs
and expenses, including attorneys’ fees, all in undisclosed
amounts.
 
 F-23
 In
December 2009, Amos Norman (“Norman”), individually and as trustee of a trust,
commenced an arbitration against National Securities and Brian Folland
(“Folland”), a securities broker registered with NSC, before FINRA Dispute
Resolution in connection with investments totaling $815,000. Claimant alleges
that he invested a total of $590,000 in Medical Capital IV, Medical Capital V
and Medical Capital VI, among other investments, although Norman concedes that
$60,000 of the amount invested in Medical Capital IV was made prior to Folland’s
registration with National Securities, and further, that National Securities
should not be liable for such investment.  Claimant also alleges that
he invested $100,000 in an entity created by Provident Royalties (discussed
further below).  Claimant asserts claims against National Securities
for violation of federal securities laws, violation of California securities
laws, violation of California’s elder abuse laws, violation of California’s
unfair, unlawful and fraudulent business practices acts, breach of contract,
common law fraud, breach of fiduciary duty, negligence and gross
negligence.
 
 In total,
Claimant seeks compensatory damages of $630,000 from National Securities
($530,000 for the Medical Capital investments and $100,000 for the Provident
Royalties investment), as well as benefit of the bargain damages, lost
opportunity costs, model portfolio damages, prejudgment interest, costs,
reasonable attorneys’ fees and punitive damages, all in undisclosed
amounts.
 
 In
October 2009, NSC received demands from counsel representing two other customers
who allegedly invested an aggregate of $200,000 in Medical Capital V and Medical
Capital VI.  Those matters have not proceeded to litigation and the
Company has not yet conducted discovery into the allegations or potential
defenses, although it appears that those customers may also be contemplated
members of the above-discussed class action.  The Company estimates,
to the extent that it can, that based on prior experience, its liability from
these demands, should they proceed to litigation, may be substantially less than
the amount of all damages and other relief sought.  These demands
arise in the normal course of business.
 
 The
Company has not yet conducted discovery into the allegations or potential
defenses in connection with any of these actions or claims and it appears that
Norman and the other claimants set forth above may be contemplated member of the
above-discussed class action with respect to his investments in Medical Capital
IV, Medical Capital V and Medical Capital VI, and with respect to Norman, the
below-discussed class action involving Provident Royalties.  The
Company intends to defend itself vigorously in this action and believes that the
eventual outcome of this matter will not have a materially adverse effect on the
Company.  However, the ultimate outcome of this matter cannot be
determined at this time.
 
 In
December 2009, plaintiffs Robert Adams, Joseph Billitteri, Karen L. Bopp, IRA,
Bussell Living Trust DTD 12/05/96, John Gilgallon, Scott Jessen, Sharon Kreindel
Revocable Trust DTD 02/09/2005, Mary Merline, James Merrill, Don Ribacchi and
Lewis Wilson, each on his, her or its own behalf and on behalf of all similarly
situated investors, filed a Consolidated Amended Class Action Complaint in the
United States District Court, Northern District of Texas, Dallas Division,
against a number of broker-dealers, including NSC, and against a number such
broker-dealers’ parent companies, including NHC, in connection with a series of
offerings for oil and gas investments.  Each member of the class
asserts claims against NSC for breach of fiduciary duty and for violations of §
33(A)(2) of the Texas Securities Act.  Each member seeks to hold NHC
liable for NSC’s conduct as a control person under § 33(F)(1) of the Texas
Securities Act.  The class members seek compensatory damages,
rescission or a recessionary measure of damages, pre-judgment interest, costs
and expenses, including attorneys’ fees, all in undisclosed
amounts.
 
 In
December 2009, claimants Lorna Chen, Terry Darden, John Davis, Barbara Farace,
David Kravetz, Janice Miyashiro and Vip Miyashiro commenced an arbitration
against NSC before FINRA Dispute Resolution.  Claimants assert claims
against NSC for negligence, negligent misrepresentation and omission, breach of
fiduciary duty, breach of contract, violation of New Jersey’s Uniform Securities
Law, violation of the Texas Securities Act, violation of California Corporate
Securities Laws, violation of the Securities Act of Washington
 
 In total,
Claimants seeks compensatory damages of $525,000 from NSC in connection with the
Provident Royalties investments, and Mr. Davis seeks compensatory damages of
$207,000 from NSC in connection with his Medical Capital
investments.  Claimants further seek rescission, prejudgment interest,
punitive damages, costs pursuant to New Jersey’s Uniform Securities Law, and
costs and attorneys’ fees pursuant to the Texas Securities Act and the
Securities Act of Washington, all in undisclosed amounts.
 
 F-24
 The
Company has not yet conducted discovery into the allegations or potential
defenses related to the Provident claims and it appears that each of the
claimants in the FINRA Dispute Resolution may be a contemplated member of the
above-discussed class action involving Provident Royalties, and that Mr. Davis
may also be a contemplated member of the above-discussed class action with
respect to his investments in Medical Capital IV, Medical Capital V and Medical
Capital VI.  The Company intends to defend itself vigorously in this
action and believes that the eventual outcome of this matter will not have a
materially adverse effect on the Company.  However, the ultimate
outcome of this matter cannot be determined at this time.
  In early
2009, Vincent Falco commenced a FINRA arbitration against National Securities
and two of its employees.   Claimant alleges that National
Securities and the registered representatives purchased unsuitable securities,
failed to follow instructions regarding the use of margin, made
misrepresentations of material fact and/or omitted material facts in connection
with the purchase of securities, managed the account negligently, breached their
contract with Mr. Falco, breached fiduciaries duties owed to him, and violated
FINRA Conduct Rules.  Claimant further alleges that National
Securities negligently supervised Mr. Alves and is vicariously liable for his
conduct in tort, under a theory of respondeat superior.  Finally,
Claimant alleges violations of unidentified laws of the State of
Florida.  Claimant seeks compensatory damages from all respondents in
the amount of $3,000,000, punitive damages of $9,000,000, plus disgorgement of
fees, attorneys’ fees, forum fees, costs and interest, all in undisclosed
amounts.
 
 National
Securities timely filed a response to this claim and has begun but not yet
completed discovery into the allegations and potential defenses.  The
Company intends to defend itself vigorously in this action, which is set for
hearing in Florida on February 15-19, 2010.  The Company believes that
the eventual outcome of this matter will not have a materially adverse effect on
the Company.  However, the ultimate outcome of this matter cannot be
determined at this time.
 
 The
Company’s subsidiaries are defendants in various arbitrations and administrative
proceedings, lawsuits and claims together alleging damages in excess of
$12,091,000.   The Company estimates, to the extent that it can,
that based on discussions with legal counsel and prior experience, its aggregate
liability from these pending actions may be less than $602,000 (exclusive of
fees, costs and unspecified punitive damages related to certain claims and
inclusive of expected insurance coverage).  These matters arise in the
normal course of business. The Company intends to vigorously defend itself
in these actions, and based on discussions with counsel believes that the
eventual outcome of these matters will not have a material adverse effect on the
Company.  However, the ultimate outcome of these matters cannot be
determined at this time.  The amounts related to such matters that are
reasonably estimable and which have been accrued at September 30, 2009 and 2008,
is $203,000 and $587,000 (inclusive of legal fees and estimated claims),
respectively, and have been included in "Accounts Payable, Accrued Expenses and
Other Liabilities" in the accompanying consolidated statements of financial
condition. The Company has included in "Professional fees" litigation and
FINRA related expenses of $829,000 and $1,820,000 for the fiscal year 2009 and
2008, respectively.
 
 NOTE
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, 2009 and 2008 the Company
recognized a charge of $28,000, for each year 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-25
 During
the fiscal years ended September 30, 2009, 2007, 2006 and 2005, the Company’s
Board of Directors declared in-kind dividends in the aggregate of 5,407, 2,537,
1,996 and 2,143 shares of Series A preferred stock, in payment of approximately
$676,000, $317,000, $300,000 and $322,000, respectively, for dividends
accumulated through March 31 of each year.  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, 2009 and 2008, the amount of accumulated
dividends for the Company’s 42,957 and 37,550 issued and outstanding shares of
Series A preferred stock was approximately $194,000 and $506,000,
respectively.
 
 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, 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.
 
 In the
fiscal year ended September 30, 2009, the Company issued options to purchase
90,000 shares of common stock with a fair value of $56,000 and exercise prices
ranging from $0.64 to $0.70 cents per share.
 
 A summary
of the status of the Company’s stock options outstanding at September 30, 2009
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$0.64-$1.15
                  
                  
                  668,100
                  
                  
                  
                  1.82
                  
                  
                  
                  $1.05
                  
                  
                  
                  533,575
                  
                  
                  
                  $1.08$1.214-$1.50
                  
                  
                  2,090,940
                  
                  
                  
                  1.51
                  
                  
                  
                  $1.39
                  
                  
                  
                  1,681,020
                  
                  
                  
                  $1.37$1.55-$2.57
                  
                  
                  3,153,125
                  
                  
                  
                  4.63
                  
                  
                  
                  $1.76
                  
                  
                  
                  1,780,829
                  
                  
                  
                  $1.775,912,165
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,995,424
 
 
 F-26
  Weighted
                  
                  
                  AggregateAverage
      Price
                  
                  
                  IntrinsicOutstanding
                  
                  
                  Per
      Share
                  
                  
                  ValueBalance,
      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
                  
                  
                  $
                  -Granted
                  
                  
                  90,000
                  
                  
                  
                  $0.67Exercised
                  
                  
                  -
                  
                  
                  
                  $-Forfeitures
                  
                  
                  (1,065,475
                  )
                  
                  
                  $1.67Balance,
      September 30, 2009
                  
                  
                  5,912,165
                  
                  
                  
                  $1.55
                  
                  
                  $
                  2,500
 
 As of
September 30, 2009, the aggregate intrinsic value of the Company’s outstanding
and exercisable options was $2,500.
 
 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 September 2009, in
exchange for forbearance of the amounts due under the terms of this note,
187,500 of these warrants were re-priced to an exercise price of
$0.75.  The total incremental cost associated with the re-pricing of
these warrants was approximately $46,000.
 
 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.
 
 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 years ended September 30, 2008 and
2009.
 
 The
following tables summarize information about warrants outstanding at September
30, 2009.
 
 Shares
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  ExercisableOutstanding
      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
                  
                  
                  
                  1,979,374Granted
                  
                  
                  112,500
                  
                  
                  
                  $0.75Exercised
                  
                  
                  0
                  
                  
                  
                  $0Expired
                  
                  
                  (1,400
                  )
                  
                  
                  $16.071Outstanding
      at September 30, 2009
                  
                  
                  2,090,474
                  
                  
                  
                  $1.27
                  
                  
                  
                  2,090,474
 
 F-27
 
 Warrants
      Outstanding and ExercisableExercise
      Prices
                  
                  Number
      Outstanding
                  
                  
                  Weighted
      Average Remaining Contractual Life
                  
                  Weighted
      Average Exercise Prices$0.75
                  
                  
                  362,500
                  
                  
                  
                  3.19
                  
                  $0.75$0.79
                  
                  
                  364,224
                  
                  
                  
                  .0.09
                  
                  $0.79$1.00
                  
                  
                  300,000
                  
                  
                  
                  1.28
                  
                  $1.00$1.25
                  
                  
                  618,750
                  
                  
                  
                  3.04
                  
                  $1.25$2.00
                  
                  
                  375,000
                  
                  
                  
                  3.50
                  
                  $2.00$2.14
                  
                  
                  14,000
                  
                  
                  
                  0.39
                  
                  $2.14$4.46
                  
                  
                  56,000
                  
                  
                  
                  1.88
                  
                  $4.462,090,474
 
 As of
September 30, 2009, the aggregate intrinsic value of the Company’s outstanding
and exercisable warrants was $0.
 
 NOTE
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, 2009, the
Company had net capital of approximately $489,000 which exceeded its requirement
by approximately $239,000
 
 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, 2009, vFinance Investments had net capital of approximately
$1,295,000 which was approximately $295,000 in excess of its required net
capital of $1,000,000 and its percentage of aggregate indebtedness to net
capital was 614%.  At September 30, 2009, EquityStation had net
capital of approximately $186,000 which was approximately $86,000 in excess of
its required net capital of $100,000 and its percentage of aggregate
indebtedness to net capital was 297%.  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.
 
 NOTE
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, 2009 and 2008, 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-28
  NOTE
22. UNAUDITED QUARTERLY DATA
 
 Selected
Quarterly Financial Data (Dollars in thousands, except per share
data)
 
 December
      31, 2007
                  
                  
                  March
      31, 2008
                  
                  
                  June
      30, 2008
                  
                  
                  September
      30, 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
                  )
 
 December
      31, 2008
                  
                  
                  March
      31, 2009
                  
                  
                  June
      30, 2009
                  
                  
                  September
      30, 2009Revenues
                  
                  $
                  27,852
                  
                  
                  $
                  24,586
                  
                  
                  $
                  33,530
                  
                  
                  $
                  30,622Net
      loss
                  
                  $
                  (1,142
                  )
                  
                  $
                  (1,927
                  )
                  
                  $
                  (868
                  )
                  
                  $
                  (2,495
                  )Preferred
      stock dividends
                  
                  
                  (85
                  )
                  
                  
                  (83
                  )
                  
                  
                  (96
                  )
                  
                  
                  (98
                  )Net
      loss attributable  to common stockholders
                  
                  $
                  (1,227
                  )
                  
                  $
                  (2,010
                  )
                  
                  $
                  (964
                  )
                  
                  $
                  (2,593
                  )Loss
      per common share - Basic
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.16
                  )Loss
      per common share - Diluted
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.16
                  )
 
 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-29