Document:

THE
      SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNLESS (I) SUCH SECURITIES
      HAVE BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS
      AMENDED, (II) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144, OR (III) THE
      COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT
      SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES
      ACT
      OF 1933 OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES
      LAWS.

     

    10%
      SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE

     

    
      	
              US
                $3,000,000.00

            	
              March
                31, 2008

            

    

     

    FOR
      VALUE
      RECEIVED, National Holdings Corporation, a Delaware corporation (the
“Company”),
      hereby unconditionally promises to pay to the order of St. Cloud Capital
      Partners II, L.P. (the “Holder”),
      having an address at 10866 Wilshire Boulevard, Suite 1450, Los Angeles, CA
      90024, at such address or at such other place as may be designated in writing
      by
      the Holder, or its assigns, the aggregate principal sum of THREE MILLION AND
      00/100 UNITED STATES DOLLARS ($3,000,000.00) (the “Principal
      Amount”),
      together with interest on the unpaid principal balance of this Note outstanding
      at a rate equal to ten (10.0%) percent (computed on the basis of the actual
      number of days elapsed in a 365-day year) per annum and continuing on the
      outstanding principal until this 10% Senior Subordinated Convertible Promissory
      Note (the “Note”)
      is
      converted into Common Stock as provided herein or indefeasibly and irrevocably
      paid in full by the Company. Such interest shall
      be
      payable quarterly in arrears on the last day of March, June, September and
      December in each year.
      Subject
      to the other provisions of this Note, the Principal Amount of this Note and
      all
      accrued and unpaid interest hereon shall mature and become due and payable
      on
      the fourth (4th)
      anniversary of the date hereof (the “Stated
      Maturity Date”).
      Except as provided herein, all payments of principal and interest by the Company
      under this Note shall be made in United States dollars in immediately available
      funds to an account specified by the Holder.

     

    1. Definitions.
      Unless
      the context otherwise requires, when used herein the following terms shall
      have
      the meaning indicated:

     

    “Board”
shall
      mean the Board of Directors of the Company.

     

    “Business
      Day”
other
      than a Saturday, Sunday or holiday, on which banks in New York City are open
      for
      the general transaction of business.

     

    “Change
      of Control”
shall
      mean (i) any transaction or series of related transactions (including any
      reorganization, merger or consolidation) that results in the transfer of 50%
      or
      more of the outstanding voting power of the Company, or (ii) a sale of all
      or
      substantially all of the assets of the Company to another person, but shall
      not
      include the Company’s proposed merger with vFinance, Inc.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    “Company
      Mandated Conversion”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Company
      Mandated Conversion Date”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Company
      Mandated Conversion Notice”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Common
      Stock”
shall
      mean the common stock, par value $0.02 per share, of the Company.

     

    “Company”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Conversion
      Price”
shall
      mean initially $2.00 per share, subject to adjustment as provided in Section
      6. 

     

    “Exchange
      Act”
shall
      mean the Securities Exchange Act of 1934, as amended.

     

    “Event
      of Default”
shall
      have the meaning ascribed to such term in Section 7 herein.

     

    “First
      Tranche CMC”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Holder”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Investor”
shall
      have the meaning ascribed to such term in the Purchase Agreement.

     

    “Market
      Price”
as
      of a
      particular date (the “Valuation Date”) shall mean the following: (a) if the
      Common Stock is then listed on a national stock exchange, the closing sale
      price
      of the Common Stock on such exchange on the last Trading Day prior to the
      Valuation Date, provided that if such security has not traded in the prior
      ten
      (10) trading sessions, the Market Price shall be the average closing bid price
      of such security in the most recent ten (10) trading sessions during which
      such
      security has traded; (b) if the Common Stock is then quoted on The Nasdaq Stock
      Market, Inc. (“Nasdaq”), the OTC Bulletin Board (the “Bulletin Board”) or such
      similar exchange or association, the closing sale price of the of Common Stock
      on Nasdaq, the Bulletin Board or such other exchange or association on the
      last
      Trading Day prior to the Valuation Date, provided that if such security has
      not
      traded in the prior ten (10) trading sessions, the Market Price shall be the
      average closing price of one share of such security in the most recent ten
      (10)
      trading sessions during which such security has traded; or (c) if the Common
      Stock is not then listed on a national stock exchange or quoted on Nasdaq,
      the
      Bulletin Board or such other exchange or association, the fair market value
      of
      the Common Stock as of the Valuation Date, shall be determined in good faith
      by
      the Board of Directors of the Company. If the Common Stock is not then listed
      on
      a national securities exchange, the Bulletin Board or such other exchange or
      association, the Board of Directors of the Company shall respond promptly,
      in
      writing, to an inquiry by the Holder as to the fair market value of a share
      of
      Common Stock as determined by the Board of Directors of the Company.

    
      
        
        

      

      
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    “Material
      Adverse Effect”
shall
      have the meaning ascribed to such term in the Purchase Agreement.

     

    “Note”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Optional
      Conversion”
shall
      have the meaning ascribed to such term in Section 5(a) hereof.

     

    “Optional
      Conversion Notice”
shall
      have the meaning ascribed to such term in Section 5(a) hereof.

     

    “Options”
shall
      have the meaning ascribed to such term in Section 6 hereof.

     

    “Other
      Senior Debt”
shall
      have the meaning ascribed to such term in Section 3 hereof.

     

    “Person”
means
      an individual, corporation, partnership, limited liability company, trust,
      business trust, association, joint stock company, joint venture, sole
      proprietorship, unincorporated organization, governmental authority or any
      other
      form of entity not specifically listed herein.

     

    “Prepayment
      Notice”
shall
      have the meaning ascribed to such term in Section 7 hereof.

     

    “Purchase
      Agreement”
shall
      mean the Securities Purchase Agreement, dated as of March 31, 2008, and as
      that
      agreement may be amended from time to time, by and among the Company and the
      Investor.

     

    “Registration
      Rights Agreement”
shall
      mean the Registration Rights Agreement, dated as of March 31, 2008, and as
      that
      agreement may be amended from time to time, by and among the Company and the
      Investor.

     

    “Second
      Tranche CMC”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Senior”
shall
      have the meaning ascribed to such term in Section 3 hereof.

     

    “Stated
      Maturity Date”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Subsidiary”
of
      any
      Person means another Person, an amount of the voting securities, other voting
      ownership or voting partnership interests of which is sufficient to elect at
      least a majority of its Board of Directors or other governing body (or, if
      there
      are no such voting interests, 50% or more of the equity interests of which)
      is
      owned directly or indirectly by such first Person.

     

    “Third
      Tranche CMC”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Trading
      Day”
means
      (i) if the relevant stock or security is listed or admitted for trading on
      The
      New York Stock Exchange, Inc. or any other national securities exchange, a
      day
      on which such exchange is open for business; (ii) if the relevant stock or
      security is quoted on Nasdaq, the Bulletin Board or any other system of
      automated dissemination of quotations of securities prices, a day on which
      trades may be effected through such system; or (iii) if the relevant stock
      or
      security is not listed or admitted for trading on any national securities
      exchange or
      quoted
      on the Nasdaq Stock Market or any other system of automated dissemination of
      quotation of securities prices, a day on which the relevant stock or security
      is
      traded in a regular way in the over-the-counter market and for which a closing
      bid and a closing asked price for such stock or security are
      available.

     

    
      
        
        

      

      
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    “Transaction
      Documents”
shall
      have the meaning ascribed to such term in the Purchase Agreement.

     

    2. Purchase
      Agreement.
      This
      Note is subject to the terms and conditions of, and entitled to the benefit
      of,
      the provisions of the Purchase Agreement. This Note is transferable and
      assignable to any person to whom such transfer is permissible under the Purchase
      Agreement and applicable law. The Company agrees to issue from time to time
      a
      replacement Note in the form hereof to facilitate such transfers and
      assignments. In addition, after delivery of an indemnity in form and substance
      reasonably satisfactory to the Company, the Company also agrees to promptly
      issue a replacement Note if this Note is lost, stolen, mutilated or
      destroyed.

     

    3. Ranking.
      The
      indebtedness evidenced by this Note and the payment of the Principal Amount
      and
      interest thereof shall be Senior (as hereinafter defined) to, and have priority
      in right of payment over, all indebtedness for borrowed money of the Company,
      except for Other Senior Debt (as hereinafter defined). “Senior”
shall
      be deemed to mean that, in the event of any default in the payment of the
      obligations represented by this Note or of any liquidation, insolvency,
      bankruptcy, reorganization, or similar proceedings relating to the Company,
      all
      sums payable on this Note, shall first be paid in full, with interest, if any,
      before any payment is made upon any other indebtedness, except for Other Senior
      Debt, and, in any such event, any payment or distribution of any character
      which
      shall be made in respect of any other indebtedness of the Company, except for
      Other Senior Debt, shall be paid over to the holder of this Note for application
      to the payment hereof, unless and until the obligations under this Note (which
      shall mean the Principal Amount and other obligations arising out of, premium,
      if any, interest on, and any costs and expenses payable under, this Note) shall
      have been paid and satisfied in full. “Other
      Senior Debt”
shall
      be deemed to mean (i) those certain notes, in the aggregate principal amount
      of
      One Million ($1,000,000) Dollars dated February 22, 2007 issued to each of
      St.
      Cloud Capital Partners, L.P. ($250,000), Bedford Oaks Partners, L.P. ($250,000)
      and Christopher C. Dewey ($500,000), which shall rank pari
      passu with
      this
      Note and (ii) up to $1,000,000 of other senior indebtedness that may be incurred
      by the Company after the date hereof, some or all of which shall rank either
      pari
      passu with,
      or
      senior to, this
      Note.

     

    4. Right
      of Redemption.
      At the
      option of the Company, which may be exercised upon ten (10) business days notice
      to the Holder (“Notice
      of Redemption”)
      at any
      time or from time to time commencing March 31, 2009, this Note may be redeemed
      in whole or in part at redemption prices as follows: (i) 125% of the Principal
      Amount of this Note plus accrued and unpaid interest through the date of
      redemption if the Notice of Redemption is delivered between March 31, 2009
      and
      March 31, 2010, (ii) 145% of the Principal Amount of this Note plus accrued
      and
      unpaid interest through the date of redemption if the Notice of Redemption
      is
      delivered between March 31, 2010 and March 31, 2011, (iii) 165% of the Principal
      Amount of this Note plus accrued and unpaid interest through the date of
      redemption if the Notice of Redemption is delivered between March 31, 2011
      and
      March 31, 2012. Within five (5) business days following the full payment of
      the
      redemption price, the Holder shall deliver to the Company the
      Note
      so redeemed. Holder shall do all further acts and things and execute all further
      documents reasonably required in the circumstances to effect the provisions
      of
      this Section 4. 

    
       

      
        
          
          

        

        
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    5. Conversion
      Rights.

    

    (a) Optional
      Conversion.

     

    (i) Subject
      to and upon compliance with the provisions of this Note, the Holder shall have
      the right, at its option at any time prior to the Stated Maturity Date, to
      convert some or all of the Note into such number of fully paid and nonassessable
      shares of Common Stock as is obtained by: (a) adding (i) the Principal Amount
      to
      be converted and (ii) the amount of any accrued but unpaid interest with respect
      to such portion of this Note to be converted; and (b) dividing the result
      obtained pursuant to clause (a) above by the Conversion Price then in effect.
      The rights of conversion set forth in this Section 5 shall be exercised by
      the
      Holder by completing and executing the notice of conversion attached to this
      Note as Exhibit
      A (“Optional
      Conversion Notice”)
      and by
      surrender of this Note (or, in lieu thereof, by delivery of an appropriate
      lost
      security affidavit in the event this Note shall have been lost or destroyed)
      to
      the Company at its principal office (or such other office or agency of the
      Company as the Company may designate by notice in writing to the Holder),
      together with a statement of the name or names (with address) in which the
      certificate or certificates for shares of Common Stock shall be
      issued.

     

    (ii) Promptly
      after receipt of the Optional Conversion Notice and surrender of this Note,
      the
      Company shall issue and deliver, or cause to be issued and delivered, to the
      Holder, registered in such name or names as the Holder may direct in writing,
      a
      certificate or certificates for the number of whole shares of Common Stock
      issuable upon the conversion of such portion of this Note. Such conversion
      shall
      be deemed to have been effected, and the Conversion Price shall be determined,
      as of the close of business on the date on which Optional Conversion Notice
      shall have been received by the Company and this Note shall have been
      surrendered as aforesaid, and at such time, the rights of the Holder shall
      cease
      with respect to the Principal Amount and accrued interest being converted,
      and
      the Person or Persons in whose name or names any certificate or certificates
      for
      shares of Common Stock shall be issuable upon such conversion shall be deemed
      to
      have become the holder or holders of record of the shares represented
      thereby.

     

    (iii) No
      fractional shares shall be issued upon any Optional Conversion of this Note
      into
      Common Stock. If any fractional share of Common Stock would, except for the
      provisions of the first sentence of this Section 5(a)(iii), be delivered upon
      such conversion, the Company, in lieu of delivering such fractional share,
      shall
      pay to the Holder an amount in cash equal to the Market Price of such fractional
      share of Common Stock. In case the Principal Amount exceeds the Principal Amount
      being converted as set forth in the Optional Conversion Notice, the Company
      shall, upon such conversion, execute and deliver to the Holder, at the expense
      of the Company, a new Note for the Principal Amount surrendered which is not
      to
      be converted.

    
      
        
        

      

      
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    (b) Company
      Mandated Conversion.

     

    (i) At
      the
      option of the Company, this Note shall be convertible (“Company
      Mandated Conversion”)
      into
      such number of fully paid and nonassessable shares of Common Stock as is
      obtained by: (a) adding (i) the applicable percentage (referenced below) of
      outstanding Principal Amount and (ii) the amount of any accrued but unpaid
      interest on such Principal Amount; and (b) dividing the result obtained pursuant
      to clause (a) above by the Conversion Price then in effect, provided, however,
      that
      the Company may only effect a Company Mandated Conversion commencing March
      31,
      2009 and
      provided further that the
      following conditions are satisfied: 

     

    (A)
      If
      the Company Mandated Conversion Notice (as defined below) is delivered between
      March 31, 2009 and March 31, 2012, thirty-three (33%) percent of the outstanding
      Principal Amount plus any accrued but unpaid interest shall be subject to
      Company Mandated Conversion (“First
      Tranche CMC”)
      if (i)
      the closing price of the Common Stock on the principal exchange or market on
      which it is then traded has equaled or exceeded 150% of the Conversion Price
      for
      the twenty two (22) consecutive Trading Days immediately prior to the Company
      Mandated Conversion Notice and (ii) the average daily trading volume during
      such
      trading period equals or exceeds 50,000 shares; 

     

    (B)
      If
      the Company Mandated Conversion Notice is delivered between March 31, 2010
      and
      March 31, 2012, thirty-three (33%) percent of the initial outstanding Principal
      Amount plus any accrued but unpaid interest shall be subject to Company Mandated
      Conversion (“Second
      Tranche CMC”)
      if (i)
      the closing price of the Common Stock on the principal exchange or market on
      which it is then traded has equaled or exceeded 200% of the Conversion Price
      for
      the twenty (20) consecutive Trading Days immediately prior to the Company
      Mandated Conversion Notice and (ii) the average daily trading volume during
      such
      trading period equals or exceeds 40,000 shares; 

     

    (C)
      If
      the Company Mandated Conversion Notice is delivered between March 31, 2011
      and
      March 31, 2012, thirty-four (34%) percent of the initial outstanding Principal
      Amount plus any accrued but unpaid interest shall be subject to Company Mandated
      Conversion (“Third
      Tranche CMC”)
      if (i)
      the closing price of the Common Stock on the principal exchange or market on
      which it is then traded has equaled or exceeded 250% of the Conversion Price
      for
      the twenty (20) consecutive Trading Days immediately prior to the Company
      Mandated Conversion Notice and (ii) the average daily trading volume during
      such
      trading period equals or exceeds 35,000 shares.

     

    Notwithstanding
      the foregoing, the Company may not effectuate a Second Tranche CMC during the
      applicable period if the First Tranche CMC had not been previously consummated
      and, similarly, may not effectuate a Third Tranche CMC during the applicable
      period if the First Tranche CMC and Second Tranche CMC had not been previously
      consummated. 

    

    (ii)
      The
      Company shall provide written notice of the Company Mandated Conversion within
      five (5) business days following the satisfaction of the applicable conditions
      (“Company
      Mandated Conversion Notice”).
      The
      Company Mandated Conversion Notice shall include the effective date of the
      Company Mandated Conversion (“Company
      Mandated Conversion
      Date”).
      Promptly after the Company Mandated Conversion Date, the Holder of this Note
      shall deliver this Note (or, in lieu thereof, an appropriate lost security
      affidavit in the event this Note shall have been lost or destroyed) to the
      Company at its principal office (or such other office or agency of the Company
      as the Company may designate by notice in writing to the Holder), together
      with
      a statement of the name or names (with address) in which the certificate or
      certificates for shares of Common Stock shall be issued. Promptly following
      the
      surrender of this Note as aforesaid, the Company shall issue and deliver, or
      cause to be issued and delivered, to the Holder, registered in such name or
      names as the Holder may direct in writing, a certificate or certificates for
      the
      number of whole shares of Common Stock issuable upon the conversion of this
      Note. Such conversion shall be deemed to have been effected (irrespective of
      Holder’s cooperation with respect to the foregoing) as of the close of business
      on the Company Mandated Conversion Date, and at such time, the rights of the
      Holder shall cease with respect to the Note being converted, and the Person
      or
      Persons in whose name or names any certificate or certificates for shares of
      Common Stock shall be issuable upon such conversion shall be deemed to have
      become the holder or holders of record of the shares represented thereby. No
      fractional shares shall be issued upon any Company Mandated Conversion of this
      Note into Common Stock. The Company, in lieu of delivering such fractional
      share, shall pay to the Holder an amount in cash equal to the Market Price
      of
      such fractional share of Common Stock.

    

    
      
        
        

      

      
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    6. Adjustment
      to Conversion Price.

    

    (a) If
      the
      Company shall, at any time or from time to time while existing obligations
      under
      the Note remain outstanding, pay a dividend or make a distribution on its Common
      Stock in shares of Common Stock, subdivide its outstanding shares of Common
      Stock into a greater number of shares or combine its outstanding shares of
      Common Stock into a smaller number of shares or issue by reclassification of
      its
      outstanding shares of Common Stock any shares of its capital stock (including
      any such reclassification in connection with a consolidation or merger in which
      the Company is the continuing corporation), then the Conversion Price in effect
      immediately prior to the date upon which such change shall become effective,
      shall be adjusted by the Company so that the Holder thereafter converting this
      Note shall be entitled to receive the number of shares of Common Stock or other
      capital stock which the Holder would have received if the Note had been
      converted immediately prior to such event upon payment of a Conversion Price
      that has been adjusted to reflect a fair allocation of the economics of such
      event to the Holder, without regard to any conversion limitation specified
      in
      this Section 6. Such adjustments shall be made successively whenever any event
      listed above shall occur.

     

    (b) If
      any
      capital reorganization, reclassification of the capital stock of the Company,
      consolidation or merger of the Company with another corporation in which the
      Company is not the survivor, or sale, transfer or other disposition of all
      or
      substantially all of the Company’s assets to another corporation shall be
      effected, then, as a condition of such reorganization, reclassification,
      consolidation, merger, sale, transfer or other disposition, lawful and adequate
      provision shall be made whereby the Holder shall thereafter have the right
      to
      purchase and receive upon the basis and upon the terms and conditions herein
      specified and in lieu of the shares of Common Stock immediately theretofore
      issuable upon conversion of this Note, without regard to any conversion
      limitation specified in Section 6, such shares of stock, securities
      or assets as would have been issuable or payable with respect to or in exchange
      for a number of shares of Common Stock equal to the number of shares of Common
      Stock immediately theretofore issuable upon conversion of this Note, had such
      reorganization, reclassification, consolidation, merger, sale, transfer or
      other
      disposition not taken place, without regard to any conversion limitation
      specified in Section 6, and in any such case appropriate provision shall be
      made
      with respect to the rights and interests of the Holder to the end that the
      provisions hereof (including, without limitation, provision for adjustment
      of
      the Conversion Price) shall thereafter be applicable, as nearly equivalent
      as
      may be practicable in relation to any shares of stock, securities or assets
      thereafter deliverable upon the conversion hereof. The Company shall not effect
      any such consolidation, merger, sale, transfer or other disposition unless
      prior
      to or simultaneously with the consummation thereof the successor corporation
      (if
      other than the Company) resulting from such consolidation or merger, or the
      corporation purchasing or otherwise acquiring such assets or other appropriate
      corporation or entity shall assume the obligation to deliver to the Holder,
      at
      the last address of the Holder appearing on the books of the Company, such
      shares of stock, securities or assets as, in accordance with the foregoing
      provisions, the Holder may be entitled to purchase, without regard to any
      conversion limitation specified in Section 6, and the other obligations under
      this Note. The provisions of this Section 6(b) shall similarly apply to
      successive reorganizations, reclassifications, consolidations, mergers, sales,
      transfers or other dispositions.

    
       

      
        
          
          

        

        
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    (c) In
      case
      the Company shall fix a payment date for the making of a distribution to all
      holders of Common Stock (including any such distribution made in connection
      with
      a consolidation or merger in which the Company is the continuing corporation)
      of
      evidences of indebtedness or assets (other than cash dividends or cash
      distributions payable out of consolidated earnings or earned surplus or
      dividends or distributions referred to in Section 6(a)), or subscription rights
      or warrants, the Conversion Price to be in effect after such payment date shall
      be determined by multiplying the Conversion Price in effect immediately prior
      to
      such payment date by a fraction, the numerator of which shall be the total
      number of shares of Common Stock outstanding multiplied by the Market Price
      of
      Common Stock immediately prior to such payment date, less the fair market value
      (as determined by the Board of Directors in good faith) of said assets or
      evidences of indebtedness so distributed, or of such subscription rights or
      Notes, and the denominator of which shall be the total number of shares of
      Common Stock outstanding multiplied by such Market Price immediately prior
      to
      such payment date. Such adjustment shall be made successively whenever such
      a
      payment date is fixed.

     

    (d) An
      adjustment to the Conversion Price shall become effective immediately after
      the
      payment date in the case of each dividend or distribution and immediately after
      the effective date of each other event which requires an
      adjustment.

     

    (e) In
      the
      event that, as a result of an adjustment made pursuant to this Section 6, the
      Holder shall become entitled to receive any shares of capital stock of the
      Company other than shares of Common Stock, the number of such other shares
      so
      receivable upon conversion of this Note shall be subject thereafter to
      adjustment from time to time in a manner and on terms as nearly equivalent
      as
      practicable to the provisions contained in this Note.

    
      
        
        

      

      
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    (f) In
      case
      at any time:

     

    (i) the
      Company shall declare any dividend upon its Common Stock payable in stock or
      make any other distribution to the holders of its Common Stock;

     

    (ii) the
      Company shall offer for subscription pro rata
      to the
      holders of its Common Stock any additional shares of Common Stock;
      or

     

    (iii) there
      shall be any capital reorganization or reclassification of the capital stock
      of
      the Company, any acquisition or a liquidation, dissolution or winding up of
      the
      Company;

     

    then,
      in
      any one or more of said cases, the Company shall give, by delivery in person
      or
      by certified or registered mail, return receipt requested, addressed to the
      Holder at the address of such Holder as shown on the books of the Company,
      (a)
      at least twenty (20) Business Days’ prior written notice of the date on which
      the books of the Company shall close or a record shall be taken for such
      dividend, distribution or subscription rights or for determining rights to
      vote
      in respect of any event set forth in clause (iii) of this Section 6(f) and
      (b)
      in the case of any event set forth in clause (iii) of this Section 6(f), at
      least twenty (20) Business Days’ prior written notice of the date when the same
      shall take place. Such notice in accordance with the foregoing clause (a) shall
      also specify, in the case of any such dividend, distribution or subscription
      rights, the date on which the holders of Common Stock or such other class or
      series of capital stock shall be entitled thereto and such notice in accordance
      with the foregoing clause (b) shall also specify the date on which the holders
      of Common Stock and such other series or class of capital stock shall be
      entitled to exchange their Common Stock and other stock for securities or other
      property deliverable upon consummation of the applicable event set forth in
      clause (iii) of this Section 6(f).

     

    (g) Upon
      any
      adjustment of the Conversion Price, then and in each such case the Company
      shall
      give prompt written notice thereof, by delivery in person or by certified or
      registered mail, return receipt requested, addressed to the Holder at the
      address of such Holder as shown on the books of the Company, which notice shall
      state the Conversion Price resulting from such adjustment and setting forth
      in
      reasonable detail the method upon which such calculation is based.

     

    (h) The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock, solely for the purpose of issuance upon conversion of this Note
      as
      herein provided, such number of shares of Common Stock as shall then be issuable
      upon the conversion of this Note. The Company covenants that all shares of
      Common Stock which shall be so issued shall be duly and validly issued and
      fully
      paid and nonassessable, and free from all taxes, liens and charges with respect
      to the issue thereof, and, without limiting the generality of the foregoing,
      and
      that the Company will from time to time take all such action as may be requisite
      to assure that the par value per share of the Common Stock is at all times
      equal
      to or less than the Conversion Price in effect at the time. The Company shall
      not take any action which results in any adjustment of the Conversion Price
      if
      the total number of shares of Common Stock issued and issuable after such action
      upon conversion of this Note would exceed the total number
      of
      shares of Common Stock then authorized by the Company’s Certificate of
      Incorporation.

    
       

      
        
          
          

        

        
          -
            9
            -

          
            

          

        

        
          
          

        

      

       

    

    (i) The
      issuance of certificates for shares of Common Stock upon conversion of this
      Note
      shall be made without charge to the holders thereof for any issuance tax in
      respect thereof, provided that the Company shall not be required to pay any
      tax
      which may be payable in respect of any transfer involved in the issuance and
      delivery of any certificate in a name other than that of the
      Holder.

     

    (j) The
      Company will not at any time close its transfer books against the transfer,
      as
      applicable, of this Note or of any shares of Common Stock issued or issuable
      upon the conversion of this Note in any manner which interferes with the timely
      conversion of this Note, except as may otherwise be required to comply with
      applicable securities laws.

     

    7. Prepayment.
      

    

    (a) Upon
      the
      occurrence of a Change of Control, this Note shall be automatically due and
      payable. In the event of a Change of Control or any prepayment, whether partial
      or in full, the Company will give the Lender not less than fifteen (15) calendar
      days prior written notice, and during such fifteen (15) day period, Lender
      shall
      be entitled to exercise its optional conversion feature.
      

    

    (b) Upon
      the
      death of Mark Goldwasser, the Company’s President and Chief Executive Officer,
      or his removal from his position without the consent of Lender, the Holder
      shall
      have the right to demand immediate prepayment of this Note by delivering a
      written notice to the Company (“Prepayment Notice”) within thirty (30) days of
      its receipt of written notice of such death or removal from office. The Company
      shall have 120 days from the date of the Company’s receipt of the Prepayment
      Notice to make full prepayment of this Note.

    

    8. Event
      of Default.
      The
      occurrence of any of following events shall constitute an “Event
      of Default”
      hereunder:

    

    (a) the
      failure by the Company to perform or observe in any material respect any
      material covenant or agreement of the Company contained in the Purchase
      Agreement, which remains uncured for a period of five (5) business days from
      the
      date the Company is notified in writing of such default; or

     

    (b) any
      representation or warranty made by the Company under any of the Transaction
      Documents was, when made, untrue or misleading, the result of which is
      reasonably likely to have a Material Adverse Effect;

     

    (c) the
      failure of the Company to make any payment of principal or interest on this
      Note
      when due, whether at maturity, upon acceleration or otherwise and the
      continuation of such failure for a period of five (5) business days following
      written notice;

     

    (d) there
      shall have occurred an acceleration of the stated maturity of any indebtedness
      for borrowed money of the Company (other than the Note) of One Hundred
Thousand
      United States Dollars ($100,000) or
      more
      in aggregate principal amount (which acceleration is not rescinded, annulled
      or
      otherwise cured within fifteen (15) business days of receipt by the Company
      of
      notice of such acceleration);

    
       

      
        
          
          

        

        
          -
            10
            -

          
            

          

        

        
          
          

        

      

       

    

    (e) the
      Company makes an assignment for the benefit of creditors or admits in writing
      its inability to pay its debts generally as they become due; or an order,
      judgment or decree is entered adjudicating the Company as bankrupt or insolvent;
      or any order for relief with respect to the Company is entered under the Federal
      Bankruptcy Code or any other bankruptcy or insolvency law; or the Company
      petitions or applies to any tribunal for the appointment of a custodian,
      trustee, receiver or liquidator of the Company or of any substantial part of
      the
      assets of the Company, or commences any proceeding relating to it under any
      bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
      dissolution or liquidation law of any jurisdiction; or any such petition or
      application is filed, or any such proceeding is commenced, against the Company
      and either (i) the Company by any act indicates its approval thereof, consents
      thereto or acquiescence therein or (ii) such petition application or proceeding
      is not dismissed within sixty (60) days; or 

     

    (f) a
      final,
      non-appealable judgment which, in the aggregate with other outstanding final
      judgments against the Company and its Subsidiaries, exceeds Two Hundred Thousand
      United States Dollars ($200,000) shall be rendered against the Company or a
      Subsidiary and within sixty (60) days after entry thereof, such judgment is
      not
      discharged or execution thereof stayed pending appeal, or within sixty (60)
      days
      after the expiration of such stay, such judgment is not discharged.

     

    Upon
      the
      occurrence of any such Event of Default all unpaid principal and accrued
      interest under this Note shall become immediately due and payable (A) upon
      election of the Holder, with respect to (a), (b), (c), (d) and (f), and (B)
      automatically, with respect to (e). Upon the occurrence of an Event of Default,
      the Holder shall have the right to exercise any other right, power or remedy
      as
      may be provided herein. Upon
      the
      occurrence of an Event of Default,
      the rate of interest on the unpaid principal shall be increased to fourteen
      percent (14%), or such lower rate that is the maximum rate allowed by law,
      from
      the date of such Event Default until such unpaid principal is repaid in
      full.

     

    9. Registration
      Rights.
      The
      Holder shall be entitled to the rights set forth under the Registration Rights
      Agreement to allow for the registration of the resale of the Common Stock
      issuable upon conversion of this Note under the Securities Act of 1933, as
      amended.

     

    10. No
      Waiver.
      No
      delay or omission on the part of the Holder in exercising any right under this
      Note shall operate as a waiver of such right or of any other right of the
      Holder, nor shall any delay, omission or waiver on any one occasion be deemed
      a
      bar to or waiver of the same or any other right on any future
      occasion.

     

    11. Amendments
      in Writing.
      None of
      the terms or provisions of this Note may be excluded, modified or amended except
      by a written instrument duly executed by the Holder and the Company expressly
      referring to this Note and setting forth the provision so excluded, modified
      or
      amended.

    
      
        
        

      

      
        -
          11
          -

        
          

        

      

      
        
        

      

    

    12. Waivers.
      The
      Company hereby forever waives presentment, demand, presentment for payment,
      protest, notice of protest, notice of dishonor of this Note and all other
      demands and notices in connection with the delivery, acceptance, performance
      and
      enforcement of this Note.

     

    13. Waiver
      of Jury Trial.
      THE
      COMPANY HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
      ARISING OUT OF OR BASED UPON THIS NOTE OR ANY CONTEMPLATED TRANSACTION,
      INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THE COMPANY
      HAS
      REVIEWED THIS WAIVER WITH ITS COUNSEL.

     

    14. Governing
      Law; Consent to Jurisdiction.
      This
      Note shall be governed by and construed under the law of the State of New York,
      without giving effect to the conflicts of law principles thereof. The Company
      and, by accepting this Note, the Holder, each irrevocably submits to the
      exclusive jurisdiction of the courts of the State of New York located in New
      York County and the United States District Court for the Southern District
      of
      New York for the purpose of any suit, action, proceeding or judgment relating
      to
      or arising out of this Note and the transactions contemplated hereby. Service
      of
      process in connection with any such suit, action or proceeding may be served
      on
      each party hereto anywhere in the world by the same methods as are specified
      for
      the giving of notices under this Note. The Company and, by accepting this Note,
      the Holder, each irrevocably consents to the jurisdiction of any such court
      in
      any such suit, action or proceeding and to the laying of venue in such court.
      The Company and, by accepting this Note, the Holder, each irrevocably waives
      any
      objection to the laying of venue of any such suit, action or proceeding brought
      in such courts and irrevocably waives any claim that any such suit, action
      or
      proceeding brought in any such court has been brought in an inconvenient
      forum.

     

    15. Costs.
      If
      action is instituted to collect on this Note, the Company promises to pay all
      costs and expenses, including reasonable attorney’s fees, incurred in connection
      with such action.

     

    16. Notices.
      All
      notices hereunder shall be given in writing and shall be deemed effectively
      given in accordance with the provisions of Section 10.4 of the Purchase
      Agreement.

     

    17. Successors
      and Assigns.
      This
      Note shall be binding upon the successors or assigns of the Company and shall
      inure to the benefit of the successors and assigns of the Holder.

     

    
      	
              NATIONAL HOLDINGS CORPORATION

            
	 	 
	
              By:

            	
              /S/
                MARK GOLDWASSER

            
	 	
              Mark
                Goldwasser 

            
	 	
              President and Chief Executive Officer

            

    

    
      
        
        

      

      
        -
          12
          -

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

     

    NOTICE
      OF
      CONVERSION

     

    OF

     

    10%
      SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE 

     

    TO: NATIONAL
      HOLDINGS CORPORATION 

     

    Pursuant
      to the 10% Senior Subordinated Convertible Promissory Note (the “Note”),
      attached hereto, dated March 31, 2008, issued by National Holdings Corporation,
      a Delaware corporation (the “Company”), to the undersigned (the “Holder”), the
      Holder hereby:

     

    Irrevocably
      elects to convert the principal and accrued interest under the Note into the
      Company’s Common Stock, in the amount of ________________ Dollars
      ($___________)(in the event no amount is specified, the entire principal and
      accrued interest outstanding under the Note shall be converted);

     

    Requests
      that a certificate for the Common Stock be issued in the name of undersigned,
      or, in the name and address of another person (the “Assignee”) are specified
      below provided, that, if the Conversion Shares are not covered by a registration
      statement effective under the Securities Act of 1933, the Assignee shall deliver
      a representation letter in form satisfactory to the Company:

     

    
      	
               

            
	
               

            
	
               

            
	
               

            

    

    

    (Name
      and
      address of person other than undersigned in 

    whose
      name Common Stock are to be registered).

    

    Requests
      that, if the entire principal and accrued interest outstanding is not hereby
      converted into Common Stock, a new Note of like tenor for the remaining
      outstanding balance be issued and delivered to the undersigned at the address
      stated below.

     

    
      	
              Dated:

            	
               

            	 	
               

            
	
            	 	 	
              Signature

            

    

     

    (This
      signature must conform in all respects to the name of the Holder as specified
      on
      the face of the Note.)

     

    
      	
               

            	 	
               

            
	
              Social
                Security Number

            	 	
              Printed
                Name

            

    

    

    
      	
              Address:

            	
               

            
	
               

            

    

     

    
      
        
        

      

      
        -
          13
          -SECURITIES
      PURCHASE AGREEMENT

    

    THIS
      SECURITIES PURCHASE AGREEMENT (“Agreement”) is made as of the 31st
      day of
      March, 2008 by and among National Holdings Corporation, a Delaware corporation
      (the “Company”), and St. Cloud Capital Partners II, L.P. (the
“Investor”).

    

    Recitals

    

    A. The
      Company and the Investor are executing and delivering this Agreement in reliance
      upon the exemption from securities registration afforded by the provisions
      of
      Regulation D (“Regulation D”), as promulgated by the U.S. Securities and
      Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended;
      and

    

    B. The
      Investor wishes to purchase from the Company, and the Company wishes to sell
      and
      issue to the Investor, upon the terms and conditions stated in this Agreement,
      (i) a 10%
      senior
      subordinated convertible promissory Note in the principal amount of $3,000,000
      (the “Note”), in the form attached as Exhibit
      A hereto
      and (iii) a Warrant to purchase 375,000 shares
      of
      the Company’s common stock, par value $0.02 per share (together with any
      securities into which the common stock may be reclassified, the “Common Stock”)
      at an exercise price equal to $2.50 per share (subject to adjustment) in the
      form attached hereto as Exhibit
      B
      (the
“Warrant”); and

    

    C. Contemporaneous
      with the sale of the Note and Warrant, the parties hereto will execute and
      deliver a Registration Rights Agreement, in the form attached hereto as
Exhibit
      C
      (the
“Registration Rights Agreement”), pursuant to which the Company will agree to
      provide certain registration rights under the Securities Act of 1933, as
      amended, and the rules and regulations promulgated thereunder, and applicable
      state securities laws.

    

    In
      consideration of the mutual promises made herein and for other good and valuable
      consideration, the receipt and sufficiency of which are hereby acknowledged,
      the
      parties hereto agree as follows:

    

    1. Definitions.
      In
      addition to those terms defined above and elsewhere in this Agreement, for
      the
      purposes of this Agreement, the following terms shall have the meanings set
      forth below:

    

    “Affiliate”
means,
      with respect to any Person, any other Person which directly or indirectly
      through one or more intermediaries Controls, is controlled by, or is under
      common control with, such Person.

    

    “Business
      Day”
means
      a
      day, other than a Saturday, Sunday or holiday, on which banks in New York City
      are open for the general transaction of business.

     

    “Company’s
      Knowledge”
means
      the actual knowledge of the executive officers (as defined in Rule 405 under
      the
      1933 Act) of the Company, after due inquiry.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    “Control”
      (including the terms “controlling”, “controlled by” or “under common control
      with”) means the possession, direct or indirect, of the power to direct or cause
      the direction of the management and policies of a Person, whether through the
      ownership of voting securities, by contract or otherwise.

    

    “Conversion
      Shares”
means
      the shares of Common Stock issuable upon conversion of the Note.

    

    “Effective
      Date”
means
      the date on which the initial Registration Statement is declared effective
      by
      the SEC.

    

    “Effectiveness
      Deadline”
means
      the date on which the initial Registration Statement is required to be declared
      effective by the SEC under the terms of the Registration Rights
      Agreement.

    

    “Intellectual
      Property”
means
      all of the following: (i) patents, patent applications, patent disclosures
      and
      inventions (whether or not patentable and whether or not reduced to practice);
      (ii) trademarks, service marks, trade dress, trade names, corporate names,
      logos, slogans and Internet domain names, together with all goodwill associated
      with each of the foregoing; (iii) copyrights and copyrightable works; (iv)
      registrations, applications and renewals for any of the foregoing; and (v)
      proprietary computer software (including but not limited to data, data bases
      and
      documentation).

    

    “Material
      Adverse Effect”
means
      a
      material adverse effect on (i) the assets, liabilities, results of operations,
      condition (financial or otherwise), or business of the Company and its
      Subsidiaries taken as a whole, or (ii) the ability of the Company to perform
      its
      obligations under the Transaction Documents.

    

    “Note”
has
      the
      meaning set forth in the recitals. 

    

    “Person”
means
      an individual, corporation, partnership, limited liability company, trust,
      business trust, association, joint stock company, joint venture, sole
      proprietorship, unincorporated organization, governmental authority or any
      other
      form of entity not specifically listed herein.

     

    “Purchase
      Price”
means
      Three Million Dollars ($3,000,000.00).

    

    “SEC
      Filings”
has
      the
      meaning set forth in Section 4.6.

    

    “Registration
      Statement”
has
      the
      meaning set forth in the Registration Rights Agreement.

     

    “Securities”
means
      the Note, the Warrant, the Conversion Shares and the Warrant
      Shares.

    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

    “Subsidiary”
of
      any
      Person means another Person, an amount of the voting securities, other voting
      ownership or voting partnership interests of which is sufficient to elect at
      least a majority of its Board of Directors or other governing body (or, if
      there
      are no such voting interests, 50% or more of the equity interests of which)
      is
      owned directly or indirectly by such first Person.

    

    “Transaction
      Documents”
means
      this Agreement, the Note, the Warrant and the Registration Rights
      Agreement.

    

    “Warrant”
has
      the
      meaning set forth in the recitals.

    

    “Warrant
      Shares”
means
      the shares of Common Stock issuable upon the exercise of the
      Warrant.

    

    “1933
      Act”
means
      the Securities Act of 1933, as amended, or any successor statute, and the rules
      and regulations promulgated thereunder.

    

    “1934
      Act”
means
      the Securities Exchange Act of 1934, as amended, or any successor statute,
      and
      the rules and regulations promulgated thereunder.

    

    2. Purchase
      and Sale of the Note and Warrant.
      Subject
      to the terms and conditions of this Agreement, on the Closing Date, the Investor
      shall purchase, and the Company shall sell and issue to the Investor, the Note
      and Warrant in exchange for the payment of the Purchase Price as specified
      in
      Section 3 below.

    

    3. Closing.
      Upon
      confirmation that the other conditions to closing specified herein have been
      satisfied or duly waived by the Investor, the Company shall deliver to Mulvaney,
      Kahan & Barry, LLP, in trust, a certificate registered in the name of the
      Investor, representing the Warrant, along with original instrument, registered
      in the name of the Investor, representing the Note, with instructions that
      such
      certificate and instrument are to be held for release to the Investor only
      upon
      payment in full of the Purchase Price to the Company by the Investor. Upon
      such
      receipt by Mulvaney, Kahan & Barry, LLP of the certificate and instrument,
      the Investor shall promptly, but no more than one Business Day thereafter,
      cause
      a wire transfer in same day funds to be sent to the account of the Company
      as
      instructed in writing by the Company or its counsel, in an amount representing
      the Purchase Price. On the date (the “Closing Date”) the Company receives the
      Purchase Price, the certificate evidencing the Warrant and instrument evidencing
      the Note shall be released to the Investor (the “Closing”). The Closing of the
      purchase and sale of the Note and Warrant shall take place at the offices of
      Littman Krooks LLP, 655 Third Avenue, 20th Floor, New York, New York 10017
      (or
      remotely via the exchange of documents and signatures),
      or at
      such other location and on such other date as the Company and the Investor
      shall
      mutually agree.

    

    4. Representations
      and Warranties of the Company.
      The
      Company hereby represents and warrants to the Investor that, except as set
      forth
      in the schedules delivered herewith (collectively, the “Disclosure
      Schedules”):

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

    4.
      1 Organization,
      Good Standing and Qualification.
      Each of
      the Company and its Subsidiaries is a corporation duly organized, validly
      existing and in good standing under the laws of the jurisdiction of its
      incorporation and has all requisite corporate power and authority to carry
      on
      its business as now conducted and to own its properties. Each of the Company
      and
      its Subsidiaries is duly qualified to do business as a foreign corporation
      and
      is in good standing in each jurisdiction in which the conduct of its business
      or
      its ownership or leasing of property makes such qualification or leasing
      necessary unless the failure to so qualify has not and could not reasonably
      be
      expected to have a Material Adverse Effect. The Company’s Subsidiaries are
      listed on Schedule
      4.1
      hereto.

    

    4.2 Authorization.
      The
      Company has full power and authority and has taken all requisite action on
      the
      part of the Company necessary for (i) the authorization, execution and delivery
      of the Transaction Documents, (ii) the authorization of the performance of
      all
      obligations of the Company hereunder or thereunder and (iii) the authorization,
      issuance (or reservation for issuance) and delivery of the
      Securities.
      The
      Transaction Documents constitute the legal, valid and binding obligations of
      the
      Company, enforceable against the Company in accordance with their terms, subject
      to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
      and
      similar laws of general applicability, relating to or affecting creditors’
rights generally.

    

    4.3 Capitalization.
      Schedule
      4.3
      sets
      forth the authorized capital stock of the Company on the date hereof. All of
      the
      issued and outstanding shares of the Company’s capital stock have been duly
      authorized and validly issued, fully paid, and nonassessable. Except as
      described on Schedule
      4.3,
      there
      are no outstanding warrants, options, convertible securities or other rights,
      agreements or arrangements of any character under which the Company or any
      of
      its Subsidiaries is obligated to issue any equity securities of any kind. Except
      as described on Schedule
      4.3,
      except
      for the Registration Rights Agreement, there are no voting agreements, buy-sell
      agreements, option or right of first purchase agreements or other agreements
      of
      any kind among the Company and any of the securityholders of the Company
      relating to the securities of the Company held by them.

    

    4.4 Valid
      Issuance.
      The
      Conversion Shares and the Warrant Shares have been duly and validly authorized.
      Upon the due conversion of the Note, the Conversion Shares will be validly
      issued, fully paid and nonassessable, and shall be free and clear of all
      encumbrances and restrictions, except for restrictions on transfer set forth
      in
      the Transaction Documents or imposed by applicable securities laws and except
      for those created by the Investor. Upon the due exercise of the Warrant and
      payment of the exercise price thereunder, the Warrant Shares will be validly
      issued, fully paid and nonassessable, and shall be free and clear of all
      encumbrances and restrictions, except for restrictions on transfer set forth
      in
      the Transaction Documents or imposed by applicable securities laws and except
      for those created by the Investor. 

    

    4.5 Consents.
      The
      execution, delivery and performance by the Company of the Transaction Documents
      and the offer, issuance and sale of the Securities require no consent of, action
      by or in respect of, or filing with, any Person, governmental body, agency,
      or
      official other than filings that have been made pursuant to applicable state
      securities laws and post-sale filings pursuant to applicable state and federal
      securities laws which the Company undertakes to file within the applicable
      time
      periods.

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

    4.6 Delivery
      of SEC Filings.
      The
      Company has made available to the Investor through the EDGAR system, true and
      complete copies of the Company’s most recent Annual Report on Form 10-K for the
      fiscal year ended September 30, 2007 (the “2007 10-K”), and all other reports
      filed by the Company pursuant to the 1934 Act since the filing of the 2007
      10-K
      (including the Company’s most recent Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2007) and prior to the date hereof (collectively,
      the
“SEC Filings”). 

    

    4.7 No
      Material Adverse Change.
      Since
      December 31, 2007, except as identified and described in the SEC Filings, there
      has not been any change in the consolidated assets, liabilities, financial
      condition or operating results of the Company from that reflected in the
      financial statements included in the SEC Filings, except for changes in the
      ordinary course of business which have not had and could not reasonably be
      expected to have a Material Adverse Effect, individually or in the
      aggregate.

    

    4.8 SEC
      Filings.
      At the
      time of filing thereof, the SEC Filings complied as to form in all material
      respects with the requirements of the 1934 Act and did not contain any untrue
      statement of a material fact or omit to state any material fact necessary in
      order to make the statements made therein, in the light of the circumstances
      under which they were made, not misleading.

    

    4.9 No
      Conflict, Breach, Violation or Default.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the issuance and sale of the Securities will not conflict with or result
      in
      a breach or violation of any of the terms and provisions of, or constitute
      a
      default under (i) the Company’s Certificate of Incorporation or the Company’s
      Bylaws, both as in effect on the date hereof (true and complete copies of which
      have been made available to the Investor through the EDGAR system), or (ii)(a)
      any statute, rule, regulation or order of any governmental agency or body or
      any
      court, domestic or foreign, having jurisdiction over the Company, any Subsidiary
      or any of their respective assets or properties, or (b) any agreement or
      instrument to which the Company or any Subsidiary is a party or by which the
      Company or a Subsidiary is bound or to which any of their respective assets
      or
      properties is subject.

    

    4.10 Tax
      Matters.
      The
      Company and each Subsidiary has prepared and filed all tax returns required
      to
      have been filed by the Company or such Subsidiary with all appropriate
      governmental agencies and timely paid all taxes shown thereon or otherwise
      owed
      by it. The charges, accruals and reserves on the books of the Company in respect
      of taxes for all fiscal periods are adequate in all material respects, and
      there
      are no material unpaid assessments against the Company or any Subsidiary nor,
      to
      the Company’s Knowledge, any basis for the assessment of any additional taxes,
      penalties or interest for any fiscal period or audits by any federal, state
      or
      local taxing authority except for any assessment which is not material to the
      Company and its Subsidiaries, taken as a whole. All taxes and other assessments
      and levies that the Company or any Subsidiary is required to withhold or to
      collect for payment have been duly withheld and collected and paid to the proper
      governmental entity or third party when due. There are no tax liens or claims
      pending or, to the Company’s Knowledge, threatened against the Company or any
      Subsidiary or any of their respective assets or property. Except as described
      on
Schedule
      4.10,
      there
      are no outstanding tax payments or tax sharing agreements or other such
      arrangements between the Company and any Subsidiary or other corporation or
      entity.

    
      
        
        

      

      
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    4.11 Title
      to Properties.
      Except
      as disclosed in the SEC Filings, the Company and each Subsidiary has good and
      marketable title to all properties and assets owned by it, in each case free
      from liens, encumbrances and defects that would materially affect the value
      thereof or materially interfere with the use made or currently planned to be
      made thereof by them; and except as disclosed in the SEC Filings, the Company
      and each Subsidiary holds any leased real or personal property under valid
      and
      enforceable leases with no exceptions that would materially interfere with
      the
      use made or currently planned to be made thereof by them.

    

    4.12 Certificates,
      Authorities and Permits.
      Except
      as disclosed in the SEC Filings, the Company and each Subsidiary possess
      adequate certificates, authorities or permits issued by appropriate governmental
      agencies or bodies necessary to conduct the business now operated by it, and
      neither the Company nor any Subsidiary has received any notice of proceedings
      relating to the revocation or modification of any such certificate, authority
      or
      permit that, if determined adversely to the Company or such Subsidiary, could
      reasonably be expected to have a Material Adverse Effect, individually or in
      the
      aggregate.

    

    4.13 Labor
      Matters.

     

    (a) The
      Company is not a party to or bound by any collective bargaining agreements
      or
      other agreements with labor organizations. The Company has not violated in
      any
      material respect any laws, regulations, orders or contract terms, affecting
      the
      collective bargaining rights of employees, labor organizations or any laws,
      regulations or orders affecting employment discrimination, equal opportunity
      employment, or employees’ health, safety, welfare, wages and hours.

     

    (b) The
      Company is, and at all times has been, in compliance in all material respects
      with all applicable laws respecting employment (including laws relating to
      classification of employees and independent contractors) and employment
      practices, terms and conditions of employment, wages and hours, and immigration
      and naturalization.

     

    4.14 Intellectual
      Property.
      All
      Intellectual Property of the Company and its Subsidiaries is currently in
      compliance with all legal requirements (including timely filings, proofs and
      payments of fees) and, to the Company’s Knowledge, is valid and enforceable. No
      Intellectual Property of the Company or its Subsidiaries which is necessary
      for
      the conduct of Company’s and each of its Subsidiaries’ respective businesses as
      currently conducted or as currently proposed to be conducted has been or is
      now
      involved in any cancellation, dispute or litigation, and, to the Company’s
      Knowledge, no such action is threatened.

    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

    4.15 Environmental
      Matters.
      Neither
      the Company nor any Subsidiary is in violation of any statute, rule, regulation,
      decision or order of any governmental agency or body or any court, domestic
      or
      foreign, relating to the use, disposal or release of hazardous or toxic
      substances or relating to the protection or restoration of the environment
      or
      human exposure to hazardous or toxic substances (collectively, “Environmental
      Laws”), owns or operates any real property contaminated with any substance that
      is subject to any Environmental Laws, is liable for any off-site disposal or
      contamination pursuant to any Environmental Laws, and is subject to any claim
      relating to any Environmental Laws, which violation, contamination, liability
      or
      claim has had or could reasonably be expected to have a Material Adverse Effect,
      individually or in the aggregate; and there is no pending or, to the Company’s
      Knowledge, threatened investigation that might lead to such a
      claim.

    

    4.16 Litigation.
      Except
      as described in the SEC Filings or on Schedule
      4.16,
      there
      are no pending actions, suits or proceedings against or affecting the Company,
      its Subsidiaries or any of its or their properties; and to the Company’s
      Knowledge, no such actions, suits or proceedings are threatened or
      contemplated.

    

    4.17 Financial
      Statements.
      The
      financial statements included in each SEC Filing present fairly, in all material
      respects, the consolidated financial position of the Company as of the dates
      shown and its consolidated results of operations and cash flows for the periods
      shown, and such financial statements have been prepared in conformity with
      United States generally accepted accounting principles applied on a consistent
      basis (“GAAP”) (except as may be disclosed therein or in the Note thereto, and,
      in the case of quarterly financial statements, as permitted by Form 10-Q under
      the 1934 Act). Except as set forth in the financial statements of the Company
      included in the SEC Filings filed prior to the date hereof, neither the Company
      nor any of its Subsidiaries has incurred any liabilities, contingent or
      otherwise, except those incurred in the ordinary course of business, consistent
      (as to amount and nature) with past practices since the date of such financial
      statements, none of which, individually or in the aggregate, have had or could
      reasonably be expected to have a Material Adverse Effect.

    

    4.18 Insurance
      Coverage.
      The
      Company and each Subsidiary maintains in full force and effect insurance
      coverage that is customary for comparably situated companies for the business
      being conducted and properties owned or leased by the Company and each
      Subsidiary, and the Company reasonably believes such insurance coverage to
      be
      adequate against all liabilities, claims and risks against which it is customary
      for comparably situated companies to insure.

    

    4.19 Brokers
      and Finders.
      No
      Person will have, as a result of the transactions contemplated by the
      Transaction Documents, any valid right, interest or claim against or upon the
      Company, any Subsidiary or the Investor for any commission, fee or other
      compensation pursuant to any agreement, arrangement or understanding entered
      into by or on behalf of the Company.

    

    4.20 No
      Directed Selling Efforts or General Solicitation.
      Neither
      the Company nor any Person acting on its behalf has conducted any general
      solicitation or general advertising (as those terms are used in Regulation
      D) in
      connection with the offer or sale of any of the Securities.

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

    4.21 Private
      Placement.
      Subject
      to the accuracy of the Investor’s representations in Section 5 of this
      Agreement, the offer and sale of the Securities to the Investor as contemplated
      hereby is exempt from the registration requirements of the 1933
      Act.

    

    4.22 Financial
      Transactions.
      The
      Company has not engaged in any account trading for its own benefit that creates
      an obligation to provide liquidity or other guarantees for special purpose
      entities (variable interest entities); that creates an obligation to repurchase
      subprime assets; nor has it any undisclosed transactions involving special
      purpose entities or special investment vehicles which utilize off balance sheet
      financing.

    

    4.23 Sarbanes
      Oxley Act.
      The
      Company is in compliance in all material respects with applicable requirements
      of the Sarbanes-Oxley Act of 2002 and applicable rules and regulations
      promulgated by the SEC thereunder in effect as of the date of this Agreement,
      except where such noncompliance could not be reasonably expected to have,
      individually or in the aggregate, a Material Adverse Effect.

    

    4.24 Disclosure.
      The
      Transaction Documents, including the Schedules to this Agreement, as the same
      relate to the Company, are true and correct in all material respects and do
      not
      contain any untrue statement of a material fact or omit to state any material
      fact necessary in order to make the statements made therein, in the light of
      the
      circumstances under which they were made, not misleading; it being understood
      that the Company has not provided the Investor, and the Investor is not relying
      on, any information constituting a forecast or projection. 

     

    5. Representations,
      Warranties and Covenants of the Investor.
      The
      Investor hereby represents, warrants and covenants to the Company
      that:

    

    5.1 Organization
      and Existence.
      The
      Investor is a validly existing limited partnership and has all requisite
      partnership power and authority to invest in the Securities pursuant to this
      Agreement. The Investor was not formed solely for the purpose of investing
      in
      the Securities.

    

    5.2 Authorization.
      The
      execution, delivery and performance by the Investor of the Transaction Documents
      to which Investor is a party have been duly authorized and will each constitute
      the valid and legally binding obligation of Investor, enforceable against
      Investor in accordance with their respective terms, subject to bankruptcy,
      insolvency, fraudulent transfer, reorganization, moratorium and similar laws
      of
      general applicability, relating to or affecting creditors’ rights
      generally.

    

    5.3 Purchase
      Entirely for Own Account.
      The
      Securities to be received by Investor hereunder will be acquired for Investor’s
      own account, not as nominee or agent, and not with a view to the resale or
      distribution of any part thereof in violation of the 1933 Act, and Investor
      has
      no present intention of selling, granting any participation in, or otherwise
      distributing the same in violation of the 1933 Act
      without
      prejudice, however, to Investor’s right at all times to sell or otherwise
      dispose of all or any part of such Securities in compliance with applicable
      federal and state securities laws.
      Nothing
      contained herein shall be deemed a representation or warranty by Investor to
      hold the Securities for any period of time. Neither Investor
      nor any Affiliate of Investor is a broker-dealer registered with the SEC under
      the 1934 Act or an entity engaged in a business that would require it to be
      so
      registered.

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

    5.4 Investment
      Experience.
      Investor acknowledges that it can bear the economic risk and complete loss
      of
      its investment in the Securities and has such knowledge and experience in
      financial or business matters that it is capable of evaluating the merits and
      risks of the investment contemplated hereby.

    

    5.5 Disclosure
      of Information.
      Investor has had an opportunity to receive all information related to the
      Company requested by it and to ask questions of and receive answers from the
      Company regarding the Company, its business and the terms and conditions of
      the
      offering of the Securities. Investor acknowledges receipt of and has reviewed
      copies of the SEC Filings. 

    

    5.6 Restricted
      Securities.
      Investor understands that the Securities are characterized as “restricted
      securities” under the U.S. federal securities laws inasmuch as they are being
      acquired from the Company in a transaction not involving a public offering
      and
      that under such laws and applicable regulations such securities may be resold
      without registration under the 1933 Act only in certain limited
      circumstances.

    

    5.7 Legends.
      It is
      understood that, except as provided below, certificates and instruments
      evidencing the Securities may bear the following or any similar
      legend:

    

    (a) “The
      securities represented hereby may not be transferred unless (i) such securities
      have been registered for sale pursuant to the Securities Act of 1933, as
      amended, (ii) such securities may be sold pursuant to Rule 144, or (iii) the
      Company has received an opinion of counsel reasonably satisfactory to it that
      such transfer may lawfully be made without registration under the Securities
      Act
      of 1933 or qualification under applicable state securities laws.”

    

    (b) If
      required by the authorities of any state in connection with the issuance of
      sale
      of the Securities, the legend required by such state authority.

    

    5.8 Accredited
      Investor.
      Investor is an accredited Investor as defined in Rule 501(a) of Regulation
      D, as
      amended, under the 1933 Act.

    

    5.9 No
      General Solicitation.
      Investor did not learn of the investment in the Securities as a result of any
      public advertising or general solicitation.

    

    5.10 Brokers
      and Finders.
      No
      Person will have, as a result of the transactions contemplated by the
      Transaction Documents, any valid right, interest or claim against or upon the
      Company, any Subsidiary or Investor for any commission, fee or other
      compensation pursuant to any agreement, arrangement or understanding entered
      into by or on behalf of Investor.

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

    5.11 Prohibited
      Transactions.
      During
      the last thirty (30) days prior to the date hereof, neither Investor nor any
      Affiliate of Investor which (x) had knowledge of the transactions contemplated
      hereby, (y) has or shares discretion relating to Investor’s investments or
      trading or information concerning Investor’s investments, including in respect
      of the Securities, or (z) is subject to Investor’s review or input concerning
      such Affiliate’s investments or trading (collectively, “Trading Affiliates”)
      has, directly or indirectly, effected or agreed to effect (i) any purchase
      or
      long sale of the Company’s securities or (ii) any short sale, whether or not
      against the box, established any “put equivalent position” (as defined in Rule
      16a-1(h) under the 1934 Act) with respect to the Common Stock, granted any
      other
      right (including, without limitation, any put or call option) with respect
      to
      the Common Stock or with respect to any security that includes, relates to
      or
      derived any significant part of its value from the Common Stock or otherwise
      sought to hedge its position in the Securities (each of such transactions
      specified in this clause (ii), a “Prohibited Transaction”). Prior to the
      earliest to occur of (i) the termination of this Agreement, (ii) the Effective
      Date or (iii) the Effectiveness Deadline, such Investor shall not, and shall
      cause its Trading Affiliates not to, engage, directly or indirectly, in a
      Prohibited Transaction. Investor acknowledges that the representations,
      warranties and covenants contained in this Section 5.11 are being made for
      the
      benefit of the Investor as well as the Company.

    

    6.
      Conditions
      to Closing.

    

    6.1 Conditions
      to the Investor’s Obligations.
      The
      obligation of Investor to purchase the Note and the Warrant at the Closing
      is
      subject to the fulfillment to Investor’s satisfaction, on or prior to the
      Closing Date, of the following conditions, any of which may be waived by
      Investor:

    

    (a) The
      representations and warranties made by the Company in Section 4 hereof qualified
      as to materiality shall be true and correct at all times prior to and on the
      Closing Date, except to the extent any such representation or warranty expressly
      speaks as of an earlier date, in which case such representation or warranty
      shall be true and correct as of such earlier date, and, the representations
      and
      warranties made by the Company in Section 4 hereof not qualified as to
      materiality shall be true and correct in all material respects at all times
      prior to and on the Closing Date, except to the extent any such representation
      or warranty expressly speaks as of an earlier date, in which case such
      representation or warranty shall be true and correct in all material respects
      as
      of such earlier date. The Company shall have performed in all material respects
      all obligations and conditions herein required to be performed or observed
      by it
      on or prior to the Closing Date.

    

    (b) The
      Company shall have obtained any and all consents, permits, approvals,
      registrations and waivers necessary or appropriate for consummation of the
      purchase and sale of the Securities and the consummation of the other
      transactions contemplated by the Transaction Documents, all of which shall
      be in
      full force and effect.

    

    (c) No
      judgment, writ, order, injunction, award or decree of or by any court, or judge,
      justice or magistrate, including any bankruptcy court or judge, or any order
      of
      or by any governmental authority, shall have been issued, and no action or
      proceeding shall have been instituted by any governmental authority, enjoining
      or preventing the consummation of the transactions contemplated hereby or in
      the
      other Transaction Documents.

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

    (d) The
      Company shall have reimbursed the Investor for its legal fees and expenses
      up to
      a maximum amount of $20,000 in the aggregate.

    

    (e) The
      Company shall have paid the Investor a closing fee equal to
      $60,000.

    

    (f) The
      Company shall have executed and delivered the Registration Rights
      Agreement.

    

    (g) The
      Company shall have delivered a Certificate, executed on behalf of the Company
      by
      its Chief Executive Officer or its Chief Financial Officer, dated as of the
      Closing Date, certifying to the fulfillment of the conditions specified in
      subsections (a), (b) and (c) of this Section 6.1.

    

    (h) The
      Company shall have delivered a Certificate, executed on behalf of the Company
      by
      its Secretary, dated as of the Closing Date, certifying the resolutions adopted
      by the Board of Directors of the Company approving the transactions contemplated
      by this Agreement and the other Transaction Documents, and the issuance of
      the
      Securities, certifying the current versions of the Certificate of Incorporation
      and Bylaws of the Company and certifying as to the signatures and authority
      of
      persons signing the Transaction Documents and related documents on behalf of
      the
      Company.

    

    (i) The
      Investor shall have received an opinion of counsel to the Company substantially
      in the form attached hereto as Exhibit
      D.

    

    6.2 Conditions
      to Obligations of the Company.
      The
      Company's obligation to sell and issue the Note and the Warrant at the Closing
      is subject to the fulfillment to the satisfaction of the Company on or prior
      to
      the Closing Date of the following conditions, any of which may be waived by
      the
      Company:

    

    (a) The
      representations and warranties made by the Investor in Section 5 hereof, other
      than the representations and warranties contained in Sections 5.3, 5.4, 5.5,
      5.6, 5.7, 5.8 and 5.9 (the “Investment Representations”), shall be true and
      correct in all material respects when made, and shall be true and correct in
      all
      material respects on the Closing Date with the same force and effect as if
      they
      had been made on and as of said date. The Investment Representations shall
      be
      true and correct in all respects when made, and shall be true and correct in
      all
      respects on the Closing Date with the same force and effect as if they had
      been
      made on and as of said date. The Investor shall have performed in all material
      respects all obligations and conditions herein required to be performed or
      observed by them on or prior to the Closing Date.

    

    (b) The
      Investor shall have executed and delivered the Registration Rights
      Agreement.

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

    (c) The
      Investor shall have delivered or caused to be delivered the Purchase Price
      to
      the Company.

     

    7. Covenants
      and Agreements of the Company.

    

    7.1 Reservation
      of Common Stock.
      The
      Company shall at all times reserve and keep available out of its authorized
      but
      unissued shares of Common Stock, solely for the purpose of providing for the
      conversion of the Note and the exercise of the Warrant, such number of shares
      of
      Common Stock as shall from time to time equal the number of shares sufficient
      to
      permit the issuance of the Conversion Shares and the Warrant Shares pursuant
      to
      the Transaction Documents in accordance with their respective
      terms.

    

    7.2 No
      Conflicting Agreements.
      The
      Company will not take any action, enter into any agreement or make any
      commitment that would conflict or interfere in any material respect with the
      Company’s obligations to the Investor under the Transaction
      Documents.

    

    7.3 Insurance.
      The
      Company shall not materially reduce the insurance coverages described in Section
      4.18.

    

    7.4 Compliance
      with Laws.
      The
      Company will comply in all material respects with all applicable laws, rules,
      regulations, orders and decrees of all governmental authorities.

    

    7.5 Use
      of
      Proceeds
      . The
      Company will use the proceeds from the sale of the Note for general corporate
      and working capital purposes.

    

    7.6 Key
      Man Life Insurance.
      The
      Company shall undertake to obtain a $3 million key-man life insurance policy
      on
      Mark Goldwasser, President and Chief Executive Officer of the Company, naming
      the Company as beneficiary, on commercially reasonable rates. The foregoing
      covenant shall remain in place until such date as the Note is paid in full.
      

    

    7.7 Board
      Composition.
      Pursuant to that certain Securities Purchase Agreement, dated January 11, 2006,
      by and between the Company, St. Cloud Capital Partners, L.P. (“St. Cloud”) and
      the other investors signatory thereto (the “Prior Agreement”), the Company
      agreed to elect one nominee of St. Cloud as a director to fill an existing
      vacancy on the Board of Directors and to include such nominee in its proxy
      statement for the Company’s 2006 Annual Meeting to continue to serve on the
      Company’s Board of Directors. Such Nominee was Marshall S. Geller, an Affiliate
      of St. Cloud and the Investor. The Company hereby reconfirms its covenant to
      elect a nominee of St. Cloud to continue to serve on the Company’s Board of
      Directors. Mr. Geller was re-elected to the Company’s Board of Directors at the
      Company’s 2008 annual meeting of stockholders.

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    7.8 Board
      Observer Rights.
      So long
      as the principal balance of the Note is unpaid, or Investor or any of its
      Affiliates are the beneficial owners (as defined under Rule 13d-3 promulgated
      under the 1934 Act) of at least 5% of the Common Stock (as determined pursuant
      to such Rule 13d-3), the Company shall give Investor written notice of each
      meeting of the Company’s Board of Directors and each committee thereof at least
      at the same time and in the same manner as notice is given to the directors,
      and
      the Company shall permit a representative of Investor to attend as an observer
      all meetings of the Company’s Board of Directors and all committees thereof;
      provided that in the case of telephonic meetings conducted in accordance with
      the Company’s bylaws and applicable law, the Investor representative shall be
      given the opportunity to listen to such telephonic meetings; and provided,
      further, that the Company shall have the right to exclude the Investor
      representative from any portion of a meeting if, in the good faith judgment
      of
      the Company’s counsel, the inclusion of the Investor representative therein
      would result in the waiver of any applicable privilege. The Investor
      representative shall be entitled to receive all written materials and other
      information (including without limitation copies of meeting minutes) given
      to
      directors in connection with such meetings at the same time such materials
      and
      information are given to the directors; provided, however, that the Company
      shall have the right to provide information to the Investor representative
      if,
      in the good faith judgment of the Company’s counsel, the provision of such
      information to the Investor representative would result in the waiver of any
      applicable privilege. If the Company proposes to take any action by written
      consent in lieu of a meeting of its Board of Directors or of any committee
      thereof, the Company shall give written notice thereof to the Investor
      representative and each of the Company’s directors prior to the effective date
      of such consent describing in reasonable detail the nature and substance of
      such
      action. The Company shall pay the reasonable out-of-pocket expenses of the
      Investor representative incurred in connection with attending such board and
      committee meetings. This covenant shall be a reconfirmation of that similar
      right granted in the Prior Agreement and shall not be construed to grant the
      Investor and its Affiliates an additional observer right.

    

    7.9 Right
      of First Offer.
      Subject
      to the terms and conditions specified in this Section 7.9, if the Company
      proposes to offer or sell any additional debt financing, ("New Debt") then
      the
      Company shall first make an offering of such New Debt to the Investor in
      accordance with the following provisions of this Section 7.9. The Investor
      shall
      be entitled to apportion the right of first offer hereby granted to it among
      itself and its Affiliates in such proportions as it deems
      appropriate.

    

    (a)
      Company
      shall deliver a notice, in accordance with the notice provisions hereof, (the
      “Debt Offer Notice”) to the Investor
      stating
      (i) its bona fide intention to offer such New Debt, (ii) the amount of
      such New Debt to be offered, and (iii) the price and terms, if any, upon
      which it proposes to offer such New Debt.

    

    (b)
      By
      written notification received by the Company, within fifteen (15) calendar
      days
      after receipt of the Debt Offer Notice, the Investor
      may
      elect to purchase all or less than all of the New Debt being
      offered.

    

    (c)
      If
      the New Debt is not elected to be purchased or obtained as provided in
Section 7.9(b)
      hereof,
      the Company may sell such New Debt during the ninety (90) day period following
      the expiration of the period provided in Section 7.9(b)
      hereof,
      to any Person or Persons at a price not less than, and upon terms no more
      favorable to the offeree than, those specified in the Debt Offer Notice. If
      the
      Company does not enter into an agreement for the sale of such New Debt within
      such period, or if such agreement is not consummated within thirty (30) days
      of
      the execution thereof, the right provided hereunder shall be deemed to be
      revived, and such New Debt shall not be offered unless first reoffered to the
      Investor in accordance with this Section
      7.9.

    
      
        
        

      

      
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    7.10 Certain
      Negative Covenants.
      From
      and after the date of this Agreement and for so long as any Note remain
      outstanding, the Company shall not without first obtaining the approval (by
      vote
      or written consent, as provided by law) of the holders of a majority of the
      outstanding principal face amount of the Note, which consent shall not be
      unreasonably withheld or delayed, take any of the following actions:

    

    (a) Incur
      additional indebtedness; provided, however, that, the foregoing restriction
      shall not preclude (i) up to $1,000,000 dollars of Other Senior Debt (as defined
      in the Note), (ii) additional debt that is expressly subordinated to the Note,
      as evidenced by a subordination agreement reasonably acceptable to the holder
      of
      the Note and (iii) indebtedness under purchase money security interests incurred
      in the ordinary course of business;

    

    (b) Declare
      or pay any dividend of any kind, in cash or in property, on any class of its
      common stock equity securities, nor purchase, redeem, retire or otherwise
      acquire for value any shares of such stock, nor make any distribution of any
      kind in respect thereof.

    

    (c) Make
      loans, advances to, or guarantees for the benefit of any its officers, directors
      or stockholders who beneficially own five percent (5%) or more of the Company’s
      Common Stock;

    

    (d) Enter
      into, amend, modify or supplement, any agreement, transaction, commitment,
      or
      arrangement with any of its officers, directors or stockholders who beneficially
      own five percent (5%) or more of the Common Stock, except for (a) customary
      employment arrangements and benefit programs on reasonable terms, and (b) any
      agreement, transaction, commitment, or arrangement which is approved by a
      majority of the disinterested directors of the Company; for purposes hereof,
      any
      director who is also an officer of the Company or any subsidiary of the Company
      shall not be a disinterested director with respect to any such agreement,
      transaction, commitment, or arrangement.

    

    (e) Enter
      into the active management or operation of any business other than the business
      currently conducted by Company and a similar business;

    

    (f) Enter
      into employment agreements not terminable at will with new or existing employees
      (other than employment agreements with senior management that are approved
      by
      the Board, including those contemplated by the merger with vFinance, Inc.);
      or
      renew any existing employment agreements with non-senior management (except
      those which are terminable at will) or establish or modify equity options
      (unless approved by the Board), retirement allowances, pensions and remuneration
      of Directors (unless approved by the Board), consultants or strategic partners
      of Company; 

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

    (g) Allow
      any
      officer of Company to use any assets of Company in such a manner as would
      violate such person’s fiduciary duties to Company or its
      shareholders;

    

    (h) Enter
      or
      consummate any off-balance sheet transactions other than operating
      leases;

    

    (i)
       Change
      the tax or accounting policies of Company, other than to comply with Generally
      Accepted Accounting Principles (“GAAP”) or existing rules of the Internal
      Revenue Code; 

    

    (j) Settle
      claims, litigation or disputes (including tax claims or audits) involving an
      amount in excess of one-hundred thousand dollars ($100,000), unless approved
      by
      the Board, other than any claims to the extent covered by Company’s errors and
      omissions, worker’s compensation or general liability insurance; 

    

    (k) File
      any
      petition for bankruptcy or similar action relating to Company or voluntarily
      dissolve or terminate Company;

    

    (l) Consummate
      any merger, reorganization, restructuring, reverse stock split consolidation,
      sale of all or substantially all of the Company’s assets or any similar
      transaction or related transactions, other than the contemplated merger with
      vFinance, Inc.; or 

    

    (m) Amend
      its
      Certificate of Incorporation or By-Laws, other than the proposed amendment
      to
      increase the Company’s authorized Common Stock from 30,000,000 to 50,000,000
      shares, as approved by the Company’s Board of Directors.

    

    7.11 Termination
      of Covenants.
      The
      provisions of Sections 7.2 through 7.4 shall terminate and be of no further
      force and effect on the later of the date (i) on which the Company’s obligations
      under the Registration Rights Agreement to register or maintain the
      effectiveness of any registration covering the Registrable Securities (as such
      term is defined in the Registration Rights Agreement) shall terminate and (ii)
      of full repayment of obligations under the Note.

     

    8. Survival
      and Indemnification.

    

    8.1 Survival.
      The
      representations, warranties, covenants and agreements contained in this
      Agreement shall survive the Closing of the transactions contemplated by this
      Agreement; provided, however, that the representations and warranties contained
      in this Agreement shall expire twelve (12) months after the
      Closing.

    

    8.2 Indemnification.
      Subject
      to the provisions of Section 8.1, the Company agrees to indemnify and hold
      harmless Investor and its Affiliates and their respective directors, officers,
      employees and agents from and against any and all losses, claims, damages,
      liabilities and expenses (including without limitation reasonable attorney
      fees
      and disbursements and other expenses incurred in connection with investigating,
      preparing or defending any action, claim or proceeding, pending or threatened
      and the costs of enforcement thereof) (collectively, “Losses”) to which such
      Person may become subject as a result of any breach of representation, warranty,
      covenant or agreement made by or to be performed on the part of the Company
      under the Transaction Documents, and will reimburse any such Person for all
      such
      amounts as they are incurred by such Person.

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

    8.3 Conduct
      of Indemnification Proceedings.
      Promptly
      after receipt by any Person (the “Indemnified
      Person”) of notice of any demand, claim or circumstances which would or might
      give rise to a claim or the commencement of any action, proceeding or
      investigation in respect of which indemnity may be sought pursuant to Section
      8.2, such Indemnified Person shall promptly notify the Company in writing and
      the Company shall assume the defense thereof, including the employment of
      counsel reasonably satisfactory to such Indemnified Person, and shall assume
      the
      payment of all fees and expenses; provided,
      however, that
      the
      failure of any Indemnified Person so to notify the Company shall not relieve
      the
      Company of its obligations hereunder except to the extent that the Company
      is
      materially prejudiced by such failure to notify. In any such proceeding, any
      Indemnified Person shall have the right to retain its own counsel, but the
      fees
      and expenses of such counsel shall be at the expense of such Indemnified Person
      unless: (i) the Company and the Indemnified Person shall have mutually agreed
      to
      the retention of such counsel; or (ii) in the reasonable judgment of counsel
      to
      such Indemnified Person representation of both parties by the same counsel
      would
      be inappropriate due to actual or potential differing interests between them.
      The Company shall not be liable for any settlement of any proceeding effected
      without its written consent, which consent shall not be unreasonably withheld,
      but if settled with such consent, or if there be a final judgment for the
      plaintiff, the Company shall indemnify and hold harmless such Indemnified Person
      from and against any loss or liability (to the extent stated above) by reason
      of
      such settlement or judgment. Without the prior written consent of the
      Indemnified Person, which consent shall not be unreasonably withheld, the
      Company shall not effect any settlement of any pending or threatened proceeding
      in respect of which any Indemnified Person is or could have been a party and
      indemnity could have been sought hereunder by such Indemnified Party, unless
      such settlement includes an unconditional release of such Indemnified Person
      from all liability arising out of such proceeding.

    

    
      
        9.
          Disclosure
          Provisions.
          

      

    

    

    9.1 Use
      of
      Proceeds-Statements and Access.
      At such
      times as Investor reasonably requests, Company shall deliver to Investor a
      written statement certified by Company’s chief financial officer describing in
      reasonable detail the use of the proceeds from the transactions contemplated
      by
      the Transaction Documents by Company. 

    

       9.2 Use
      of
      Proceeds-Public Interest.
      The
      Company shall not, and shall not permit its Subsidiaries to, use any proceeds
      from the transactions contemplated by the Transaction Documents for any purpose
      contrary to public interest (including, but not limited to, activities which
      are
      in violation of law) or inconsistent with free enterprise, in each case within
      the meaning of 13 C.F.R. Section 107.720.

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

    9.3
       Economic
      Impact Information.
      Promptly after the end of each calendar year (but in any event prior to February
      28 of each year), the Company shall deliver to Investor a written assessment
      of
      the economic impact of Investor’s investment in the Company, specifying the
      full-time equivalent jobs created or retained in connection with the investment,
      the impact of the investment on the businesses of the Company and its
      Subsidiaries and on taxes paid by Company and its employees.

    

    10. Miscellaneous.

    

    10.1 Successors
      and Assigns.
      This
      Agreement may not be assigned by a party hereto without the prior written
      consent of the Company or the Investor, as applicable, provided, however, that
      Investor may assign its rights and delegate its duties hereunder in whole or
      in
      part to an Affiliate or to a third party acquiring some or all of its Securities
      in a private transaction without the prior written consent of the Company,
      after
      notice duly given by Investor to the Company provided, that no such assignment
      or obligation shall affect the obligations of Investor hereunder. The provisions
      of this Agreement shall inure to the benefit of and be binding upon the
      respective permitted successors and assigns of the parties. Nothing in this
      Agreement, express or implied, is intended to confer upon any party other than
      the parties hereto or their respective successors and assigns any rights,
      remedies, obligations, or liabilities under or by reason of this Agreement,
      except as expressly provided in this Agreement.

    

    10.2 Counterparts.
      This agreement may be executed in any number of counterparts, each of which
      shall be deemed to be an original, and all of which shall constitute one and
      the
      same document. in the event that any signature (including a financing signature
      page) is delivered by facsimile transmission or by e-mail delivery of a “.pdf”
format data file, such signature shall create a valid and binding obligation
      of
      the party executing (or on whose behalf such signature is executed) with the
      same force and effect as if such facsimile or “.pdf” signature page were an
      original thereof. 

     

    10.3 Titles
      and Subtitles.
      The
      titles and subtitles used in this Agreement are used for convenience only and
      are not to be considered in construing or interpreting this
      Agreement.

    

    10.4 Notices.
      Unless
      otherwise provided, any notice required or permitted under this Agreement shall
      be given in writing and shall be deemed effectively given as hereinafter
      described (i) if given by personal delivery, then such notice shall be deemed
      given upon such delivery, (ii) if given by telex or telecopier, then such notice
      shall be deemed given upon receipt of confirmation of complete transmittal,
      (iii) if given by mail, then such notice shall be deemed given upon the earlier
      of (A) receipt of such notice by the recipient or (B) three days after such
      notice is deposited in first class mail, postage prepaid, and (iv) if given
      by
      an internationally recognized overnight air courier, then such notice shall
      be
      deemed given one Business Day after delivery to such carrier. All notices shall
      be addressed to the party to be notified at the address as follows, or at such
      other address as such party may designate by ten days’ advance written notice to
      the other party:

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

    If
      to the
      Company:

    

    National
      Holdings Corporation

    120
      Broadway, 27th
      Floor

    New
      York,
      NY 10271

    Attention:
      Mark Goldwasser, CEO

    Fax:
      (212) 417-8010

    

    With
      a
      copy to:

    

    Littman
      Krooks LLP

    655
      Third
      Avenue, 20th
      Floor

    New
      York,
      NY 10017

    Attention:
      Mitchell C. Littman, Esq.

    Fax:
      (212) 490-2990

    

    If
      to the
      Investor:

    

    St.
      Cloud
      Capital Partners II, L.P.

    10866
      Wilshire Boulevard, Suite1450

    Los
      Angeles, CA 90024

    Attention:
      Marshall S. Geller

    Fax:
      (310) 475-0550

    

    With
      a
      copy to:

    

    Mulvaney,
      Kahan & Barry, LLP

    401
      West
      A Street, 17th Floor

    San
      Diego, CA 92101

    Attention:
      Rex B. Beatty, Esq.

    Fax:
      (619) 238-1010

    

    10.5 Expenses.
      The
      parties hereto shall pay their own costs and expenses in connection herewith,
      except that the Company shall pay the reasonable fees and expenses of
      Investor not
      to
      exceed $20,000. Such expenses shall be paid not later than the Closing. In
      the
      event that legal proceedings are commenced by any party to this Agreement
      against another party to this Agreement in connection with this Agreement or
      the
      other Transaction Documents, the party or parties which do not prevail in such
      proceedings shall severally, but not jointly, pay their pro rata share of the
      reasonable attorneys’ fees and other reasonable out-of-pocket costs and expenses
      incurred by the prevailing party in such proceedings. In addition and
      notwithstanding
      anything contained herein to the contrary, the Company agrees to pay the
      reasonable fees and expenses incurred by Investor in connection with its
      preparation, filing and updating of all required SEC filings related to this
      transaction; provided that counsel to the Company prepares the Schedule 13(d)
      and related amendments required to be filed. 

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

    10.6 Amendments
      and Waivers.
      Any
      term of this Agreement may be amended and the observance of any term of this
      Agreement may be waived (either generally or in a particular instance and either
      retroactively or prospectively), only with the written consent of the Company
      and the Investor. Any amendment or waiver effected in accordance with this
      paragraph shall be binding upon each holder of any Securities purchased under
      this Agreement at the time outstanding, each future holder of all such
      Securities, and the Company.

    

    10.7 Publicity.
      Except
      as set forth below, no public release or announcement concerning the
      transactions contemplated hereby shall be issued by the Company or the Investor
      without the prior consent of the Company (in the case of a release or
      announcement by the Investor) or the Investor (in the case of a release or
      announcement by the Company) (which consents shall not be unreasonably
      withheld), except as such release or announcement may be required by law or
      the
      applicable rules or regulations of any securities exchange or securities market,
      in which case the Company or the Investor, as the case may be, shall allow
      the
      Investor or the Company, as applicable, to the extent reasonably practicable
      in
      the circumstances, reasonable time to comment on such release or announcement
      in
      advance of such issuance. In addition, the Company will make such other filings
      and notices in the manner and time required by the SEC. 

    

    10.8 Severability.
      Any
      provision of this Agreement that is prohibited or unenforceable in any
      jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
      such prohibition or unenforceability without invalidating the remaining
      provisions hereof but shall be interpreted as if it were written so as to be
      enforceable to the maximum extent permitted by applicable law, and any such
      prohibition or unenforceability in any jurisdiction shall not invalidate or
      render unenforceable such provision in any other jurisdiction. To the extent
      permitted by applicable law, the parties hereby waive any provision of law
      which
      renders any provision hereof prohibited or unenforceable in any
      respect.

    

    10.9 Entire
      Agreement.
      This
      Agreement, including the Exhibits and the Disclosure Schedules, and the other
      Transaction Documents constitute the entire agreement among the parties hereof
      with respect to the subject matter hereof and thereof and supersede all prior
      agreements and understandings, both oral and written, between the parties with
      respect to the subject matter hereof and thereof, other than any written
      confidentiality agreement between the Company and Investor, which shall continue
      in full force and effect.

    

    10.10 Further
      Assurances.
      The
      parties shall execute and deliver all such further instruments and documents
      and
      take all such other actions as may reasonably be required to carry out the
      transactions contemplated hereby and to evidence the fulfillment of the
      agreements herein contained.

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

    10.11 Governing
      Law; Consent to Jurisdiction; Waiver of Jury Trial.
      This
      Agreement shall be governed by, and construed in accordance with, the internal
      laws of the State of New York without regard to the choice of law principles
      thereof. Each of the parties hereto irrevocably submits to the exclusive
      jurisdiction of the courts of the State of New York located in New York County
      and the United States District Court for the Southern District of New York
      for
      the purpose of any suit, action, proceeding or judgment relating to or arising
      out of this Agreement and the transactions contemplated hereby. Service of
      process in connection with any such suit, action or proceeding may be served
      on
      each party hereto anywhere in the world by the same methods as are specified
      for
      the giving of notices under this Agreement. Each of the parties hereto
      irrevocably consents to the jurisdiction of any such court in any such suit,
      action or proceeding and to the laying of venue in such court. Each party hereto
      irrevocably waives any objection to the laying of venue of any such suit, action
      or proceeding brought in such courts and irrevocably waives any claim that
      any
      such suit, action or proceeding brought in any such court has been brought
      in an
      inconvenient forum. EACH
      OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
      LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN
      CONSULTED SPECIFICALLY AS TO THIS WAIVER.

    

    10.12 Confidentiality.
      Each
      party hereto agrees that, except with the prior written permission of the
      other party or as required by applicable federal or state securities law, it
      shall at all times keep confidential and not divulge, furnish or make accessible
      to anyone any confidential information, knowledge or data concerning or relating
      to the business or financial affairs of the other parties to which such party
      has been or shall become privy by reason of this Agreement, discussions or
      negotiations relating to this Agreement, the performance of its obligations
      hereunder or the ownership of the Securities purchased hereunder. The
      provisions of this Section 10.12 shall be in addition to, and not in
      substitution for, the provisions of any separate nondisclosure agreement
      executed by the parties hereto with respect to the transactions contemplated
      hereby.

    

    [SIGNATURE
      PAGE FOLLOWS]

    
      
        
        

      

      
        -20-

        
          

        

      

      
        
        

      

    

    

    IN
      WITNESS WHEREOF, the parties have executed this Agreement or caused their duly
      authorized officers to execute this Agreement as of the date first above
      written.

    

    
      	
              The
                Company:

            	
              NATIONAL
                HOLDINGS CORPORATION

            
	 	 
	 	
              By:

            	
              /S/
                MARK GOLDWASSER

            
	 	 	
               
                Mark Goldwasser

            
	 	 	
               
                President and Chief Executive Officer

            
	 	 
	
              The
                Investor:

            	
              ST.
                CLOUD CAPITAL PARTNERS II, L.P.

            
	 	 
	 	
              By:
                SGCP II, LLC

            
	 	
              Its
                : General Partner

            
	 	 
	 	
              By: 

            	
              /S/
                MARSHALL S. GELLER

            
	 	 	
                Marshall
                S. Geller

            
	 	 	
               
                Managing Member

            

    

    
      
        
        

      

      
        -21-

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

    

    NOTE

    
      
        
        

      

      
        -22-

        
          

        

      

      
        
        

      

    

    EXHIBIT
      B

    

    WARRANT

    
      
        
        

      

      
        -23-

        
          

        

      

      
        
        

      

    

    EXHIBIT
      C

    

    REGISTRATION
      RIGHTS AGREEMENT

    
      
        
        

      

      
        -24-

        
          

        

      

      
        
        

      

    

    EXHIBIT
      D

    

    FORM
      OF
      LEGAL OPINION

    

    [THE
      FOLLOWING IS SUBJECT TO CUSTOMARY ASSUMPTIONS AND DISCLAIMERS TO BE SET FORTH
      IN
      ACTUAL OPINION]

    

    
      	 	
              1.

            	
              The
                Company is a corporation validly existing and in good standing under
                the
                laws of the State of Delaware.  

            

    

    

    
      	 	
              2.

            	
              The
                Company has the corporate power and corporate authority to enter
                into and
                perform each of the Transaction
                Documents.

            

    

    

    
      	 	
              3.

            	
              The
                Company has taken all corporate action necessary to authorize the
                execution, delivery and performance of each of the Transaction Documents
                and has duly executed and delivered each of the Transaction
                Documents.

            

    

    

    
      	 	
              4.

            	
              Each
                of the Transaction Documents is a valid and binding obligation of
                the
                Company, enforceable by the Investor against the Company in accordance
                with its terms.

            

    

    

    
      	 	
              5.

            	
              Neither
                the execution and delivery of the Transaction Documents on behalf
                of the
                Company, nor the issuance and sale of the Note and the Warrant to
                the
                Investor at the Closing, violates any provision of the Certificate
                of
                Incorporation or Bylaws of the
                Company.

            

    

    

    
      	 	
              6.

            	
              The
                shares of Common Stock issuable upon (i) conversion of the Note and
                (ii)
                exercise of the Warrant have been duly and validly authorized and
                reserved
                as of the date hereof. The issuance of the shares of Common Stock
                issuable
                upon (i) conversion of the Note and (ii) exercise of the Warrant
                are not
                subject to any statutory or, to our knowledge, contractual or other
                preemptive rights, other than as set forth in the Transaction
                Documents.

            

    

    
      
        
        

      

      
        -25-

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